AxessPoint: Impact of recent FINRA guidance on ATS volumes

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Highlights

  • ATS activity has accounted for an increasing volume share of the TRACE corporate feed over the past few years.
  • The nature of ATS activity lends itself to a multiplicative factor of trade prints; In July 2021 FINRA took action to mitigate these effects.
  • In the months following FINRA’s changes, as much as 3.5% of all TRACE corporate volume was removed due to ATS double counting.

A brief history of corporate bond ATS activity

An Alternative Trading System (ATS) refers to a group of trading platforms that operate outside of the traditional phone and RFQ methods of trading. At times referred to as Electronic Communication Networks (ECNs), these marketplaces can take several forms, but commonly appear as live order books or matching sessions.

Between the start of 2017 and the middle of 2021, the ATS count share of the TRACE feed remained stagnant and even fell slightly. However, the volume share executed thru ATS’s grew nearly threefold, due to the average size of trade ballooning from $107k to $319k.

ATS TRACE trends 2017-2022*

ATS AP Chart Data

Recent changes to TRACE volume reporting

An important characteristic to note about ATS trades is the unique way that their executed trades are commonly reported. As noted by FINRA in rule 6730 and related notice here, a single ATS transaction can result in a string of related records that extend across multiple unique trade reports. Over time, it became apparent that clusters of trades on some ATS platforms were inflating the TRACE feed. The chart below summarises an analysis from June of 2021, where it was seen that ATS trades with a venue listed as the contra party had at least one accompanying trade within 30 seconds on the same bond and size. Commonly, these groupings numbered three or more records that all appeared as individual trades.

Clusters of trades centered around an ATS print | June 2021

ATS clusters of trades table


In July of 2021, FINRA announced a change to their monthly volume reporting (can be seen here) to “standardize volumes across different ATS business models”. This new methodology excluded some redundant transactions between ATS venues and their clients. The impact was immediately noticeable. The July volume reports showed a 30.8% reduction in reported ATS volume and a 3.2% drop in overall TRACE volumes due to this new policy. The overall reduction peaked in September, when 3.52% of all volume as previously reported was reduced from the total.

The magnitude of this phenomenon changed shortly after the change went into effect. In the three-month period from November 2021 thru January 2022, the ATS reduction in share noted above decreased to 20% of ATS volume and 1.5% of all TRACE corporate volume. This effect is still significant in the context of the entire market but the magnitude of ATS activity has been reduced by the reporting patterns of some market participants.

*Data up to June 2021 provided directly from FINRA. From July 2021 onwards, new reports and FINRA’s guidance were used to assemble comparable values.

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