Alternative Trading System: Definition and Overview


Trading securities like stocks, bonds, derivatives, and commodities has traditionally involved public exchanges. However, in recent decades alternative trading systems (ATS) have emerged to offer greater efficiency and flexibility. But what exactly are ATS platforms, and how do they differ from exchanges?

This guide will explain what ATS are, their key features, major benefits and risks, and overall role in modern electronic trading.

What Are Alternative Trading Systems?

Alternative trading systems (ATS) are electronic trading platforms that match buyers and sellers of securities, similar to public stock exchanges. However, ATS operate as private markets run by approved broker-dealers rather than exchanges like NYSE or NASDAQ.

ATS platforms use electronic systems and algorithms to efficiently match orders and facilitate security transactions. They offer features like price discovery, order matching, and transaction execution without going through traditional exchanges.

Major Types of Alternative Trading Systems

There are a few common types of ATS platforms:

Dark pools – Anonymous ATS that do not display pre-trade orders or bids to the public. This allows institutional investors to execute large block trades without impacting prices.

Multilateral trading facilities – European version of ATS that facilitate securities trading among multiple parties.

Electronic communication networks – ATS focused on lower costs and faster execution times, ideal for high frequency and algorithmic trading.

Crossing networks – Designed to cross or match large buy and sell orders directly without exchanges.

Benefits of Alternative Trading Systems

ATS offer several potential advantages compared to public exchanges:

Lower fees – Can have lower trading, clearing, and settlement costs.

Anonymity – Dark pools conceal identities and trading strategies of investors.

Control – Owners can set specific rules around order types, participants, and disclosures.

Faster execution – Computerized systems can match trades in microseconds.

Flexibility – Customizable systems for different trading needs and assets.

Convenience – Seamless electronic trading without exchange floor limitations.

Risks to Consider

However, ATS also come with some risks to consider:

Lower liquidity – Insufficient liquidity can lead to volatility and price swings.

Less transparency – Limited public information on trading volumes or prices on some ATS.

Fragmented markets – Spreading volume over multiple venues can reduce efficiency.

Technology risks – Heavy reliance on systems means outages can disrupt trading.

While not without some tradeoffs, ATS provide useful trading alternatives to complement public exchanges. Overall, they exemplify the continued evolution of global electronic trading.

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