Alternative Trading System (ATS) has been gaining traction in recent years as an innovative and cost-effective way to facilitate trading in the financial markets. ATS is a non-exchange trading platform that allows traders and investors to buy and sell securities outside of traditional exchanges. Through ATS, investors are able to access a variety of financial instruments, including stocks, bonds, futures, options, and foreign currencies. This type of trading provides certain advantages, such as greater transparency, increased liquidity, lower transaction costs, and improved order execution. Additionally, ATS offers investors the ability to execute trades quickly and with less risk. In this article, we will explore the advantages of ATS and how it can benefit traders and investors.
What is Alternative Trading System (ATS)?
An Alternative Trading System (ATS) is an electronic trading platform that allows the trading of equities outside an exchange such as NYSE or NASDAQ. While exchanges provide centralised trading facilities, ATS is a decentralised trading platform that is operated by a third party. Traditionally, a broker would match buyers and sellers. However, with the implementation of ATS, the brokers’ role has been reduced to the provision of order execution services. ATS facilitates the execution of orders in a transparent manner, allowing traders to view real-time quotes and transactions. With increasing popularity, ATS has grown beyond equity trading and can now handle a variety of financial instruments, including stocks, bonds, futures, options, and foreign currencies. ATS provides benefits such as greater transparency, increased liquidity, lower transaction costs, and improved order execution.
Advantages of ATS
A key advantage of ATS is that it provides transparency for investors. The trading platform allows investors to follow real-time transactions and view the latest market prices. With increased transparency, investors can reduce the risk of fraudulent activities such as “banging the close.” Banging the close refers to the illegal practice of manipulating the closing prices of stocks by brokers to earn additional commissions. Brokers will usually bang the close by buying large quantities of stocks at the close to artificially increase the prices of stocks. With transparency, investors can see this type of illegal activity happening and avoid being involved. Another advantage of ATS is that it provides greater liquidity. Liquidity refers to the ease with which an asset can be bought or sold without affecting the asset’s price. ATS increases liquidity by allowing the trading of various financial instruments, such as stocks and bonds, outside the exchange. This provides investors with greater flexibility when buying or selling stocks.
Examples of ATS
ATS is a popular alternative trading platform that allows investors to trade equities outside of traditional exchanges. ATS also allows investors to trade other financial instruments, including bonds, mutual funds, exchange-traded funds (ETFs), commodities, and futures. Below are three examples of ATS trading platforms. 1. Dark Trading – Dark Trading is an Alternative Trading System that allows investors to trade equities online. This online trading platform provides traders with access to real-time quotes, a wide range of financial instruments, and competitive pricing. 2. Electronic Communication Network (ECN) – ECNs are Alternative Trading Systems that provide liquidity by matching buy and sell orders. ECNs are typically not owned by brokerages and are often operated by third-party companies. 3. Hybrid Trading Venues – Hybrid Trading Venues are regulated Alternative Trading Systems that facilitate the execution of trades outside of traditional exchanges.
Types of ATS
There are two types of ATS – regulated and non-regulated ATS. Regulated ATS is an electronic trading platform that is supervised by the Securities and Exchange Commission (SEC). These types of ATS are closely monitored and have heightened trading standards. Popular regulated ATS include NASDAQ and NYSE. Conversely, non-regulated ATS does not fall under the jurisdiction of the SEC and is not held to the same standards as regulated ATS.
Regulations of ATS
The regulations governing ATS are not always clear due to the ever-evolving nature of the trading platforms. However, most ATS fall under regulatory jurisdiction. The Securities and Exchange Commission (SEC) is responsible for maintaining oversight of Alternative Trading Systems. In addition, the Financial Industry Regulatory Authority (FINRA) is responsible for the regulation of broker-dealers, including those who execute orders on ATS. The creation of ATS has posed a challenge for the SEC and FINRA in terms of regulatory oversight. Due to the decentralised nature of ATS, it is more difficult to regulate the platforms compared to regulated exchanges. Therefore, ATS must implement certain processes that adhere to regulatory requirements. These requirements include: – Appropriate governance and risk management systems – Appropriate recordkeeping systems – Appropriate compliance systems – Appropriate internal audit systems – Appropriate systems for the protection of customer and non-customer information – Appropriate systems for the protection of confidential information
Applications of ATS
The trading of equities through ATS has become increasingly common, enabling all investors to trade stocks, regardless of their location. This provides a number of benefits, such as increased liquidity, lower transaction costs, and better order execution. ATS can also be used to trade other financial instruments, such as bonds, mutual funds, ETFs, commodities, and futures. Additionally, ATS provides greater transparency as all transactions are displayed in real-time. This enables investors to follow market trends and view current pricing. ATS also provides greater liquidity by allowing the trading of a wide range of financial instruments. This allows investors to buy and sell securities more easily, regardless of their location.
Challenges of ATS
In recent years, ATS have grown in popularity. This is partly due to their lower cost of operation and their ability to attract a larger number of investors. However, due to their decentralized nature, ATS pose challenges for regulators. This is because it is more difficult to oversee ATS compared to regulated exchanges. A challenge for investors is determining whether a particular ATS is trustworthy. Since there are no regulatory standards for ATS, investors need to perform their due diligence and select the trading platform that meets their requirements. Another challenge is that there is no standard method to determine the exact number of ATS trading platforms. This is due to the fact that ATS are not required to disclose their activities or financial information. Therefore, in order to determine the number of ATS trading platforms, researchers must manually search SEC and FINRA websites.
Conclusion
Alternative Trading Systems (ATS) are electronic trading platforms that allow the trading of equities outside of traditional exchanges. ATS provides a number of benefits, including increased liquidity, lower transaction costs, and better order execution. ATS can also be used to trade other financial instruments, such as bonds, mutual funds, ETFs, commodities, and futures. Regulatory authorities are responsible for overseeing ATS, although it is difficult to regulate decentralized trading platforms. Investors should do their due diligence and select a trustworthy ATS trading platform that meets their requirements.
