Alternative Trading Systems (ATS) Explained: 2025 Definition, Regulations & Pricing Insights

Adam Hayes, Ph.D., CFA, brings over 15 years of Wall Street experience as a derivatives trader and is an expert in economics and behavioral finance. Holding advanced degrees from The New School for Social Research and the University of Wisconsin-Madison, he also holds CFA and FINRA licenses while teaching economic sociology at Hebrew University.

What Is an Alternative Trading System (ATS)?

An Alternative Trading System (ATS) is a trading venue that operates with lighter regulation compared to traditional stock exchanges. ATS platforms primarily facilitate the matching of large buy and sell orders among their subscribers, often institutional investors. In the U.S., the most common ATS type is the Electronic Communication Network (ECN), an automated system that matches security orders electronically.

Key Points to Remember

• ATSs serve as venues for executing substantial buy and sell trades.
• They operate under fewer regulations than stock exchanges.
• Examples include dark pools and ECNs.
• SEC Regulation ATS provides a structured regulatory framework for ATS operations.

How Alternative Trading Systems Function

ATSs contribute significantly to the liquidity of publicly traded securities globally. Known as multilateral trading facilities in Europe, these systems—registered mostly as broker-dealers—focus on connecting counterparties rather than enforcing strict subscriber conduct rules. Unlike exchanges, ATSs usually exclude subscribers from trading as their primary disciplinary measure.

Institutional investors leverage ATSs to execute large transactions discreetly, avoiding the market impact that might arise from public trades on stock exchanges. These private transactions help maintain price stability by concealing large order flows from public order books.

Terminology Insight

In North America, the term "Alternative Trading System" is used, while in Europe, similar platforms are called "multilateral trading facilities." 

Critiques and Concerns Surrounding ATSs

While ATSs must be approved by the SEC, regulatory scrutiny has increased due to infractions like trading against client orders or misusing confidential information. These issues are more prevalent in ATSs because of their relatively lighter regulatory environment compared to national exchanges.

Understanding Dark Pools

Dark pools are specialized ATSs where institutional investors, such as hedge funds, trade large blocks privately to avoid signaling their intentions to the broader market. These transactions are mostly hidden from public view, leading to concerns about transparency.

Though legal, dark pools and high-frequency trading have faced criticism within the financial community for potentially granting unfair advantages to select market participants.

Regulatory Framework Governing ATSs

The SEC's Regulation ATS establishes rules that ATSs must follow. While ATSs are considered exchanges under federal law, they can operate under exemptions if they comply with specific rules, including registration as broker-dealers and filing operational reports using Form ATS.

Recent amendments have enhanced transparency requirements, mandating detailed public disclosures about conflicts of interest and risks, as well as protective measures for subscriber trading data.

According to the SEC, an ATS is defined as any organized system or group that provides a marketplace for buyers and sellers of securities without setting subscriber conduct rules or disciplining members beyond trading exclusion.

ATS vs. OTC: What's the Difference?

Over-the-counter (OTC) securities trade directly between parties and usually are not listed on exchanges. Most OTC trades occur on ATS platforms, which display broker-dealer quotes through systems like Global OTC ATS and OTC Link ATS.

Exchange vs. ATS: Key Distinctions

Stock exchanges are highly regulated marketplaces for listed securities with strict oversight. Conversely, ATSs are electronic venues that match buyers and sellers for both listed and unlisted securities but operate under lighter regulatory responsibilities, though still supervised by the SEC.

Revenue Model of Alternative Trading Systems

ATSs generate income primarily by charging transaction fees and commissions. Increased trading activity leads to higher revenue for the ATS operators.

Conclusion

Alternative Trading Systems play a vital role in facilitating large, private trades between institutional players, helping to minimize market disruption and maintain price stability. Understanding their operation, regulation, and differences from traditional exchanges is essential for investors navigating today's complex financial landscape.

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