Alternative Trading System (ATS)

What is an ATS?

An Alternative Trading System (ATS) is an electronic trading venue that brings together buyers and sellers of securities outside of traditional national exchanges. ATSs are commonly used by institutional investors to execute large orders with reduced market impact and greater anonymity. In Europe, comparable venues are called multilateral trading facilities (MTFs); other terms include electronic communication networks (ECNs), cross networks, and call networks.

How ATSs work

• ATSs typically operate as broker-dealers rather than formal national exchanges.
• They match counterparties for trades but generally do not set or enforce broad conduct rules for subscribers beyond excluding them from the venue.
• Transactions executed on many ATSs do not appear on national exchange order books, which can help hide large orders from the wider market to prevent price movement.
• ATSs facilitate both exchange-listed and over-the-counter (OTC) securities trading; many OTC trades occur on ATS platforms.

Common types

• Dark pools: Private ATS venues where buy and sell orders—often large block trades by institutional investors—are matched without immediate public disclosure of order details. Dark pools help prevent large trades from moving market prices but are criticized for lack of transparency.
• Other ATS models include lit ATSs (with displayed quotes) and interdealer quotation systems for OTC securities (e.g., platforms that aggregate broker-dealer quotes).

Regulation and oversight

• Regulation ATS (SEC) establishes the framework for ATS operations in the U.S. An ATS must register as a broker-dealer and file Form ATS with the SEC before beginning operations, and must update or file cessation reports as operations change or stop. Relevant rules include Regulation ATS Rules 300–303 and reporting requirements under Rule 301(b)(2).
• Although an ATS can qualify as an exchange under federal law, many operate under exemptions (e.g., Exchange Act Rule 3a1-1(a)) so they do not register as national securities exchanges.
• In recent years the SEC has increased transparency and oversight expectations. Amendments require public disclosures about conflicts of interest and information-leakage risks, plus written safeguards and procedures to protect subscribers’ trading information.
• Enforcement activity has focused on problems such as trading against customer orders or misuse of confidential information, issues that can be more acute where venue transparency is limited.

ATS vs. national exchanges and OTC trading

• National exchanges: Heavily regulated venues that list securities and enforce participant conduct and disclosure rules. Trades are generally visible on public order books.
• ATS: Less prescriptive regulatory responsibilities toward subscribers; provides anonymity and often handles large institutional orders privately.
• OTC: Securities not listed on an exchange; many OTC trades are executed via ATSs that display broker-dealer quotes or facilitate interdealer trading.

How ATSs make money

Revenue typically comes from transaction fees and commissions charged to subscribers—higher trading volumes generate more fee income. Some ATSs may also charge connectivity, market data, or membership fees.

Benefits and risks

Benefits:
* Reduced market impact for large orders
Greater anonymity for institutional trading strategies
Additional sources of liquidity and price discovery beyond exchanges

Risks and criticisms:
* Reduced transparency, especially in dark pools, can disadvantage public price discovery
Potential conflicts of interest and information leakage
Greater opportunity for abusive practices (e.g., trading against customer flows) if safeguards are weak
* Concerns about fairness when certain participants gain informational or speed advantages (including interactions with high-frequency trading)

Conclusion

ATSs play a significant role in modern market structure by providing venues for large and often discreet transactions, contributing to liquidity and alternative execution options. Because they operate differently from national exchanges, they require tailored regulation and oversight. Recent regulatory changes seek to increase operational transparency and protect subscriber information, but concerns about conflicts of interest and market fairness continue to drive calls for stronger disclosures and controls.