U.S. Securities and Exchange Commission

Fixed Income Market Structure Advisory Committee 

Preliminary Recommendation Regarding Defining “Electronic Trading” for Regulatory Purposes

October ___, 2020

The Technology and Electronic Trading Subcommittee (“Subcommittee”) of the Fixed Income Market 

Structure Advisory Committee (“FIMSAC”) was formed to consider the impact of the growth of 

electronic trading platforms and the increased use of other electronic systems on the liquidity, 

efficiency, and resiliency of the corporate and municipal bond markets. On July 16, 2018, the FIMSAC 

unanimously approved the Subcommittee’s recommendation that the SEC review the framework for the 

oversight of electronic trading platforms for corporate and municipal bonds (the “E-Trading Oversight 

Recommendation”). The driver behind the E-Trading Oversight Recommendation was the

Subcommittee’s concern that the existing distinctions in regulatory oversight between electronic trading 

platforms regulated as broker-dealers, alternative trading systems (ATSs), or, in some cases, not at all,

complicated efforts to improve the efficiency and resiliency of the fixed income electronic trading 

markets. The Subcommittee further believes that a consistent definition of “electronic trading,” and an 

industry standard for reporting “electronic trading volumes,” are both necessary for the harmonization 

of applicable regulation in accordance with the E-Trading Oversight Recommendation, as well as to 

allow regulators, investors, dealers, analysts, and the public to better understand the liquidity, market 

share and transaction cost trends across the wide variety of electronic trading venues currently in 

existence.

I. Current Inconsistencies in the Reporting of Fixed Income Electronic Trading Volume

No consistent standard for publicly reporting electronic trading volumes exists across the over 20

trading platforms currently trading corporate and municipal bonds. Multiple inconsistent practices

characterize the discretionary disclosure of volumes by the individual venues. In some cases, the trading 

and settlement protocols of the varying platforms also impact the volumes that they and dealers report 

to TRACE. As a result, volumes are reported inconsistently, which makes interpreting them difficult. 

Some factors that influence the reporting of “electronic trading” volumes to, and away from, TRACE

include:

• ATS versus non-ATS: TRACE currently requires trade reports to identify whether the trade 

occurred on an ATS. Although most such trading is electronic, substantially more electronic 

trading also takes place on platforms not classified as ATSs, and some trading at ATSs differs 

from the regulatory definitions of ATS trading that the SEC first developed. 

As noted in the E-Trading Oversight Recommendation, the classification of platforms as ATSs is 

based on whether the platforms furnish services commonly performed by registered stock 

exchanges.1

 This definition of an ATS primarily reflects the trading practices of the equity 

 1 See 17 CFR § 242.300. An ATS is generally defined as any organization or system which constitutes, maintains or 

provides “a market place or facilities for bringing together purchases and sellers of securities or for otherwise 

performing with respect to securities the functions commonly performed by a stock exchange.”
2

markets, where the use of non-discretionary matching technology is the prevalent form of 

trading. Accordingly, the fixed income electronic trading platforms that are regulated as ATSs 

were those that had had live matching trading protocols that brought together the orders of 

multiple buyers and sellers. Since most of these platforms serve the retail segment of the 

market, most fixed income ATS volume historically has been associated with retail trading 

platforms that operate order books. The recent growth of institutional matching platforms now 

is mixing these two types of electronic volumes into the reported ATS volumes. Importantly, 

request-for-quote (RFQ) platforms, which execute the large majority of electronically-traded 

corporate bond volumes, generally are excluded from Regulation ATS based on the 

characteristics of the RFQ trading protocol.2

Although TRACE captures and publicly disseminates bond volumes traded on an ATS, the metric 

is not reliable as an indicator of total electronic trading volumes due to the above exclusions and 

limitations. TRACE reporting rules further complicate reliance on the ATS flag because they 

require each ATS to report all transactions executed “within the ATS” to TRACE.3

 The SEC has 

not historically precluded ATSs from including non-ATS functionality “within the ATS.” Although 

the various Form ATS filings are not publicly available, the Subcommittee believes that certain

ATSs include electronic RFQ volumes and voice-brokered trades in their ATS volumes, even 

though such protocols would not qualify as an ATS in their own right.

• Fully Electronic Trades versus Processed Trades: Current reporting venue practices often do not 

distinguish between trades that are “fully electronic” trades versus those that are only 

“processed.” Fully electronic trades are those for which all material interactions between the 

parties to the trade, including price discovery, occur through the functionality provided by the 

platform. Processed trades are trades for which counterparties bilaterally negotiate the price 

and other material terms away from the venue, but then submit the trade to a venue to obtain 

the benefits of straight-through processing. Currently, some venues report processed trades 

separately from fully electronic trades, while other venues commingle them.

• Single-Dealer versus Multi-Dealer: Current reporting venue practices do not distinguish 

between electronic trades that result from only a single dealer inquiry as opposed to those 

trades that result from inquiries sent to multiple dealers or on an all-to-all basis. Volumes 

reported from single dealer protocols without notation may give a false impression that the 

trade resulted from a multi-dealer or all-to-all inquiry from which the best responsive price 

presumably was selected. Single dealer executions are also more likely than multi-dealer trades 

to be “processed trades” which were agreed bilaterally and then submitted through a venue.

 2 The nature of the RFQ protocol allows for only the requestor to interact with bids or offers sent in response to a 

request. As such, this functionality (one-to-many) does not constitute bringing together orders for securities of 

multiple buyers and sellers (many-to-many) as required under §240.3b-16(a)(1). In addition, the RFQ requestor 

may have the ability to transact against any quote provided in response to his or her request for quote. This 

trading discretion puts the protocol outside the requirement that the platform use “established, non-discretionary 

methods under which such orders interact with each other” as required under §240.3b-16(a)(2).

