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.

RELATED TERMS
  1. SEC Form ATS

    A form that is filed with the SEC as an initial operation report ...
  2. Electronic Communication Network ...

    An electronic system that attempts to eliminate the role of a ...
  3. Alternative Asset

    An alternative asset is any non-traditional asset with potential ...
  4. Alternative Depreciation System ...

    Alternative Depreciation System is a depreciation schedule with ...
  5. Limit Order Information System ...

    An electronic system used by specialists in the stock market. ...
  6. Financial System

    A financial system can be defined at the global, regional or ...
Related Articles
  1. Investing

    Are Alternative Mutual Funds, ETFs Right for You? (MORN)

    Alternative mutual fund and ETFs are gaining popularity but are they a good idea for your regular Joe investor?
  2. Investing

    Investment Strategy Case Study: Traditional Vs. Alternatives for 2016

    Learn more about some types of alternative investments and why you should consider adding them in your portfolio in 2016.
  3. Insights

    Should You Be Afraid Of Dark Pool Liquidity?

    Don't fear the deep end. Dark pool liquidity can help drive down stock cost for everyday investors.
  4. Trading

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
  5. Taxes

    How A Company Files With The SEC

    Filing with the SEC is not as complicated as you might thing -- just be meticulous about following the steps.
  6. Investing

    Alternative Assets For Average Investors

    These investments can add a new level of diversification to your portfolio.
  7. Insights

    Getting to Know the Stock Exchanges

    Here are the answers to all the questions you have about stock exchanges but are too afraid to ask.
RELATED FAQS
  1. To what extent does government regulation impact the electronics sector?

    Learn more about production regulation in the electronics industry and how these regulations may contribute to lesser productivity ... Read Answer >>
  2. Should mutual funds be subject to more regulation?

    Understand whether mutual funds need stricter regulation. Learn what types of current and future regulations have been put ... Read Answer >>
  3. How are margin calls regulated by the SEC?

    Learn how FINRA and the Federal Reserve Board regulate trading in margin accounts, and see how brokers can liquidate positions ... Read Answer >>
  4. Move from an OTC to a major exchange

    In order to move a company from over-the-counter market to a major exchange, a number of conditions must be met to being ... Read Answer >>
  5. What does it mean when my broker says that shares are for auction?

    An auction market is one in which stock buyers enter competitive bids and stock sellers enter competitive offers at the same ... Read Answer >>
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  5. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  6. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Trading Center