In a rare enforcement action against the lightly regulated alternative trading system industry, the Securities and Exchange Commission is sanctioning TP ICAP-owned ATS operator Liquidnet over failures in its market access controls and protection of confidential trading information.
The settlement, announced on January 10, marks the second major enforcement action against Liquidnet in a decade, following a US$2 million penalty in 2014 for similar violations regarding the handling of confidential subscriber data. TP ICAP had reported continued strong revenue growth at Liquidnet with revenue up 26% in the third quarter of 2024.
The SEC found that Liquidnet had set “inappropriate” credit thresholds for its customers, including a default limit of US$1 billion, while failing to restrict access to confidential trading information adequately. The regulator also determined that the firm misrepresented material about its control systems to customers.
The case highlights the SEC’s continued scrutiny of alternative trading systems, which have become vital liquidity venues in US markets, now accounting for approximately 16% of U.S. equity volumes and satisfying up to half of institutional traders’ liquidity needs. It follows similar actions against other ATS operators, including tZERO’s US$800 thousand settlement in 2022 for disclosure failures.
“ATSs are incubators in a market structure laboratory, with less stringent rule sets than exchanges,” Jesse Forster from Coalition Greenwich said, highlighting the innovative potential of these venues. This innovation is exemplified by newer entrants which have gained traction among sophisticated market participants seeking enhanced liquidity with reduced information leakage. According to Coalition Greenwich about 16% of U.S. equity volumes overall are currently executed via ATS and could be accounting for at least half of the liquidity needs for institutional traders.
Joseph Sansone, chief of the SEC’s Market Abuse Unit, stated that “ATS operators account for a significant amount of liquidity in public markets and are part of the fabric of our market structure.”
While Liquidnet neither admitted nor denied the findings, the firm has agreed to be censured and has retained an external consultant to improve its controls and procedures. The company will also submit ongoing reports and certifications related to these remedial efforts.
The enforcement action underscores regulators’ growing focus on market structure participants’ operational controls and transparency, as alternative trading venues capture significant market share. As of July 2023, the Trade Reporting Facilities (TRF) market share, which encompasses both ATS and non-ATS over-the-counter (OTC) trading, accounted for 44.97% of overall market volume according to CBOE
Read more: https://www.globaltrading.net/atss-take-half-us-institutional-equity-execution/
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