Alternative Trading Systems – Is Supervision Testing on Your Radar?

By Evan Rosser

A hiking trail leads through a wildflower meadow at Cedar Breaks National Monument, nearby Cedar City, Utah.

FINRA issued Regulatory Notice 18-25 (“FINRA Reminds Alternative Trading Systems of Their Obligations to Supervise Activity on Their Platforms”) to remind Alternative Trading Systems (ATS) registered as a broker-dealer to evaluate the supervisory systems they use to comply with FINRA rules including, but not limited to, the federal securities laws Regulation ATS, Regulation NMS, Regulation SHO, and the SEC’s Market Access Rule (SEA Rule 15c3-5), to the extent applicable.

Regulation ATS does not reduce or eliminate a firm’s obligation under FINRA rules to supervise the trading activity that occurs on its platform; Regulation ATS requires compliance with FINRA’s supervision obligations, as with all other applicable FINRA rules. FINRA expects that an ATS’s supervisory system be reasonably designed to identify “red flags,” including potentially manipulative or non-bona fide trading that occurs on or through its systems, including its ATS.

The requirements of Regulation ATS complement, not replace, the existing broker-dealer regulatory framework. Regulation ATS specifically requires that “an ATS that registers as a broker-dealer must, in addition to complying with Regulation ATS, comply with the filing and conduct obligations associated with being a registered broker-dealer, including membership in a Self-Regulatory Organization and compliance with its rules.”

Accordingly, ATSs must comply with all FINRA rules that are applicable to them and their business activity such as the new and continuing membership and registration rules in the NASD Rule 1000 Series and the financial and operational rules that apply generally to broker-dealers, including the business continuity plan requirements in Rule 4370, and the recordkeeping and reporting obligations in the Rule 4500 Series.

FINRA rules also apply to the trading activity that occurs on an ATS. For example, ATSs must report trades— and quotations, to the extent applicable—according to the rules in the FINRA Rule 6000 Series and must report order information to FINRA’s Order Audit Trail System.

ATSs also must comply with the trading halt requirements in Rule 6120 and Rule 5210 which states that no member “shall publish or circulate, or cause to be published or circulated, any…communication of any kind which purports to report any transaction as a purchase or sale of any security unless such member believes that such transaction was a bona fide purchase or sale of such security; or which purports to quote the bid price or asked price for any security, unless such member believes that such quotation represents a bona fide bid for, or offer of, such security.”  Rules 2010 (Standards of Commercial Honor and Principles of Trade) and 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices) both prohibit a broker-dealer from publishing or circulating any report of any securities transaction unless the member knows or has reason to believe that such transaction was a bona fide transaction.

All FINRA members must review all transactions related to their securities business by employing risk-based review systems— e.g., electronic surveillance—with parameters designed to assess which transactions merit further review.

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About The Author
Photo of Evan Rosser

Evan Rosser

Evan Rosser is an experienced and respected securities industry professional with over 25 years of experience managing complex securities investigations for NASD/FINRA and providing compliance expertise to both broker-dealers and investment advisors.  Evan has served as CCO for both investment advisors and broker-dealers, as well as providing compliance support to numerous broker-dealers and registered investment advisors.