What is an Alternative Trading System?

An alternative trading system (ATS) is a trading venue that operates with less regulation than traditional stock exchanges. ATS platforms, like electronic communication networks (ECNs), match large buy and sell orders for securities. They provide a platform for institutional investors to find counterparties and execute trades away from public view.

ATS, also known as multilateral trading facilities in Europe, do not set rules or discipline subscribers. Instead, their primary focus is on connecting buyers and sellers. These platforms, including dark pools, offer advantages such as anonymity and the ability to conceal trading activity.

While ATS accounted for around 18% of all stock trading between 2013 and 2015, they have also faced enforcement actions for infractions like trading against customer order flow. To ensure compliance, ATS must register as a broker-dealer and adhere to reporting requirements.

Overall, ATS offer a less regulated alternative for institutional investors seeking counterparties and privacy in their trading activities. However, concerns about transparency and unfair advantages have brought attention to the need for enhanced operational transparency and public disclosures in the ATS industry.

• Alternative trading systems (ATS) are less regulated than exchanges and focus on finding counterparties for securities transactions.

• ATS, such as electronic communication networks (ECNs) and dark pools, provide opportunities for institutional investors to conceal trading and avoid public view.

• ATS accounted for a significant portion of stock trading between 2013 and 2015 but have faced enforcement actions for infractions like trading against customer order flow.

• SEC Regulation ATS establishes a regulatory framework for ATS, requiring registration as a broker-dealer and compliance with reporting requirements.

• ATS have been criticized for lack of transparency and unfair advantages, but moves have been made to enhance operational transparency and public disclosures.

Understanding Alternative Trading Systems

Definition

An alternative trading system (ATS) is a trading venue that operates outside the traditional exchange framework and is generally subject to less regulation. ATS platforms, such as electronic communication networks (ECNs), provide a platform for matching large buy and sell orders for securities. These platforms focus on bringing together buyers and sellers without setting rules or disciplining subscribers.

In Europe, alternative trading systems are known as multilateral trading facilities (MTFs). They serve as an alternative to traditional stock exchanges and primarily focus on facilitating transactions between buyers and sellers of securities.

Regulation

While alternative trading systems are generally less regulated than exchanges, they are not completely exempt from regulatory oversight. In the United States, the Securities and Exchange Commission (SEC) established Regulation ATS to provide a regulatory framework for these trading systems. ATS platforms must register as broker-dealers and comply with reporting requirements. Compliance with Financial Industry Regulatory Authority (FINRA) rules is also required for registered broker-dealers operating an ATS.

The SEC defines an ATS as a marketplace or facility for bringing together buyers and sellers of securities without setting rules or disciplining subscribers. Although not a national securities exchange, an ATS can apply to become one.

To ensure compliance with regulatory obligations, member firms operating alternative trading systems should review specific FINRA rules, such as 1012, 1013, 1014, and 1017, for new membership applications or existing members operating an ATS. Member firms must stay updated on new laws, rules, and regulations and regularly update their compliance programs.

Multilateral Trading Facilities

In Europe, alternative trading systems are referred to as multilateral trading facilities (MTFs). MTFs, like ATS platforms, provide a venue for bringing together buyers and sellers of securities. These trading facilities offer a less regulated alternative to traditional stock exchanges.

Trading conducted on MTFs is not publicly available and does not appear on national exchange order books. This lack of transparency has been a common issue associated with alternative trading systems, including dark pools.

Dark pools, a type of ATS, operate with little transparency and are often used by institutional investors to conduct block trades out of the public eye. However, dark pools have faced criticism for providing unfair advantages and preventing other investors from buying in advance.

Other examples of alternative trading systems include electronic communication networks (ECNs), crossing networks, and call markets. ECNs enable major brokerages and individual traders to trade securities directly without a middleman. Crossing networks and call markets also allow trades to occur outside of the public eye and do not impact security prices.

It is worth noting that alternative trading systems can be susceptible to allegations of rules violations and may face enforcement actions by regulators. Ensuring compliance with regulatory obligations and maintaining transparency are ongoing challenges for these trading venues.

For more information and detailed guidance on regulatory obligations related to alternative trading systems, member firms can refer to the Broker-Dealer Registration Topic Page and other relevant FINRA Topic Pages. Additionally, the SEC's Office of General Counsel (OGC) provides interpretative guidance on FINRA's rules, and MAP's pre-filing meeting process can be utilized for additional guidance by contacting MAP.

To learn more about alternative trading systems, you can refer to the Investopedia article on the topic.

