Targeted Exam Letter on Alternative Trading Systems

May 2013

As you are aware, the Trading Examinations Unit (TEU) of the Market Regulation Department at FINRA is conducting a review of Alternative Trading Systems (ATS) operated by XYZ Firm (the Firm). For the purpose of this inquiry, the term "ATS" means an ATS operated by the Firm and/or any affiliate of the Firm that is utilized to route orders or other messages into or out of the ATS.  In addition, the term "Subscriber" means any broker/dealer or non-broker/dealer that is authorized to route orders, indications of interest, or other messages to the ATS for purposes of executing within the ATS or otherwise (i.e., have their interest routed to other market centers outside the ATS).

In connection with this matter, TEU requests the information specified below.

  1. List all orders and their attributes available to the ATS's Subscribers.  Include a description of each "order type".
    1. Identify how each of the ATS's order types are marketed to Subscribers and include any corresponding materials used in such marketing.  Please provide any communications with Subscribers that are sent for the purpose of explaining how an order type operates, or are otherwise used to market the order types that the ATS offers for the period of January 2012 to present.  
    2. Identify any of the ATS's order types that are not made available to all Subscribers or other entities whose order flow interacts with the Firm's ATS.  Explain why the order type use is limited to certain parties.
  2. Describe how order flow from Subscribers is identified within the ATS (e.g. retail orders, proprietary orders). 
    1. Please explain whether fees are lower for any types of order flow, such as retail orders.
    2. Please list and describe what information the ATS, ATS operator or other related entity requires that Subscribers provide about the orders they route to the ATS.
  3. State whether the Firm tracks the use of different order types.  If so please provide the following information.
    1. Examples of how the Firm tracks order types including copies of generated reports.
    2. A description of how the Firm uses the tracked order type information.
  4. State whether the ATS allows Subscribers to elect the types of orders with which they will interact within the ATS. Please describe whether the ATS or its affiliates provide functionality to permit a Subscriber to choose or screen the type of order flow they wish to interact with.  Please include detailed examples in the Firm's response.
  5. If the Firm has an affiliate, does the Firm allow its affiliate's proprietary traders, including market makers, to enter orders/quotes, or other trading interest into the ATS?  If so, state how this occurs and how this is disclosed to Subscribers.  Please provide copies of any written disclosure or other evidence of disclosure.
  6. If the Firm has any affiliates, state whether the Firm will attempt to cross a Subscriber's order with the interest of any such affiliate prior to entering the order into the ATS.  If so, describe how this process occurs and how this is disclosed to Subscribers.  Please provide copies of any written disclosure or other evidence of disclosure.
  7. Please provide all destinations to which the ATS routes orders or IOIs.  In addition, please provide:
    1. A detailed discussion of all factors that are considered in the ATS's routing decisions (e.g., fees charged by other venues, rebates, customer/subscriber controls the decision to route an order outside the ATS, etc.).
    2. Please provide all disclosures to subscribers regarding the ATS' routing practices.
  8. Identify all surveillance conducted by the Firm in connection with trading on the ATS, including a description of each surveillance pattern. 
    1. Describe in detail the conduct (e.g., SEC or SRO rules) that the surveillance reviews for or other activity that the surveillance is designed to capture.
    2. Please provide a detailed description of the resources dedicated to any surveillance and supervision of ATS activity including the number of individuals involved in such oversight, each individual's function, and to whom these individuals report.  Please provide the related organization chart showing reporting lines.
    3. Explain the actions that staff of the ATS takes in reviewing and following-up on conduct identified in the ATS surveillance reports.  Describe in detail what the ATS staff does if it finds problematic activity.  For the 12-month period preceding the date of this letter, describe in detail any problematic activity that the ATS identified and any corrective or follow up action the ATS took.
  9. Provide a list of the top 10 Subscribers by executed share volume for each ATS operated by the Firm for the period of January 2013 to present.
  10. Describe how the Firm ensures that what is filed in the Form ATS is accurate, including, but not limited to ascertaining that the description of the firm's system is accurate and current. 
    1. Describe the process by which the Firm monitors its Form ATS's to ensure it is up-to-date and accurate and identify the responsible person(s) (name and position description) for performing this function.  
    2. Also, describe the Firm's process to provide FINRA with timely updates to its Form ATS as referenced by FINRA Regulatory Notice 09-46.
  11. State whether any Subscriber orders enter any Firm ATS via a Firm or affiliate's smart order router (SOR).  If so, provide a detailed discussion regarding the functionality of each SOR, including a description of all destinations to which the SOR can send orders, the identity of any person or entity that is made aware of any SOR order information prior to the order being routed to any destination, and all disclosures about the SOR's order-routing practices that are made to all Subscribers.
  12. State whether the ATS uses any third-party to provide technology or operational support that may have access to Subscriber order or trade information.  If so, please provide the following information.
    1. Identify any such third-party provider.
    2. Provide a copy of all confidentiality agreements with any such third-party in connection with the safeguarding of ATS order and trade information.
    3. Describe how the use of each identified third-party is disclosed to Subscribers.