Alternative Trading System (ATS)

Definition

An Alternative Trading System (ATS) in the USA is a trading platform that facilitates the trading of securities outside of the traditional public exchanges like the NYSE or NASDAQ. Although not recognized as a public exchange, an ATS is nonetheless approved and regulated by the Securities and Exchange Commission (SEC). ATSs often operate electronically, matching buyers and sellers anonymously, with the details of the transaction becoming public only after it is completed. This anonymity and operational format have raised concerns regarding market transparency and the potential for market abuse.

Examples

Dark Pools: These are a type of ATS used for large transactions that do not have to be disclosed to the public until after they are completed, minimizing market impact.
Electronic Communication Networks (ECNs): ECNs are another form of ATS, providing immediate electronic execution of trades at the best available prices.
Broker-Dealer Networks: These platforms facilitate transactions for broker-dealers, operating under strict SEC regulations to ensure compliant and fair trading practices.

Frequently Asked Questions (FAQs)

What is the primary function of an ATS?

An ATS primarily facilitates the trading of securities between buyers and sellers outside of formal public exchanges, typically with electronic matching and execution of orders.

How are ATSs different from traditional exchanges?

Unlike traditional exchanges, ATSs are not visible publicly until a transaction is completed. They provide a platform for anonymous trading, which may help in reducing the immediate impact on market prices.

Are there regulatory concerns regarding ATS?

Yes, there have been concerns about the lack of transparency in ATS operations, which potentially increases the risk of market abuse. To address this, ATSs are heavily regulated by the SEC to monitor compliance and mitigate these risks.

What is a ‘dark pool’ in the context of an ATS?

A dark pool is a type of ATS used by major financial institutions to trade large volumes of securities without revealing the details until after the transaction. This helps prevent impacting market prices negatively.

Securities and Exchange Commission (SEC)

The SEC is the federal agency responsible for enforcing federal securities laws, regulating the securities industry, and overseeing US stock market exchanges to protect investors and maintain fair, efficient markets.

Multilateral Trading Facility (MTF)

An MTF is a European equivalent to an ATS, providing a platform for multiple participants to trade financial instruments outside traditional exchanges, also under strict regulatory oversight.

Online Resources and References

Suggested Books for Further Studies

“Trading and Exchanges: Market Microstructure for Practitioners” by Larry Harris - A comprehensive guide to the functioning of various trading platforms including ATS.
“The Microstructure of Financial Markets” by Frank de Jong and Barbara Rindi - An examination of the microstructure laws affecting different markets, including those operating ATS.
“Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market” by Scott Patterson - An in-depth exposition of dark pools within the ATS landscape.

Accounting Basics: “Alternative Trading System (ATS)” Fundamentals Quiz

### What is the primary regulatory body for ATS in the U.S.? - [ ] The Federal Reserve - [ ] National Credit Union Administration (NCUA) - [ ] Financial Industry Regulatory Authority (FINRA) - [x] Securities and Exchange Commission (SEC) > **Explanation:** The Securities and Exchange Commission (SEC) is the primary regulatory body governing ATS, ensuring compliance with federal securities laws. ### Which of the following is a potential disadvantage of ATS? - [ ] Enhanced Market Transparency - [x] Increased Risk of Market Abuse - [ ] Lower Trading Fees - [ ] Reduced Transaction Times > **Explanation:** A potential disadvantage of ATS is the increased risk of market abuse due to the lack of immediate public information about trades. ### What term describes an ATS that allows large transactions to be executed without immediate public disclosure? - [ ] Public Exchange - [x] Dark Pool - [ ] Multilateral Trading Facility (MTF) - [ ] Electronic Brokering Exchange > **Explanation:** Dark pools are ATS platforms that allow large transactions to be executed with limited immediate public disclosure, mitigating large market price shifts. ### Which European equivalent serves a purpose similar to ATS? - [ ] Centralized Exchange Platform - [ ] Dark Pool Exchange - [x] Multilateral Trading Facility (MTF) - [ ] Investment Swap Centers > **Explanation:** The Multilateral Trading Facility (MTF) in Europe serves a purpose similar to ATS by providing regulated platforms for trading outside of traditional exchanges. ### What kind of trading technology is typically employed by ATS? - [ ] Manual Order Matching - [ ] Market Maker Brokerages - [ ] Scheduled Auction Trading - [x] Fully Electronic Communication Networks (ECNs) > **Explanation:** ATS often utilize fully electronic communication networks (ECNs) to facilitate the rapid and anonymous matching of buy and sell orders. ### ATS platforms are typically used for what primary type of trading? - [ ] Intra-day Public Market Links - [ ] Government Bond Trading - [x] Securities Trading Outside Public Exchanges - [ ] Forex Market Communications > **Explanation:** ATS platforms are primarily used for trading securities outside of traditional public exchanges, aiding anonymity and efficiency. ### Who typically participates in dark pool trading provided by ATS? - [ ] Retail Investors - [x] Major Financial Institutions - [ ] Individual Homebuyers - [ ] Municipal Governments > **Explanation:** Major financial institutions are the primary participants in dark pool trading, enabling large transactions with minimal market disruption. ### What concern is associated with ATS in terms of market regulation? - [x] The opaqueness could increase market manipulation risks. - [ ] They often have higher transaction fees. - [ ] They are not regulated at all. - [ ] They fail to execute trades timely. > **Explanation:** The relative opaqueness and lack of immediate data disclosure in ATS raise concerns about market manipulation and abuse. ### How does the SEC regulate ATS? - [ ] Conduct monthly audits of every trade - [x] Require periodic reporting and compliance checks to ensure transparency and fairness - [ ] Imposes penalties when anonymity is broken - [ ] Implements total control over all transactions and banning electronic trading > **Explanation:** The SEC regulates ATS by requiring periodic reporting and conducting compliance checks to ensure the systems remain transparent and fair, mitigating risks. ### What technological feature is a hallmark of ATS platforms? - [ ] Physical Trading Floors - [ ] In-person Order Fill - [ ] Near-Term Market Orders - [x] Electronic Trade Matching > **Explanation:** The hallmark of ATS platforms is their use of electronic trade matching to facilitate transactions efficiently and discretely.

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Alternative Trading System (ATS)