Remember, alternative trading systems offer a different approach to trading securities, providing a platform for matching large buy and sell orders. While they may offer certain advantages for institutional investors and professional traders, their lack of transparency and potential regulatory challenges require careful consideration.

Functionality of Alternative Trading Systems

Alternative trading systems (ATS) play a significant role in the world of securities trading. These platforms, which are often referred to as multilateral trading facilities in Europe, provide a trading venue that is less regulated than traditional exchanges. ATS platforms, such as electronic communication networks (ECNs), match large buy and sell orders for securities, allowing investors to execute trades efficiently.

Matching Orders

One of the key functions of an alternative trading system is to match orders from buyers and sellers. When a buyer and a seller place orders for the same security at the same price, the ATS platform facilitates the transaction, bringing the two parties together. This matching process helps ensure that trades are executed promptly and at the desired price.

Finding Counterparties

ATS platforms focus on finding counterparties for transactions rather than setting rules or disciplining subscribers. This means that their primary goal is to connect buyers and sellers, allowing them to complete their trades. Institutional investors, in particular, find ATS valuable for this purpose. These investors can utilize ATS to find counterparties and conduct trades away from the public view. This level of confidentiality can be advantageous for institutional investors who wish to conceal their trading activities.

Institutional Investors

Institutional investors, such as hedge funds and pension funds, often turn to alternative trading systems for their trading needs. These investors typically engage in large-scale trading, and ATS platforms provide the liquidity and anonymity necessary for their transactions. By utilizing ATS, institutional investors can execute trades without affecting market prices and minimize the impact of their trading activities on the broader market.

ATS accounted for approximately 18% of all stock trading between 2013 and 2015, highlighting their significance in the financial markets. However, it's worth noting that ATS have faced enforcement actions in the past for infractions such as trading against customer order flow. Maintaining compliance with regulatory requirements is crucial for the proper functioning of these trading systems.

Overall, alternative trading systems offer unique functionality that caters to the needs of institutional investors and other market participants. While they operate with less regulation compared to traditional stock exchanges, ATS platforms provide a valuable service by facilitating trades and connecting buyers and sellers. However, it's important to address concerns regarding transparency and unfair advantages associated with certain types of ATS, such as dark pools.

For more information on alternative trading systems, you can refer to the Corporate Finance Institute website.

Please note that the provided information is accurate as of the current date (2024-03-24) and may not reflect recent regulatory changes. It is always advisable to stay updated on new laws, rules, and regulations in the financial industry.

ATS vs. Traditional Stock Exchanges

In the world of stock trading, there are various platforms and venues where investors can buy and sell securities. One such platform is an alternative trading system (ATS). But what exactly is an ATS, and how does it differ from traditional stock exchanges?

Regulatory Differences

One of the key distinctions between ATS and traditional stock exchanges lies in the level of regulation. ATS platforms, such as electronic communication networks (ECNs), operate with less regulatory oversight compared to exchanges. In Europe, ATS are known as multilateral trading facilities (MTFs).

Unlike traditional exchanges, ATS do not set rules or discipline their subscribers. Instead, their primary focus is on finding counterparties for transactions. This lack of regulatory control can attract institutional investors who may use ATS to find counterparties and conceal their trading activities from public view.

However, it's important to note that ATS have not escaped scrutiny and enforcement actions. In the past, they have faced enforcement actions for infractions such as trading against customer order flow. One particular type of ATS, known as dark pools, has been criticized for operating with little transparency and providing unfair advantages to certain investors.

Trading Transparency

Transparency is another area where ATS and traditional exchanges differ. When trading is conducted on an ATS, the transactions are not publicly available and do not appear on national exchange order books. This lack of transparency is especially prevalent in dark pools, where trading occurs out of the public eye.

On the other hand, traditional exchanges provide a higher level of trading transparency. Transactions conducted on exchanges are publicly visible, allowing investors to see the order flow and market activity.

Market Accessibility

Another aspect to consider when comparing ATS and traditional stock exchanges is market accessibility. ATS platforms can be particularly useful for investors and professional traders who conduct large quantities of trading. Examples of ATS include ECNs, dark pools, crossing networks, and call markets.

ECNs, for instance, enable major brokerages and individual traders to trade securities directly without the need for a middleman. Dark pools, on the other hand, are often used by institutional investors for block trades, allowing them to trade discreetly. Crossing networks and call markets also offer alternative trading options outside of the public eye.

While ATS provide unique opportunities for market participants, it's important to highlight that they need to obtain approval from the U.S. Securities and Exchange Commission (SEC) to operate.

