Alternative Trading Systems (ATS)
An Alternative Trading System (ATS) is a SEC-regulated electronic trading venue that matches buyers and sellers of securities outside of traditional exchanges. ATSs provide alternative methods for trading securities, often offering specialized features like dark liquidity, unique order types, or specific trading protocols.
Understanding alternative trading systems
Alternative Trading Systems serve as important venues in modern market structure, operating alongside traditional exchanges but with distinct characteristics and regulatory requirements. Unlike exchanges, ATSs typically don't set rules governing subscriber conduct beyond trading practices and don't discipline subscribers beyond exclusion from trading.
The most common type of ATS is an Electronic Communication Network (ECN), which automatically matches buy and sell orders at specified prices. Another significant category is dark pools, which provide anonymous trading without displaying quotes publicly.
Key characteristics of ATSs
Trading mechanisms
ATSs employ various matching mechanisms to execute trades:
Regulatory framework
ATSs must:
- Register as broker-dealers
- File Form ATS with the SEC
- Comply with Regulation ATS requirements
- Meet fair access requirements if trading volume exceeds certain thresholds
Market impact
ATSs contribute to market structure in several ways:
- Provide additional sources of liquidity
- Reduce market impact through anonymous trading
- Enable specialized trading strategies
- Foster competition with traditional exchanges
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Technology infrastructure
ATSs require robust technology infrastructure to operate effectively:
Core components
- Matching engines for order execution
- Market data distribution systems
- Risk management controls
- Connectivity infrastructure
- Surveillance systems
Performance considerations
- Latency management
- High availability requirements
- Capacity planning
- Data integrity controls
Market data and transparency
ATSs must balance operational efficiency with regulatory transparency requirements:
Reporting obligations
- Real-time trade reporting to FINRA
- Volume reporting requirements
- Best execution documentation
- Order handling disclosures
Price discovery
While some ATSs contribute to public price discovery, others (particularly dark pools) intentionally minimize market impact by limiting pre-trade transparency.
Future developments
The ATS landscape continues to evolve with:
- Integration of new technologies
- Expansion into new asset classes
- Enhanced regulatory oversight
- Innovation in matching mechanisms
- Adaptation to changing market structure
ATSs remain at the forefront of market structure evolution, adapting to new technologies and regulatory requirements while providing valuable trading alternatives to market participants.