What is an Alternative Trading System?

An alternative trading system (ATS) is a non-exchange trading platform that is approved by the Securities and Exchange Commission (SEC). Buy and sell orders are matched on this trading platform to find counterparties ready to engage in trade. Investors or traders can subscribe to ATS so as to get their orders matched. Alternative trading systems are common in the US and Canada for regulatory purposes, they are considered as broker-dealers and not exchanges.

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How Does an Alternative Trading System Work?

Alternative Trading Systems (ATSs) are a popular non-exchange avenue for trading. They are electronic trading systems that are approved by the SEC to execute buy and sell orders. One of the major attributes of ATS is its high liquidity amongst other trading platforms and exchanges ATSs are required to undergo a registration process, these platforms focus on matching but and sell orders but do not function as actual exchanges, instead, they are registered as broker-dealers. There are some differences between ATS and national exchanges. For instance, an ATS cannot regulate the conduct of subscribers because they have no power to set rules guiding the behaviors of subscribers. Exclusion of certain subscribers from trading cannot be done on ATS as against what is obtainable in national exchanges where traders can face disciplinary actions. Individual investors and institutional investors can trade on ATS, rather than on national exchanges. The reason for this is mostly because ATS transactions do not show on national exchange order books and can, therefore, be easily shielded from public view. 

Key Takeaways 

Here are some key points to know about the alternative trading system;

• An alternative trading system is an electronic platform where buy and sell orders of traders are matched to counterparties
• ATS is not considered a national exchange but must be registered and approved by the SEC.
• ATSs are registered as broker-dealers and not exchanges.

Regulation ATS Explained

The regulatory framework of ATS is established by Regulation ATS as provided by the SEC. Below are some of the regulatory frameworks;

• An ATS is permitted to operate if it meets the definition of a national exchange.
• An ATS under the Exchange Act Rule 3a1-1(a) is exempted from registering as an exchange.
• ATSs are required to comply with Rules 300-303 of Regulation ATS.
• An ATS must report its books and records.

However, additional regulations have been added to Regulation ATS by the SEC to enhance the operational transparency of these platforms. One of the regulations is a mandatory requirement of ATS to file a comprehensive public disclosure.