Conclusion

In summary, alternative trading systems (ATS) differ from traditional stock exchanges in terms of regulatory oversight, trading transparency, and market accessibility. ATS platforms operate with less regulation, attracting institutional investors who seek privacy in their trading activities. However, this lack of transparency can raise concerns about fairness and market integrity. On the other hand, traditional exchanges provide greater trading transparency and are open to all market participants. Each platform has its advantages and disadvantages, and investors should consider their specific needs and preferences when choosing where to trade.

For more information on ATS and their regulatory obligations, you can refer to this Investopedia article.

Types of Alternative Trading Systems

Alternative trading systems (ATS) are trading venues that operate with less regulation than traditional exchanges. They provide a platform for matching large buy and sell orders for securities. ATS platforms, such as electronic communication networks (ECNs), dark pools, crossing networks, and call markets, play a significant role in the financial market landscape.

Electronic Communication Networks (ECNs)

ECNs enable major brokerages and individual traders to trade securities directly without the need for intermediaries. These platforms electronically match buy and sell orders, allowing for efficient and transparent trading. ECNs have revolutionized the way securities are traded, providing increased speed and accessibility to market participants.

Dark Pools

Dark pools are ATS used primarily by institutional investors to execute large block trades away from public view. These platforms operate with little transparency, as trading activity is not publicly available and does not appear on national exchange order books. While dark pools offer benefits such as reduced market impact and improved execution prices for large trades, they have faced criticism for providing unfair advantages and contributing to a lack of market transparency.

Crossing Networks

Crossing networks are another type of ATS that allows trades to occur outside of the public eye. These platforms match buy and sell orders internally, without impacting security prices. Crossing networks are particularly useful for institutional investors looking to execute large trades while minimizing market impact. By matching orders internally, crossing networks provide a more discreet trading environment.

Call Markets

Call markets are ATS that group together orders until a specific number is reached before conducting the transaction. This type of trading system is commonly used in auctions or when there is a need for price discovery. Call markets provide a centralized platform for buyers and sellers to come together and execute trades at a specified time and price.

ATS platforms have gained popularity among institutional investors and professional traders due to their ability to facilitate large quantities of trading and provide anonymity. However, they have also faced enforcement actions for infractions such as trading against customer order flow.

It is important to note that ATS platforms are subject to regulatory oversight. In the United States, the U.S. Securities and Exchange Commission (SEC) established Regulation ATS, which provides a regulatory framework for these systems. ATS platforms must register as broker-dealers and comply with reporting requirements. Efforts have been made to enhance operational transparency and public disclosures to make ATS platforms more transparent.

In Europe, ATS platforms are known as Multilateral Trading Facilities (MTFs) and operate under different regulatory frameworks. While ATS platforms offer benefits in terms of liquidity and execution efficiency, they also pose challenges related to transparency and potential rules violations. It is crucial for market participants to stay updated on new laws, rules, and regulations and regularly review their compliance programs.

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Challenges and Concerns with Alternative Trading Systems

Alternative trading systems (ATS) have emerged as popular trading venues that offer flexibility and convenience to market participants. However, they also come with their own set of challenges and concerns. In this section, we will delve into some of the key issues associated with ATS, including lack of transparency, enforcement actions, and rules violations.

Lack of Transparency

One of the major concerns surrounding alternative trading systems is the lack of transparency. Unlike traditional stock exchanges, ATS operate with less regulation and do not provide the same level of transparency to the public. This opacity can make it difficult for investors to fully understand the market dynamics and the true supply and demand for securities.

Dark pools, a type of ATS, are particularly criticized for their lack of transparency. These platforms allow institutional investors to trade large blocks of securities away from public view. While dark pools can offer advantages in terms of anonymity and price improvement, their lack of transparency raises concerns about unfair advantages and potential market manipulation.

Enforcement Actions

Another challenge faced by alternative trading systems is the risk of enforcement actions. ATS have been subject to regulatory scrutiny and enforcement actions for various infractions. One common issue is trading against customer order flow, where ATS operators or participants may engage in practices that prioritize their own interests over the best execution of customer orders.

Enforcement actions can have serious consequences for ATS operators, including fines, sanctions, and reputational damage. Regulators closely monitor ATS activities to ensure compliance with securities laws and regulations, heightening the need for robust internal controls and oversight.

Rules Violations

ATS operate within a regulatory framework established by the U.S. Securities and Exchange Commission (SEC). While ATS themselves do not set rules or discipline subscribers, they are required to register as broker-dealers and comply with reporting requirements. Failure to adhere to these obligations can result in rules violations and regulatory sanctions.

