What is an 'Alternative Trading System - ATS'

An alternative trading system is one that is not regulated as an exchange but is a venue for matching the buy and sell orders of its subscribers. Alternative trading systems are becoming increasingly popular around the world and account for much of the liquidity found in publicly traded issues. Also known as a multilateral trading facility in Europe, electronic communication networks (ECNs), cross networks, and call networks, depending on the situation.

BREAKING DOWN 'Alternative Trading System - ATS'

Most alternative trading systems – or ATS – are registered as broker-dealers rather than exchanges and focus on finding counterparties for transactions. Unlike some national exchanges, alternative trading systems do not set rules governing the conduct of subscribers or discipline subscribers in any way other than excluding them from trading. Most ATSs match orders electronically, but they don’t necessarily have to be electronic. These trading systems play an important role in providing alternative means for accessing liquidity.

Often times, institutional investors 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 don’t appear on national exchange order books. For example, a hedge fund interested in building a large position in an equity may use an ATS to prevent other investors from buying in advance. ATSs used for these purposes may also be referred to as dark pools.

The Securities and Exchange Commission (SEC) must approve alternative trading systems. In recent years, these regulators have stepped up enforcement actions against alternative trading systems for infractions like trading against customer order flow or making use of confidential customer trading information. These violations may be more common in alternative trading systems than national exchanges given that they face fewer regulations.

Regulation ATS

The Securities and Exchange Commission introduced Regulation ATS in 1998 to protect investors and resolve any concerns arising from alternative trading systems. The regulations require stricter record keeping and demand more intensive reporting on issues like transparency once it reaches more than 5% of the trading volume of any given security. These requirements include reporting under Rule 301 (b)(5)(ii) of Regulation ATS.

The Bottom Line

Alternative trading systems are those that are not regulated as an exchange, but still match buyers and sellers within their own subscriber base. The SEC requires alternative trading systems to apply for approval and requires that they keep proper records under Regulation ATS.

  1. SEC Form ATS

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  2. SEC Form ATS-R

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  5. Multilateral Trading Facility - ...

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