What is an Alternative Trading System?

What is an Alternative Trading System?

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 its subscribers. The most widely used type of ATS in the United States are electronic communication networks (ECNs)—computerized systems that automatically match buy and sell orders for securities in the market.

Alternative trading systems (ATS) are venues for matching large buy and sell transactions.

They are not as highly regulated as exchanges.

Examples of ATS include dark pools and ECNs.

How Does an Alternative Trading System Work?

Alternative Trading Systems (ATSs) are a popular non-exchange avenue for trading. They are electronic trading systems that are approved by the SEC to execute buy and sell orders. One of the major attributes of ATS is its high liquidity amongst other trading platforms and exchanges ATSs are required to undergo a registration process, these platforms focus on matching but and sell orders but do not function as actual exchanges, instead, they are registered as broker-dealers.

There are some differences between ATS and national exchanges. For instance, an ATS cannot regulate the conduct of subscribers because they have no power to set rules guiding the behaviors of subscribers. Exclusion of certain subscribers from trading cannot be done on ATS as against what is obtainable in national exchanges where traders can face disciplinary actions.

 Individual investors and institutional investors can trade on ATS, rather than on national exchanges. The reason for this is mostly because ATS transactions do not show on national exchange order books and can, therefore, be easily shielded from public view.

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What Do Alternative Trading Systems Do?

Alternative Trading Systems play an important role in public markets as an alternative to traditional stock exchanges to access market liquidity or how quickly an asset can be sold for goods or services.

An ATS is particularly useful for those who are conducting large quantities of trading, such as investors and professional traders, since the skewing of the market price can be avoided as with regular stock exchanges. It is because trading conducted on ATS is not publicly available and does not appear on national exchange order books. There are also fewer rules involved, other than those governing conduct.

Regulation of Alternative Trading Systems (ATS)

SEC Regulation ATS established a regulatory framework for ATS. 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 requirements in 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 is in Rule 301(b)(2) of Regulation ATS. These requirements include mandated reporting of books and records.

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In recent times, 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. ATS are also required to have written safeguards and procedures to protect subscribers’ trading information.