It is essential for ATS operators to have a thorough understanding of the regulatory requirements and ensure compliance with applicable rules. This includes membership with the Financial Industry Regulatory Authority (FINRA) and adherence to FINRA rules for new membership applications or existing members operating an ATS.

In conclusion, alternative trading systems offer unique advantages and opportunities for market participants. However, they also face challenges and concerns related to lack of transparency, enforcement actions, and rules violations. To navigate these issues effectively, ATS operators must prioritize transparency, establish robust compliance programs, and stay updated on evolving regulatory requirements.

For more information on alternative trading systems, you can refer to the Corporate Finance Institute.

Regulatory Framework for Alternative Trading Systems

Alternative trading systems (ATS) play a significant role in the world of securities trading. These trading venues, also known as multilateral trading facilities in Europe, offer a less regulated environment compared to traditional exchanges. ATS platforms, such as electronic communication networks (ECNs), provide a platform for matching large buy and sell orders for securities. Unlike exchanges, ATS do not set rules or discipline subscribers; instead, they focus on finding counterparties for transactions.

Institutional investors often utilize ATS to find counterparties and conceal their trading activities from public view. This ability to operate in a more discreet manner has made ATS a popular choice for investors seeking anonymity. In fact, ATS accounted for approximately 18% of all stock trading between 2013 and 2015.

However, the regulatory landscape surrounding ATS has been evolving to address concerns related to transparency and fair practices. The U.S. Securities and Exchange Commission (SEC) has established regulations specifically for ATS, known as SEC Regulation ATS. Under this framework, ATS must register as a broker-dealer and comply with reporting requirements.

SEC Regulation ATS

The SEC defines an ATS as a market place or facility for bringing together buyers and sellers of securities, without setting rules or disciplining subscribers. While an ATS is not a national securities exchange, it does have the option to apply to become one. This regulatory framework aims to strike a balance between providing flexibility for ATS operators while ensuring investor protection and market integrity.

Broker-Dealer Registration

To operate as an ATS, registration as a broker-dealer is mandatory. This requirement entails complying with the obligations associated with being a registered broker-dealer, including membership with the Financial Industry Regulatory Authority (FINRA) and adherence to FINRA rules. Member firms must review specific FINRA rules, such as 1012, 1013, 1014, and 1017, for new membership applications or existing members operating an ATS.

Compliance Obligations

Compliance with regulatory obligations is a crucial aspect for ATS operators. While the provided compliance tool is optional, it can be tailored to the firm's size and needs. It's important to note that the tool does not guarantee compliance or create a safe harbor. Additionally, as regulatory changes can occur, member firms should stay updated on new laws, rules, and regulations and regularly update their compliance programs.

Further guidance on regulatory obligations can be found on the Broker-Dealer Registration Topic Page and other relevant FINRA Topic Pages. For additional assistance, MAP's pre-filing meeting process can be utilized by contacting MAP. The SEC's Office of General Counsel (OGC) provides interpretative guidance on FINRA's rules, and OGC staff contacts are Kosha Dalal and Sarah Kwak. For any inquiries regarding MAP, Jante Turner is the designated staff contact. MAP Intake can be reached at [email protected] or (212) 858-4000 (Option 5 - Membership Applications).

Conclusion

Alternative trading systems (ATS) provide a valuable platform for matching large buy and sell orders for securities. While they offer a less regulated environment compared to traditional exchanges, ATS are subject to specific regulatory frameworks, such as SEC Regulation ATS. It is essential for ATS operators to register as broker-dealers, comply with reporting requirements, and adhere to the obligations associated with being a registered broker-dealer. By staying updated on regulatory changes and maintaining robust compliance programs, ATS operators can ensure investor protection and market integrity.

Staying Compliant and Informed

In the rapidly evolving world of finance, staying compliant and informed is essential for individuals and institutions alike. It ensures adherence to regulatory requirements and helps navigate the complexities of the market. This section will explore the importance of compliance in the context of alternative trading systems (ATS) and provide valuable resources for guidance.

FINRA Rules

The Financial Industry Regulatory Authority (FINRA) plays a significant role in overseeing the activities of broker-dealers and ensuring compliance with regulatory standards. When it comes to ATS, member firms must review specific FINRA rules to ensure they meet the necessary requirements for new membership applications or operating an existing ATS.

