Alternative Trading System (ATS) Definition

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Alternative Trading System (ATS) Definition

What Is an Alternative Trading System (ATS)?

An alternative trading system (ATS) is a less strictly regulated trading venue than an exchange. ATS systems are often used to match big buy and sell orders between their members. In the United States, the most common kind of ATS is electronic communication networks (ECNs), which are automated systems that automatically match buy and sell orders for securities in the market.

Key Takeaways

  • Alternative trading systems (ATS) are marketplaces for massive buy-and-sell transactions.
  • They are not as highly regulated as exchanges.
  • Examples of ATS include dark pools and ECNs.
  • SEC Regulation ATS establishes a regulatory framework for these trading venues.

Understanding an Alternative Trading System (ATS)

ATSaccount for a large portion of the liquidity available in publicly traded securities across the globe. In Europe, they are known as multilateral trading facilities, ECNs, cross networks, and call networks. Most ATS are registered as broker-dealers rather than exchanges, and their primary mission is to locate counterparties for transactions.

In the United States and Canada, the phrase “alternative trading system” (ATS) is used. They are known as multilateral trading facilities in Europe.

Unlike several national exchanges, ATS does not impose regulations limiting subscriber behavior or penalize subscribers other than by excluding them from trading. They play a crucial role in offering alternate methods of obtaining liquidity.

Instead of trading big blocks of shares on national stock exchanges, institutional investors may utilize an ATS to discover counterparties for transactions. Because ATS transactions do not show on national exchange order books, these moves may be intended to hide trade from public view. The advantage of employing an ATS to execute such orders is that it lowers the domino effect that huge transactions may have on an equity’s price.

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According to the Securities and Exchange Commission, ATS accounted for about 18% of all stock trading between 2013 and 2015. (SEC).This number was more than four times higher than in 2005.

Criticisms of Alternative Trading Systems (ATS)

The SEC must authorize these trading venues. Regulators have increased enforcement proceedings against ATS in recent years for violations such as trading against client order flow or using sensitive customer trading information. Because ATS face less controls, these infractions may be more prevalent than in national exchanges.

Dark Pools

A hedge fund that wants to acquire a significant stake in a stock may utilize an ATS to prevent other investors from purchasing ahead of time. Dark pools are ATS that are used for these reasons.

Dark pools include institutional orders placed on secret exchanges trading on ATS. The public has little access to information about these transactions, which is why they are referred to be “dark.” The majority of dark pool liquidity is generated by block transactions executed by institutional investors away from the major stock exchanges (primarily investment banks).

Despite the fact that they are legal, dark pools operate with minimal transparency. As a consequence, dark pools and high-frequency trading (HFT) are often criticized by many in the financial business; some traders think that these aspects provide an unfair edge to some stock market participants.

Regulation of Alternative Trading Systems (ATS)

SEC Regulation ATS developed an ATS regulatory framework. An ATS fits the definition of an exchange under federal securities laws, but it is not needed to register as a national securities exchange if it operates under the Exchange Act Rule 3a1-1 exemption (a).To operate under this exemption, an ATS must follow the rules in Regulation ATS Rules 300-303.

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Before commencing operations, an ATS must register as a broker-dealer and submit an initial operating report on Form ATS with the Commission. An ATS must submit Form ATS modifications to give notice of any changes to its activities, and a cessation of operation report on Form ATS if it shuts. The requirements for submitting reports using Form ATS are outlined in Regulation ATS Rule 301(b)(2). Mandatory reporting of books and records is one of these obligations.

There have been recent efforts to make ATS more transparent. In 2018, for example, the SEC modified Regulation ATS to improve “operational transparency” for such systems. This includes, among other things, submitting extensive public disclosures to notify the broader public about possible conflicts of interest and information leaking hazards. ATSs must also have established protections and processes in place to secure their subscribers’ trade information.

The SEC defines an alternative trading system formally as “any organization, association, person, group of persons, or systems (1) that constitutes, maintains, or provides a market place 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 trading of securities.”

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