Alternative Trading System (ATS)Alternative Trading System (ATS)

An alternative trading system (ATS) is an alternative trading venue to an organized exchange, approved by a regulatory authority such is SEC or FSA. An ATS is a common example of a trading dark pool.

What is an Alternative Trading System?

An ATS or else an alternative trading system is a system designed to trade a range of financial instruments that is not regulated as an organized exchange. An ATS works as a matching machine between the buying and selling orders of its subscribers. These subscribers may be brokers, institutional traders, investment banks, or even large retail traders.

Regulated by SEC in the US

The American SEC started to regulate Alternative Trading Systems back in 1998. The SEC regulation aims to resolve any issues arising from the operation of an ATS but also to protect investors in general. According to SEC framework, if the volume generated by an ATS exceeds 5% of the overall volume for any given security, then more intensive reporting and operation transparency are demanded by SEC.

The Advantage of Anonymity of an Alternative Trading System

Institutional traders use ATSs to find counterparties for their large transactions. The use of an ATS is better than trading large blocks of assets on common exchanges, and the reason is anonymity. If a large player starts to buy or to sell large blocks of a particular security on a common exchange that can skew the market in a particular direction. That means problems for the institutional player and thus the use of an ATS seems a better option. Note that many ATSs are designed to match exclusively large buyers and sellers.


The Customers of an ATS

These are the common customers of an ATS:

(1) Asset Managers

Including mutual funds and pension funds.

(2) Professional Traders

Including hedge funds, proprietary trading desks, high-frequency traders, and others.

(3) Financial Brokers

Financial brokers are firms that buy and sell securities for their clients.

(4) Brokers / Dealers

These brokers / dealers buy and sell securities for their clients, but also they execute trades for their own accounts. Usually, these brokers are parts of large commercial banks such as Citigroup, Goldman Sachs, and Morgan Stanley.

(5) Market Makers

Market makers create a market within a market and use an ATS for enhancing their liquidity. They include UBS, Citi, Knight Capital, Citadel, and many others.

(6) Retail Traders

They gain access to an ATS via their online brokers.




Types of Alternative Trading Systems (ATSs)

An ATS usually refers to an electronic system where investors can buy or sell existing financial instruments. These financial instruments include Forex derivatives, shares, bonds and other derivatives. There are two main types of ATS:

(a) matching systems

(b) crossing networks

Different Venues of an ATS

These are the main different venues for trading securities off of exchanges:

(1) ECNs (Electronic Communication Networks)

The ECNs are similar to exchanges but are not allowed to list stocks.

(2) Dark Pools or Crossing Networks

Dark Pools offer anonymity. Some of the largest dark pools are:

(3) Matching Networks

The Matching Networks allow a company to fill a trade order from that company's own internal supply of stock.

(4) Voice-Brokered Third-Party Matching

Refers to traditional traders that match buy and sell orders directly.

Examples of Equity ATSs in the US and Canada:

ATS List by FINRA:


What is an ECN (Electronic Communication Network)?

An ECN network is an automated alternative trading system designed to match buyers and sellers. An ECN network is able to operate as a bridge connecting brokerages and individual traders without the need of a middleman. An ECN allows investors located in different geographic places to trade easily and instantly with each other.


The Forex ECN Network

The Foreign Exchange (Forex) trading is based on the technology of the Electronic Communication Networks. The first ECN for currency trading was the Matchbook FX formed in 1999, in New York. Today, there are several ECN provides for currency trading, including:

  1. CurreneX

  2. DMA Link

  3. Fxall (Thomson Reuters)

  4. Bloomberg Tradebook

  5. Hotspot FX

  6. 360T

  7. Integral

These networks operate as matching engines offering tight spreads and very fast execution (less than 100 milliseconds per trade). The matching is quote-driven and that means that each order is filled with the best available match.

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