FINRA rules 1012, 1013, 1014, and 1017 are particularly relevant in the context of ATS. These rules outline the obligations and procedures that member firms must follow to maintain compliance. It is crucial for firms to familiarize themselves with these rules and incorporate them into their compliance programs.

Ongoing Compliance

Compliance with regulatory requirements is not a one-time task but an ongoing commitment. As new laws, rules, and regulations emerge, member firms must stay updated and adapt their compliance programs accordingly. Regular updates to compliance programs help ensure that firms continue to meet regulatory obligations and mitigate potential risks.

To aid in this process, FINRA provides additional guidance on regulatory obligations through various resources. The Broker-Dealer Registration Topic Page and other relevant FINRA Topic Pages offer valuable insights and interpretations of the rules. Additionally, member firms can utilize the pre-filing meeting process offered by FINRA's Member Regulation Department of Market Regulation (MAP) to seek guidance and clarification on compliance matters.

Guidance Resources

Navigating the intricacies of compliance can be challenging, but fortunately, there are resources available to assist member firms. FINRA's Office of General Counsel (OGC) provides interpretative guidance on FINRA's rules, ensuring firms have a clear understanding of their obligations. For further assistance, member firms can reach out to OGC staff contacts, including Kosha Dalal and Sarah Kwak.

For specific inquiries related to ATS, member firms can also contact MAP staff, with Jante Turner being the designated contact. The MAP Intake team can be reached via email at [email protected] or by phone at (212) 858-4000 (Option 5 - Membership Applications).

It is important to note that while these resources provide valuable guidance, compliance is ultimately the responsibility of member firms. The provided compliance tool, while optional, can be tailored to the firm's size and needs. However, it is crucial to understand that it does not guarantee compliance or create any safe harbor. Member firms should consult with legal and compliance professionals to ensure their programs align with regulatory requirements.

In conclusion, staying compliant and informed is paramount in the world of finance, particularly in the context of alternative trading systems. By understanding and adhering to FINRA rules, maintaining ongoing compliance efforts, and utilizing available guidance resources, member firms can navigate the complexities of ATS while meeting regulatory obligations.

Frequently Asked Questions

What is an alternative trading system (ATS)?

An alternative trading system (ATS) is a trading venue that is less regulated than an exchange. ATS platforms, such as electronic communication networks (ECNs), match large buy and sell orders for securities.

How do ATS platforms operate?

ATS platforms focus on finding counterparties for transactions and do not set rules or discipline subscribers. They are known as multilateral trading facilities in Europe.

Who uses ATS?

Institutional investors may use ATS to find counterparties and conceal trading from public view. ATS accounted for approximately 18% of all stock trading between 2013 and 2015.

What are dark pools?

Dark pools are ATS used to prevent other investors from buying in advance. They operate with little transparency and are criticized for providing unfair advantages.

What regulations apply to ATS?

SEC Regulation ATS establishes a regulatory framework for ATS. ATS must register as a broker-dealer and comply with reporting requirements. Moves have been made to make ATS more transparent, including enhanced operational transparency and public disclosures.

Can an ATS become a national securities exchange?

An ATS is not a national securities exchange, but it can apply to become one if it meets the necessary requirements.

What obligations do ATS have?

ATSs have obligations to supervise activity on their platforms, as reminded by FINRA Regulatory Notice 18-25. They must also comply with the obligations associated with being a registered broker-dealer, including FINRA membership and compliance with FINRA rules.

What tools and resources are available for ATS compliance?

Member firms should review specific FINRA rules for new membership applications or existing members operating an ATS. Additional guidance on regulatory obligations can be found on the Broker-Dealer Registration Topic Page and other relevant FINRA Topic Pages. MAP's pre-filing meeting process can be utilized for additional guidance by contacting MAP. FINRA's Office of General Counsel (OGC) provides interpretative guidance on FINRA's rules.

Who can be contacted for further information?

For ATS-related inquiries, contact Jante Turner from the MAP staff. For general MAP Intake, reach out to [email protected] or call (212) 858-4000 (Option 5 - Membership Applications). Contacts at FINRA's Office of General Counsel are Kosha Dalal and Sarah Kwak.

What are the advantages of using ATS?

ATSs are useful for investors and professional traders conducting large quantities of trading. They provide a platform for matching buyers and sellers, enabling direct trading without intermediaries. Examples of ATS include ECNs, dark pools, crossing networks, and call markets.

What are the concerns associated with ATS?

Lack of transparency is a common issue with ATS, especially with dark pools. ATS can be susceptible to allegations of rules violations and enforcement action by regulators.