When I think about how different tech was back in 1999, it seems such a short time for human society to change so profoundly. Back then, I didn’t have an email address, and it would be two years before I owned a very basic cellphone (a Nokia 5210, natch).

If you want to understand how the internet and tech have altered the ways that humans interrelate, you could do worse than read Canadian philosopher Marshall McLuhan. McLuhan never saw the internet—he died in 1980—but the formulation for which he’s famous—“the medium is the message”—is a key insight for our hyper-connected times.

What McLuhan meant was that the means by which a message is sent is more important than the message itself, and the meaning of the message is never neutral of the medium of its communication. It’s not just that the internet made communications faster and more efficient; the internet actually changed the meaning of what was being communicated, reshaping human relations.

Maybe it seems a stretch, but I think this can help us understand how profoundly tech is altering fixed-income markets: It’s not just that the internet and tech made existing trading methods faster and more efficient—they have reshaped the relationships between buyers, sellers, and brokers.

These transformations had regulators worried back then, and they have them worried now.

In the 1990s, while fungible securities like equities and futures were well on their way to automation, the large fixed-income dealer firms worked their networks on the phone, executing trades bilaterally. In the inter-dealer market, it was tough for brokers to find and match buyers and sellers. But the late 1990s brought an inflection point as electronic trading platforms in the most liquid inter-dealer markets sprang up.

By the year 2000, eSpeed, Tradeweb, and BrokerTec were trading US Treasuries, while EuroMTS provided a venue for sovereigns, agency bonds, and repos. Entrepreneur Richard McVey had pitched the idea that became MarketAxess to JP Morgan, launching it in 2000.

The better part of a quarter century later, automation in fixed income still lags other asset classes, especially in instruments like high-yield corporate bonds. But for the most part, voice traders have, as supervisors have put it, hung up the phone.

Lines between market participants, broker-dealers, and exchanges have blurred as new protocols like request-for-quote (RFQ) and central limit order books emerged, and liquidity provision transformed. High-frequency trading (HFT) strategies developed. In the dealer-to-customer markets, multi-dealer platforms have lowered costs and created efficiencies for customers.

There are decided benefits to innovation, but it has rattled the Securities and Exchange Commission (SEC). Back in 1999, the regulator—worried about the rapid automation of equities and, to a lesser extent, fixed-income trading—passed Regulation ATS. Reg ATS was designed to replace the 60-year-old framework in place at the time, which the SEC said did not account for the emergence of all the alternative trading systems (ATS) that were doing essentially what exchanges did while being regulated only as broker-dealers, or even not at all.

Reg ATS was the SEC’s answer to a classic regulator’s dilemma: how to incentivize innovation while also ensuring investor protection.

The rule allowed ATSs to choose whether to register as national securities exchanges (with a heavy regulatory burden) or as broker-dealers (with a lighter regulatory burden), depending on activities and trading volume. And it was apparently successful: Lobby organization Healthy Markets says that “With the adoption of Reg ATS, the SEC ushered in a new era of off-exchange trading. By mid-2015, approximately 15% of trades in National Market System securities were traded on ATSs.”

But of course trading tech has evolved since 1999, and over the years the SEC has amended the rule to reflect concerns about, for example, transparency of dark pools.

This year, however, may see the most thorough reform of Reg ATS yet.

The times they are a-changin’

On January 26, the SEC published a proposal for amendments to Reg ATS, and boy, it’s a monster. Weighing in at just shy of 700 pages, the proposal’s concerns hit a range of players in fixed income, equities, securities lending, and (possibly) even crypto.

Firstly, the proposal would expand the definition of “exchange” to include “systems that offer the use of non-firm trading interest and communications protocols (CPSs) to bring together buyers and sellers of securities.” A non-exhaustive list of examples given in the proposal says a CPS could be anyone or anything that provides RFQ, streams axes, or offers conditional order systems or bilateral negotiation protocols (chat functions and bulletin boards would not be pulled into scope).

As Larry Tabb, head of market structure research at Bloomberg Intelligence, wrote in a detailed report on this proposal, “In making these changes, the SEC is shifting the emphasis from firm ‘orders’ to the pre-trade ‘interaction’ between buyers and sellers.”

The proposal would also define “government securities ATS” as those that trade government securities, or repos or reverse repos in those securities. Essentially, that sweeps into the Reg ATS’s scope CPSs that handle those instruments.

As Tabb stated in a LinkedIn post, “It would appear that this proposal only impacts US T and repo platforms like [BrokerTec] or Tradeweb, but guess what? It’s way more impactful and will impact equity platforms, corporate bond, and muni platforms too.”

