In the Matter of INET ATS, Inc.

INET ATS, Inc. (INET) (defendant) was a registered broker-dealer that operated an alternative trading system (ATS) pursuant to Regulation ATS under the Securities Exchange Act of 1934. INET was formed by the combination of Instinet-ATS, an ATS operated by a subsidiary of Instinet Group Incorporated, and another ATS. Rule 301(b)(5) of Regulation ATS (the fair-access rule) required that an ATS with 20 percent or more of the average daily volume for any covered security during four of the preceding six months (the fair-access threshold) establish written standards for granting access to trading the security on its system and not unreasonably prohibit or limit access to its services by applying its standards in an unfair or discriminatory manner. The rule also required that all grants, denials, and limitations of access and the reasons for them be reported on the ATS’s quarterly Form ATS-R. Between February 2002 and July 2003, Instinet-ATS crossed the fair-access threshold with respect to multiple securities each month. Instinet-ATS’s product BookStream allowed a subscriber to view all bids and offers on the ATS, not just the best ones, thus providing real-time data about the depth of trading interest in securities. Instinet-ATS’s written access standards incorporated by reference subscriber agreements that prohibited subscribers from making Instinet-ATS services and data available to third parties without Instinet-ATS’s approval. The standards did not specify the circumstances under which Instinet-ATS would authorize subscribers to redistribute BookStream’s services to customers. Instinet-ATS authorized some subscribers to redistribute BookStream and denied permission to other similarly situated subscribers. The Forms ATS-R Instinet-ATS filed failed to disclose all grants, denials, and limitations of access to BookStream. The Securities and Exchange Commission (SEC) (plaintiff) instituted public administrative and cease-and-desist proceedings against INET.