What is an Alternative Trading System (ATS)

An alternative trading system (ATS) is one that is not regulated as an exchange but is a venue for matching the buy and sell orders of its subscribers. 

BREAKING DOWN Alternative Trading System (ATS)

ATS account for much of the liquidity found in publicly traded issues worldwide. They are known as multilateral trading facilities in Europe, electronic communication networks (ECNs), cross networks, and call networks. Most ATS are registered as broker-dealers rather than exchanges and focus on finding counterparties for transactions. Unlike some national exchanges, ATS do not set rules governing the conduct of subscribers or discipline subscribers other than by excluding them from trading. They are important in providing alternative means to access liquidity.

 Institutional investors may 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 do not 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. ATS used for these purposes may be referred to as dark pools.

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

Regulation ATS Explained

Regulation ATS established a regulatory framework for ATS. An ATS imeets the definition of 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, among other things, 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.