Alternative Trading Systems

Alternative Trading Systems (ATS), are United States Securities and Exchange Commission approved non-exchange trading venues specifically designed to match buyers and sellers to find counterparties for transactions, instead of trading large blocks of shares on the normal exchange, a practice that can skew the market price in a particular direction, depending on a security's market capitalization and trading volume.

ATS have to be distinguished from electronic communication networks (ECNs), that are a "fully electronic subset of ATSs that automatically and anonymously match orders".^[1] The equivalent term of ECN under European legislation is a Multilateral Trading Facility (MTF). These venues play an important role in public markets for allowing alternative means of accessing liquidity.

Rule 300(a) of the SEC's Regulation ATS provides the following legal definition of an "alternative trading system":

Any organization, association, person, group of persons, or system:

• That constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 of this chapter; and
• That does not:

1. Set rules governing the conduct of subscribers other than the conduct of such subscribers' trading on such organization, association, person, group of persons, or system; or
2. Discipline subscribers other than by exclusion from trading.

Regulation ATS was introduced by the SEC in 1998 and is designed to protect investors and resolve any concerns arising from this type of trading system. Regulation ATS requires stricter record keeping and demands more intensive reporting on issues such as transparency once the system reaches more than 5% of the trading volume for any given security.

Specifically, it requires that an alternative trading system comply with the reporting and record keeping requirements Rule 301 (b)(5)(ii) of Reg ATS, if during at least 4 of the preceding 6 calendar months, such alternative trading system had:

• With respect to any NMS stock, 5 percent or more of the average daily volume in that security reported by an effective transaction reporting plan;
• With respect to an equity security that is not an NMS stock and for which transactions are reported to a self-regulatory organization, 5 percent or more of the average daily trading volume in that security as calculated by the self-regulatory organization to which such transactions are reported;
• With respect to municipal securities, 5 percent or more of the average daily volume traded in the United States; or
• With respect to corporate debt securities, 5 percent or more of the average daily volume traded in the United States.

Examples of ATS

• Electronic communication networks
• Call markets - An auction market where orders are grouped until they reach a certain amount, and then executed together at a predetermined time.
• Electronic trade matching
• Crossing networks
• Dark pools

References