The proposal also makes this wider range of ATS subject to Regulation Systems Compliance and Integrity (Reg SCI), a standardized reporting framework the SEC uses to ensure the resiliency of electronic systems.

The proposal also tackles the Fair Access Rule, a provision in Reg ATS that prevents ATSs with significant trading volume in a particular security from discriminating against who it allows to access that liquidity. Under the proposal, fair access thresholds would be calculated at the parent company, rather than the platform.

And then there are the provisions around Form ATS-N, disclosures that certain equity ATSs (mainly dark pools) must make about their operations.

Basically, what this proposal would do if it became regulation in its present form is increase the number of ATSs that fall under its purview, increasing their disclosure requirements, among other compliance burdens associated with registration. Some of these are small businesses and Tabb says some may have to shutter their ATS altogether thanks to the burden associated with increased Reg SCI reporting.

The sheer size of the proposal, in addition to the fact that it has a 30-day deadline, has commenters worried. People at ATSs who I have reached out to about this proposal say they are still digesting it and trying to grasp which bits of it would affect their businesses.

The 30-day comment period only begins once the proposal is filed in the Federal Register, however. And since there is currently a backlog in register filings of a few months, commenters will have more time to better understand this document.

Sign o’ the times

I also believe that some aspects of the proposal are more a “concept release” than a reg proposal, per se: These parts are the SEC asking stakeholders for their opinion on how to go about regulating them, not so much telling them this is how they are going to be regulated.

The parts that I do think the SEC is set on passing into regulation, the ones that are a sign of the times, as it were, are those parts that try to pull more electronic fixed-income venues into Reg ATS (namely, the parts that deal with expanding the definition of exchange).

I think this because, as I have said, the Commission has always kept a worried eye on electronifying markets, and the regulation of corporate and muni electronic platforms is not a new problem for consideration. In 2018, the SEC formed the Fixed Income Market Structure Advisory Committee (Fimsac), which in that same year advised the Commission to review its oversight of these companies.

Fimsac, whose members included MarketAxess’s McVey, Tabb, Tradeweb founder Lee Olesky and representatives from large buy-side firms, government, tech providers, banks, and academia, said they found that credit and muni bond platforms in the US are subject to varying regulatory treatment. While some are regulated as ATSs, and others as broker-dealers, some offering comparable systems are not regulated at all, thanks to the equity-heavy focus of Reg ATS.

“For example, as a practical matter, electronic RFQ platforms for corporate and municipal bonds are excluded from Regulation ATS based on the characteristics of the RFQ trading protocol. Accordingly, a large and growing fraction of the corporate and municipal bond volumes that trade electronically in the US today occurs on platforms regulated only as broker-dealers,” the Fimsac report from 2018 says.

This disparity hinders competition in these markets, and fails to bring under scrutiny a large chunk of the volumes that trade on electronic platforms, Fimsac says, complicating efforts to improve the efficiency and resiliency of fixed-income electronic trading markets.

The Fimsac report fed into a concept release and proposal that the SEC published in September 2020 (some bits of which went into this latest Reg ATS proposal), and commenters agreed. MarketAxess, for example, said in its comment letter that “We believe that there should be a common regulatory framework for all multilateral fixed-income electronic trading platforms that requires minimum standards of conduct and oversight in areas such as trade reporting, resiliency, cyber-security, operational reporting, financial standards, examination, surveillance, and confidentiality.”

This concept release in its turn was foundational to the January 2022 proposal.

All things must pass

The other reason is I suspect the definitional parts of this proposal are the ones the SEC is most set on in their current form is that the EU is considering exactly the same measures.

Last year, my colleague Jo Gallagher wrote an article on the EU’s review of continental markets regulation. Jo reported then that the review was reigniting old debates around which kinds of firms should have to register as trading facilities, thus submitting to stricter supervision by EU authorities.

Jo said that large fixed-income venues like Bloomberg and Tradeweb have lobbied the European Commission to increase their scrutiny of a cohort of tech vendors, including providers of workflow tools, price aggregators, and even order and execution management systems. These exchanges have said that these vendors—which include pre-trade bond data provider Neptune, Symphony’s Sparc platform, Virtu Financial’s multi-asset RFQ hub, derivatives platform OTCX, and GMLX, a securities financing platform.

In late January of this year, just two days after the SEC proposed its own Reg ATS amendments, the European markets regulator published an opinion, the outcome of the review that Jo was reporting on, clarifying its ideas of what defines a multilateral system and the trading venue perimeter—in other words, who should register as a trading venue—and asking for comment.

To bring it back to McLuhan: If this massive proposal is the medium, the message from the Commission is that a new era of stricter fixed-income platform regulation is here.