KOR Group and Healthy Markets ATS Transparency Index Alternative Trading Systems (ATSs) have received quite a bit of attention over the past year. From Flash Boys to the New York Attorney General, the spotlight has focused squarely on ATSs and more specifically on broker-owned ATSs. Brokers who route orders face a non-trivial conflict-of-interest if they also operate their own ATS. While conflicts-of-interest will never be eliminated, in the face of such conflicts transparency and disclosure are crucial. Transparency and disclosure are one of the driving principles behind Healthy Markets’ and KOR’s efforts to shed more light to the darkest corners of US capital markets. Many ATSs have touted their “unprecedented” transparency, which usually involves publishing their Form ATS alone. KOR and Healthy Markets have delved deeper and are proud to publish the very first ATS Transparency Index™. Data from ATSs have been collected by scouring publicly available information and by distributing a detailed questionnaire to every ATS. We have formulated the most comprehensive ATS questionnaire in the industry. Buy-side firms that are interested in the questionnaire, and more broadly working with KOR to understand ATSs and how interacting with them can affect execution quality, should contact us for more information. The KOR and Healthy Markets ATS Transparency Index™ does not pass judgment on ATSs – while we believe ATSs with pegged order types should use direct feeds to price the NBBO, ATSs that price from the SIP were not penalized – provided that they disclose what feeds they use. The ATS Transparency Index™ is strictly a measure of what information ATSs are willing to adequately disclose, not whether we like the content of those disclosures. After all, some firms may disagree with our judgements, but nobody would disagree that firms cannot make responsible order routing decisions without a complete picture of the capabilities and operations of each ATS. In fact, we would argue that firms that fail to account for this should be concerned about whether they are meeting their regular and rigorous Best Execution obligations.
Our Methodology We have restricted this analysis to significant-volume ATSs. We have separated scoring into two broad categories: Publicly Available Data and Questionnaire Responses. We have also given firms credit for publicly available information, regardless of whether they responded to our questionnaire or not. We chose these categories and individual questions carefully, based on our experience analyzing equity market structure and working with buyside firms to analyze execution quality and order routing decisions.
The categories firms were scored on are:
- Publicly Available Data
- Form ATS
- Statistics on trading activity and execution quality
- Raw FINRA 4552 data
- Order type guide
- Fees disclosed
- Questionnaire Responses
- Order Type and Matching Behavior
- Conflicts of Interest: General
- Conflicts of Interest: Broker-Owned Dark Pools
- Block Trading Statistics
- Other Trading Statistics
The scoring methodology is simple and straightforward. If a firm publishes the piece of Publicly Available Data, they receive 1 point. For the Questionnaire Responses, a firm receives between 0 and 1 point based on the percentage of questions that they answered adequately. For example, if they answer 5 of 10 questions in the Technology section (or if we are able to find responses to those questions from publicly available information) they receive 0.5 points. Each category is therefore equally weighted, in an attempt to avoid bias. Many firms might disagree with this, and we are happy to provide custom weightings to firms that are interested. We have strived to ensure that this is an objective scoring mechanism, driven only by what we consider to be important disclosures. This technique is similar to the Linaburg Maduell Transparency Index, the Open Budget Index, the JLL Global Real Estate Transparency Index and many other measures of transparency in different industries. Some of these indices apply subjective, rather than equal weighting, and that is a modification we may consider in the future. The raw scores are then normalized to come up with a Composite score. Scores above 0 indicate that an ATS is sufficiently transparent relative to its peers. Scores below 0 indicate that an ATS is not disclosing a sufficient amount of information, and we would encourage firms to be cautious when routing. With that said, here is the first ATS Transparency Index:
As you can see, IEX is by far the most transparent of all ATSs, disclosing detailed data on trading and operations. BIDS, SuperX, Bloomberg Tradebook and LeveL are also very transparent and broadly very responsive to inquiries. On the other hand, KOR and Healthy Markets were unable to find any publicly available information on Apogee, Interactive Brokers, JPMX, LightPool or MS POOL. All ATSs were contacted – these ATSs did not respond or refused to provide questionnaire responses.
We expect the ATS Transparency Index™ to evolve over time as ATSs become more transparent (we hope that it will no longer be needed when the industry reaches a better level of mandatory or voluntary disclosure). We encourage opinions and ideas be submitted on how to improve it. We also encourage ATSs to improve their level of disclosure and complete the ATS Questionnaire so that their score can be updated. Final Thoughts:
- How can you make informed order routing decisions if ATSs refuse to publicly disclose critical details about their core functionality?
- How can you know that you are fulfilling your Best Execution obligations without insight into the venues your orders are routed to?
- Are you sufficiently incorporating qualitative and quantitative data in your order routing decisions and execution quality analysis?