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Alternative Trading System

An Alternative Trading System (ATS) is a venue for trading securities that is not a registered stock exchange but operates under SEC Rule 10b-2. An ATS matches customer orders electronically without displaying quotes or operating a visible order book (if it is a dark pool) or with full transparency (if it is a lit venue). ATSs are a heterogeneous category encompassing hundreds of platforms and account for approximately 30% of US equity trading volume.

This entry is about the regulatory category. For transparent ATSs, see lit venue; for opaque ones, see dark pool.

What is an ATS?

An Alternative Trading System is, fundamentally, a private order-matching system. A customer submits a buy or sell order; the ATS matches it with another customer’s order and executes a trade.

The key distinction from a stock exchange is that an ATS does not have to operate a visible, disclosed order book or quote system. This allows ATSs to operate dark pools or other opaque venues.

However, ATSs must meet certain regulatory requirements:

  • Registration with SEC: Must file Form 1-ATS and comply with Rule 10b-2.
  • Fair access: Must provide fair and non-discriminatory access to market participants meeting reasonable financial and technical standards.
  • Rule adoption: Must adopt and enforce rules regarding order conduct, market manipulation, and insider trading.
  • Trade reporting: Must report trades to the consolidated tape.
  • Record-keeping: Must maintain detailed records and audit trails.

Types of ATSs

Dark pools: Private matching venues where pre-trade orders are not visible. Examples: Goldman Sachs Sigma X, JPMorgan’s internal pool, Citadel’s Apian.

Lit venues: ATSs with visible order books and quotes. Examples: Cboe BXE, Instinet, Turquoise (in Europe).

Broker crossing networks: Brokers operating internal venues that match client orders at negotiated prices.

Specialized venues: ATSs for specific securities (bonds, options, commodities) or strategies.

How ATSs compete with exchanges

Before Reg NMS (2007), exchanges had near-monopolies on trading listed securities. Reg NMS opened the market to alternative trading systems, allowing them to compete on:

  • Fees: Charging lower or zero fees to attract order flow.
  • Speed: Operating ultra-low-latency systems for high-frequency traders.
  • Order types: Offering specialized order types (pegging, iceberg, etc.) not available on exchanges.
  • Dark liquidity: Allowing large institutions to trade without moving markets.
  • Technology: Investing in cutting-edge matching engines and data systems.

Advantages and disadvantages

Advantages:

  • Lower fees: Many ATSs charge less than exchanges, reducing trading costs.
  • Customization: Brokers can tailor ATS functionality to their needs.
  • Innovation: ATSs often pioneer new order types and execution strategies.
  • Flexibility: Can operate 24-hour markets or specialized asset classes.

Disadvantages:

  • Fragmentation: Trading fragmentation across ATSs makes price discovery harder.
  • Opacity (dark pools): Dark pools reduce market transparency.
  • Systemic risk: Opaque ATSs are harder to monitor for market abuses.
  • Conflicts of interest: ATS operators (often banks) may prioritize internal flow.

Regulatory oversight

ATSs are subject to SEC Rule 10b-2 and Reg NMS. Key rules:

  • Must report trades promptly.
  • Cannot discriminate against participants.
  • Must maintain fair and orderly markets.
  • Must adopt conflict-of-interest policies.

The SEC and FINRA conduct surveillance of ATSs, looking for manipulation, insider trading, and order-routing violations.

Market share and growth

ATSs have grown from near zero in 1998 to approximately 30% of US equity volume by 2020. Growth has accelerated with:

  • Regulatory encouragement under Reg NMS.
  • Technology improvements reducing operating costs.
  • Fee competition from established exchanges.
  • Demand from institutions for dark pools.

The largest ATSs are affiliated with major banks; independent ATSs hold a smaller share but are growing.

Systemic importance

The proliferation of ATSs has raised systemic stability questions. In the 2010 flash crash and other volatile episodes, fragmentation across multiple ATSs has sometimes contributed to cascading failures. Regulators are concerned about:

  • Contagion risk if one major ATS fails.
  • Difficulty monitoring and understanding aggregate market behavior.
  • Potential for manipulation in less-regulated venues.

See also

Wider context