What Is an Alternative Trading System (ATS)?
An alternative trading system (ATS) is a trading venue that is more loosely regulated than an exchange. ATS platforms are often used to match large buy and sell orders among their subscribers. The most widely used type of ATS in the United States is anelectronic communication network(ECN)—a computerized system that automatically matches buy and sell orders for securities in the market.
Key Takeaways
- Alternative trading systems (ATS) are venues for matching large buy and sell transactions.
- They are not as highly regulated as exchanges.
- Examples of ATSs include dark pools and ECNs.
- SEC Regulation ATS establishes a regulatory framework for these trading venues.
Understanding an Alternative Trading System (ATS)
ATSsaccount for much of theliquidityfound in publicly traded issues worldwide. They are known as multilateral trading facilities in Europe,ECNs, cross networks, and call networks. Most ATSs are registered as broker-dealers rather than exchanges and focus on findingcounterpartiesfor transactions.
Unlike some national exchanges, ATSs do not set rules governing the conduct of subscribers or discipline subscribers, other than by excluding them from trading. They are important in providing alternative means to access liquidity.
Institutional investorsmay use an ATS to find counterparties for transactions, instead of trading large blocks of shares on national stock exchanges. These actions may be designed to conceal trading from public view since ATS transactions do not appear on national exchange order books. The benefit of using an ATS to execute such orders is that it reduces the domino effect that large trades might have on the price of an equity.
"Alternative trading system (ATS)" is the terminology used in the U.S. and Canada. In Europe, they are known as "multilateral trading facilities."
Criticisms of Alternative Trading Systems (ATSs)
These trading venues must be approved by the SEC. Regulators have stepped up enforcement actions against ATSs for infractions such as trading against customer order flow or making use of confidential customer trading information. These violations may be more common in ATSs than in national exchanges because ATSs face fewer regulations.
Dark Pools
A hedge fund interested in building a large position in a company may use an ATS to prevent other investors from buying in advance. ATSs used for these purposes may be referred to asdark pools.
Dark pools entail trading on an ATS byinstitutionalorders executed on private exchanges. Information about these transactions is mostly unavailable to the public, which is why they are called "dark." The bulk of dark poolliquidityis created by block trades facilitated away from the central stock market exchanges and conducted by institutional investors (primarily investment banks).
Although they are legal, dark pools operate with little transparency. As a result, dark pools, along with high-frequency trading(HFT), are oft-criticized by those in the finance industry; some traders believe that these elements convey an unfair advantage to certain players in the stock market.
Regulation of Alternative Trading Systems (ATSs)
SEC Regulation ATS established a regulatory framework for ATSs. An ATS meets the definition of an exchange under federal securities laws but is not required to register as a national securities exchange if the ATS operates under the exemption provided under Exchange Act Rule 3a1-1(a). To operate under this exemption, an ATS must comply with the requirementsin Rules 300-303 of Regulation ATS.
To comply with Regulation ATS, an ATS must register as a broker-dealer and file an initial operation report with the Commission on Form ATS before beginning operations. An ATS must file amendments to Form ATS to provide notice of any changes to its operations and must file a cessation of operation report on Form ATS if it closes. The requirements for filing reports using Form ATS are in Rule 301(b)(2) of Regulation ATS. These requirements include mandated reporting of books and records.
There have been moves to make ATS more transparent. For example, the SEC amended Regulation ATS to enhance "operational transparency" for such systems in 2018. Among other things, this entails filing detailed public disclosures to inform the general public about potential conflicts of interest and risks of information leakage. ATSs are also required to have written safeguards and procedures to protect subscribers' trading information.
The SEC formally defines an alternative trading system as "any organization, association, person, group of persons, or systems (1) that constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 under the Exchange Act; and (2) that does not (i) set rules governing the conduct of subscribers other than the conduct of such subscribers' trading on such organization, association, person, group of persons, or system, or (ii) discipline subscribers other than by exclusion from trading."
What Is the Difference Between OTC and ATS?
Over-the-counter (OTC) securities are securities that are not listed on an exchange. They trade between parties directly. Most of these trades are completed on alternative trading systems (ATS). ATSs show quotes from broker-dealers for OTC securities. There are two such interdealer quotation systems: Global OTC ATS and OTC Link ATS.
What Is the Difference Between an Exchange and an ATS?
A stock exchange is a heavily regulated marketplace that brings together buyers and sellers to trade listed securities. An ATS is an electronic venue that also brings buyers and sellers together; however, it does not have any regulatory responsibilities (though it is regulated by the SEC) and trades both listed and unlisted securities.
How Do Alternative Trading Systems Make Money?
Alternative trading systems make money by charging fees and commissions for transactions. The more trades a trader makes, the more cost to them and more sales revenue for the ATS.
The Bottom Line
Alternative trading systems (ATSs) facilitate large buy and sell orders between parties, usually institutional investors, which helps keep such trades private and limits the impact that such large orders would have on the price of a security in the open, public markets.
