Better Markets filed a comment letter in response to the proposal of the Securities and Exchange Commission (SEC) to eliminate the exemption for Government Securities alternative trading systems (ATS) from compliance with Regulation ATS and update its rule on the definition of an exchange to include Communication Protocol Systems.
Why It Matters. In the Securities Exchange Act of 1934, Congress intentionally adopted a broad definition of what constitutes an “exchange” to enable the SEC to adapt to changes in the markets. In 1998, the SEC adopted Regulation ATS to provide a regulatory regime that accounted for technological advancements in broker-dealer activities that increasingly blurred the lines between the functions of a broker-dealer and those of an exchange. The government securities markets, in particular the U.S. Treasury markets, and fixed income markets generally have seen an explosion in trading on electronic trading venues over the past decade. While the rise in electronic trading in these securities can help better facilitate the purchasing and selling of securities, it also presents more opportunities for market manipulation by bad actors and heightens risks to financial stability, as we saw in the U.S. Treasury markets during the Covid-19 pandemic.
What We Said. The SEC’s proposed rule appropriately adapts the definition of “exchange” to include Communication Protocol Systems, while also eliminating the exemption for Government Securities ATSs from compliance with Regulation ATS, a reform that is long overdue. These changes, along with others in the proposal, will help the SEC’s regulatory framework keep pace with the increased use of electronic trading venues and innovations in facilitating the purchasing and selling of securities in our markets. The Proposal will move our regulatory regime another step closer to full transparency, fair competition, and above all, stronger investor protections in the realm of exchanges, ATSs, and the associated activities of their broker-dealer operators. However, the SEC should strengthen the proposal by imposing more disclosure requirements and limitations on ATS conflicts of interest. In addition, it should extend Regulation ATS to platforms trading all types of securities, including corporate and municipal debt as well as non-NMS equities.
Bottom Line. Better Markets supports the SEC’s proposed rule to expand Regulation ATS to Government Securities ATSs and update its rule on the definition of an exchange to keep pace with rapidly evolving technology.
Read our full Comment Letter here or click the button below.
