An alternative trading system (ATS) is what, exactly?
A trading platform that is less tightly regulated than an exchange is known as an alternative trading system (ATS). To match huge buy and sell orders among its users, ATS systems are frequently employed. Electronic communication networks (ECNs), computerized systems that automatically match buy and sell orders for securities in the market, are the most popular kind of ATS in the United States.
ATS (Alternative Trading System) Understanding
Most of the liquidity in publicly listed securities globally is provided through ATS. They are called multilateral trading facilities, cross networks, call networks, and ECNs in Europe. Most ATS are registered as broker-dealers rather than exchanges, concentrating on locating transaction counterparties.
Contrary to certain national exchanges, ATS does not establish guidelines for customer behavior or penalize customers other than by preventing them from trading. They are crucial in offering different ways to access liquidity.
Instead of trading big blocks of shares on national stock exchanges, institutional investors may utilize an ATS to discover transaction counterparties. Since ATS transactions are not recorded on national exchange order books, these moves may be intended to hide trading from the general public. The advantage of employing an ATS to carry out such orders is that it lessens the potential domino impact of big trades on an equity’s price.
Alternative Trading Systems (ATS) criticism
The SEC must authorize these trading venues. Regulators have recently increased their enforcement proceedings against ATS for violations such as trading against client order flow or using private customer trading information. Because ATS is subject to fewer rules than national exchanges, these infractions could be more frequent in ATS.
To stop other investors from making advance purchases, a hedge fund interested in amassing a sizable holding in equity may deploy an ATS. Dark pools may be used to refer to ATS utilized for these reasons.
Dark pools involve institutional orders from private exchanges transacting on ATS. These transactions are “dark” since much of their information is hidden from the general public. Block trades enabled outside the primary stock market exchanges and carried out by institutional investors, typically investment banks, produce the most liquidity in dark pools.
Dark pools operate with minimal transparency, although it is legal. As a result, dark pools and high-frequency trading (HFT) are frequently criticized by many in the financial sector; some traders think these components provide some stock market participants an unfair edge.
Alternative Trading System (ATS) regulation
A regulatory framework for ATS was established under SEC Regulation. While an ATS satisfies the requirements for an exchange under federal securities laws, it is exempt from registration as a national securities exchange if it operates by Exchange Act Rule 3a1-1(a). An ATS must follow rules 300–303 of Regulation ATS to operate under this exemption.
An ATS must register as a broker-dealer and submit a Form ATS Initial Operation Report to the Commission before starting operations to comply with Regulation ATS. For any modifications to its activities, an ATS must file updates to Form ATS, and if it shuts, it must file a cessation of operation report on Form ATS. Rule 301(b)(2) of Regulation ATS outlines the requirements for submitting reports using Form ATS. Mandatory reporting of books and records is one of these obligations.3
There have been initiatives to increase ATS transparency recently. For instance 2018, the SEC modified Regulation ATS to improve “operational transparency” for these platforms. This includes, among other things, submitting thorough public disclosures to alert the public to potential conflicts of interest and information-leaking hazards. Additionally, ATS is expected to have policies and procedures in writing to secure the trade information of its subscribers.4
According to Rule 3b-16 of the Exchange Act, an alternative trading system is “any organization, association, person, group of persons, or systems that (1) 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; and (2) that does not (i) set rules governing the trading of securities.”
- Large purchase and sell transactions are matched on alternative trading systems (ATS).
- Compared to exchanges, they are less strictly controlled.
- Dark pools and ECNs are ATS examples.
- A regulatory framework for these trading venues is established under SEC Regulation ATS.