3 See FINRA Rule 6720(c).
3

• Inconsistencies with Double-Counting: The Subcommittee believes having a uniform 

understanding of when transactions should be double-reported in volumes would be helpful. 

For example, for transactions for which the platform acts as the matched principal counterparty 

between two participants, the broker-dealer operating the platform will be party to two backto-back trades in which the platform buys from the seller in one trade and then sells to the 

buyer in the second trade. Platforms typically include both legs of these transactions in their 

electronic trading volumes to match the reporting method prescribed by TRACE. However, for 

electronic trades in which the platform is not a party to the transaction (ie., disclosed trades), 

the trades are typically single-counted.

The method of settling an electronic trade also can give rise to discrepancies in the volumes 

reported by TRACE. As discussed above, if an ATS executes a trade and acts as the matched 

principal counterparty between two participants, there will be two transactions disseminated by 

TRACE. However, if the ATS qualifies for an exemption from the TRACE reporting rules under 

FINRA Rule 6732, only one transaction will be disseminated.

4

 Further, if the ATS “gives up” the 

trade to another broker-dealer for clearing and settlement, the clearing broker will additionally

report the trade(s) to TRACE. This process can result in a single transaction being disseminated 

three or four times on TRACE depending on how many FINRA member firms are party to the 

trade.

II. Why is a Common Standard of Reporting Electronic-Trading Volumes Important?

Market participants require reliable and consistent data on electronic trading volumes to best 

understand where they can find liquidity. The inconsistencies in current reporting practices described 

above ensure that the ATS volumes captured and disclosed by TRACE do not accurately reflect aggregate 

electronic trading volumes.

5 ATSs are also permitted to include trades executed via non-ATS protocols.

And double (or even triple or quadruple) trade counting inflates TRACE volumes, which leads to 

incorrect inferences on market turnover, liquidity and the proportion of electronic trading. Inflated 

volume numbers can lead to inflated risk limits based on false measures of liquidity at the various 

venues and in the individual securities. 

To determine where bonds are truly trading electronically, practitioners must undertake substantial 

work to arrive at even an approximation of electronic liquidity across multiple venues. Most market 

participants do not have the resources to undertake these efforts, and they therefore remain

susceptible to misunderstanding the nature of the volumes that each platform discloses.

Inconsistent reporting methods limit the ability of regulators, market participants, investors, and 

researchers to look at aggregate trends in electronic trading volume and market share across fixed 

income markets. As a result, determining the effect of electronic trading on liquidity conditions and 

 4 FINRA Rule 6732 provides that FINRA staff may grant an exemption from trade reporting obligations to an ATS if, 

in summary, the trade is between FINRA members; the ATS does not pass the trade through any ATS account or 

take either side of the trade for clearing or settlement purposes; and the ATS has ensured that any FINRA member 

that is party to the trade has reported that the trade occurred on the ATS.

5 Aggregate ATS volumes were approximately 7% of high-grade TRACE volumes for July 2020, while Greenwich 

Associates estimates aggregate high-grade electronic volumes were 31% of TRACE volumes for the same period. 
4

transaction costs over time is difficult. Investors in the e-trading venues, whether public or private 

companies, lack precise information on volume and market share trends for the various companies in 

the fixed income e-trading sector, making investing decisions more difficult. Further, without clear 

disclosure as to whether the various electronic trading volumes are limited to the retail, inter-dealer, or 

institutional customer markets, knowing whether electronic trading is bridging these disparate liquidity 

pools or whether they remain mostly separate is challenging.

Last, as discussed in the E-Trading Oversight Recommendation, the lack of a comprehensive definition of 

“electronic trading” complicates efforts to improve the efficiency and resiliency of the fixed income 

electronic trading markets. Without a unifying regulatory definition of “electronic trading,” market 

structures will fragment further should regulators adopt new regulations that apply only to ATSs. Even if 

regulators broadened electronic trading regulation to all broker-dealers (which would still exclude at 

least one fixed income trading platform with significant volume in municipal and corporate bond trading 

that does not fall under any regulatory oversight in the U.S.), a clear definition of “electronic trading” 

would still be needed to ensure that regulators craft new regulations that capture only the intended 

electronic trading activities in which they are interested.

III. Recommendations: 

Given the broad public interest in reporting standards for fixed income electronic trading, the market 

would benefit from one common regulatory framework for all fixed income electronic trading venues. 

The promulgation of industry standards for electronic trade volume reporting would provide a 

consistent and transparent framework for regulators, analysts, investors, and dealers to easily observe 

the liquidity, market share, and transaction cost trends across the e-trading venues and all regulated 

entities.

In conjunction with its July 16, 2018 recommendation to the SEC to establish a common regulatory 

framework for fixed income electronic trading venues, the Subcommittee, therefore, recommends that 

the SEC, in coordination with FINRA and the MSRB as appropriate:

• clearly define “electronic trading” so that any new regulation or framework comprehensively 

covers the platforms and trading functionality that the SEC intends to cover without reliance on 

the current ATS definition;

• take the above-discussed factors into account when defining “electronic trading,” including

single dealer versus multi-party execution and fully-electronic versus post-trade processing; and

• establish industry-standards for electronic trade reporting that address the current 

inconsistencies described above relating to ATS functionality, single-counting versus doublecounting, and the treatment of “give-up” trades for settlement.