By Kelvin To, Founder and President, Data Boiler Technologies

Kelvin to

Do market participants need a better ability to assess potential conflicts of interest of multilateral trading venues? No. Market participants are not “cops” to regulate trading platforms, the Securities and Exchange Commission (SEC) is. The public relies on market regulators and self-regulatory organizations (SROs) to make sure they don’t get ripped off in the open market. Such a market is called the Stock Exchange. Otherwise, civilians must read all the “fine print” (Form ATS, ATS-N, ATS-R, ATS-G and other enhanced disclosures) on their own and take risks by engaging with a business partner or counterparties. These are then referred to as bilateral agreements or multilateral trade agreements. The terms of trade and the maintenance of corresponding records are subject to the protection of privacy. Regulators should refrain from intervening in legitimate private practices.

A broker able to offer multiple Alternative Trading System (ATS) markets is not a problem, contrary to alleged exploitations or potential conflicts of interest. Those that point to a slew of settlement cases between ATS operators and regulators have some merit. According to Steven and Steven’s empirical research, “market makers are willing to reduce or eliminate execution advantage to exploit information advantage.” Therefore, this raises additional concerns about the “selective timing” to enter and exit the market. This is not how a broker-dealer “pretends” that transactions were dealing with a client or counterparty. Rather, as the business data would reveal, with consistency, whether the firm was “in fact” acting in the best interest of the client rather than treating the party as a counterparty (i.e. without fiduciary responsibility).

With regard to the assessment of potential conflicts of interest, it is a question of defining the line between the authorized use of its “economy of scope/scale” to discover new sources of income and the action(s) potential prohibitions that generate a range of adverse effects causing harm. on others. The Commission may consult market participants to obtain information and/or set up whistleblower programmes. Yet the responsibilities of conducting assessments and drawing the line still lie with regulators and SROs.

Given that an ATS must register as a broker and become a member of an SRO, and that SROs must establish standards of conduct for their members and administer examinations for compliance with those standards, then even not an oversight failure if the SRO(s) failed to curb COI activities or other alleged misconduct by ATS? Shouldn’t the SEC be going after SROs for forcing improvements to their standards of conduct and oversight systems to enforce compliance by ATSs? Would tolerating SROs not fulfilling their ATS oversight responsibilities be something worth considering by the SEC? SROs have far more resources than the SEC to properly guard against ATS misconduct. Shifting this burden onto market participants is unfair and in effect makes ATS more like brokerage functions. We looked at a recent settlement case between FINRA and Deutsche Bank Securities Inc. (DBSI) to see whether or not regulators have sufficient basis to act or impose government costs at this time. DBSI offered SuperX customers a way to “disable” the default routing practice. Prosecutors are required to determine whether the available evidence will lead to a conviction on the “beyond a reasonable doubt” standard. The prosecutors’ argument in this particular incident is a moot point. Pursuing a prejudicial view that an alleged wrongdoing “tends to” harm another in a way that creates a conflict of interest requires careful analysis of market timing, consistency in method of order routing and drill down into other details.

ATS regulations and other enhanced disclosure requirements largely focus on written standards and have provided some scenarios that may involve a material change in the way ATS operates. Market operators or investment firms that run ATS do their best to understand what to write (mainly with the support of major law and consultancy firms) and then certify in various forms that they “do nothing wrong”. Then, regulators can decide whether or not they agree with these “well-articulated” filings and written policies and procedures. The proposed amendments do nothing with respect to market timing monitoring and trade consistency to detect what prohibited activities or conflicts of interest are taking place.

The transactions in the DBSI case took place between 2014 and 2019, while the company closed ATS – SuperX on September 24, 2021. Enforcement actions or disclosures do not preclude the alleged wrongdoing, nor avoid a market failure. If ever there was serious public harm, an investigation after the fact would take years to complete. Although there is a settlement, the $37 million fine is split evenly between the SEC and the New York Attorney General. It seems that there is not a single dollar allocated to a victim. Where victims are not identified or cannot be counted on to recover losses quickly, how can rules such as the ATS regulations and other disclosure requirements under the proposed rule changes improve protection? investors? !

The SEC’s proposal regarding Investor Protection in Communications Protocol Systems (CPS) and ATS, if adopted, would allow more entities to register as an exchange or comply with the ATS regulations pursuant to Rule 3a1-1(a)(2) of the Exchange Act. By increasing fair access and pushing CPSs to become regulated exchanges or ATSs, the “push” can dissipate some of the benefits of regulated markets. Capital markets are never lacking in competition. Indeed, we have more than enough markets but not enough farmers and diversity to work on the ground. Market participants are required to understand the different types of orders and the functions of different light and dark venues. These intermediaries (trading venues, TCAs, liquidity supply, outsourced execution tools and smart order routers) do not care about eroding market efficiency. Instead, they are taking advantage of an increasingly fragmented market. We fear that when “everyone is a trading platform, no one is a trading platform”. This increases the costs of connecting to additional sites for BestEx compliance when those additional sites may add little or no real benefit. The current market environment is in the Warring States period. It is an Animal Farm where each constituent wants to negotiate to be “more egalitarian”. Small businesses struggle to survive and merge due to uneven markets. The number of firms registered with FINRA has fallen from more than 4,000 in 2014 to 3,435 at the end of 2020. The SEC should go after SROs to redress this dwindling number of registered brokers, otherwise face the no – renewal of their Exchange license. SROs should also be held accountable for raising the “standards of conduct” of their members, including ATSs.

Transparency does not always help advance the Commission’s objectives. Larger companies may have broader “shoulders” to bear the burden through large law or consultancy firms that smaller players cannot afford, but that does not mean that smaller companies have a greater risk. higher than their larger counterparts. Increasing disclosures in the embellished name of “enhancing transparency” may indeed be bad policy for an uneven playing field that hurts smaller players, increases the costs of operating an ATS, and deters new entrants into the business. ATS space.

The confidentiality of commercial transactions must be respected. Extending record-keeping requirements to technology/CPS providers beyond FINRA-registered companies would give government regulators too intrusive power over private information. These private records would otherwise be unobtainable unless summoned for suspected illicit activity. Being curious can create resentment, feelings of discomfort, and civic anxieties about massive government surveillance.