Alternative Trading System (ATS)

An alternative trading system (ATS) is a trading venue in the United States that brings together orders from multiple buyers and sellers of securities and matches them using set rules, much like an exchange, but which is not registered as a national securities exchange. Instead, it is operated by a registered broker-dealer and complies with the Securities and Exchange Commission's Regulation ATS. ATSs trade equities, corporate and government bonds and other securities, and include many of the venues known as dark pools.

The category sits between a stock exchange, which has self-regulatory duties and listing functions, and a single broker trading with its own clients. In the European Union and the United Kingdom, the closest equivalents are multilateral trading facilities and organised trading facilities under MiFID II.

A big public market hall has official rules, inspectors and a register of approved stalls. But traders can also meet in a private auction room run by a licensed agent, where members bring their goods and the agent matches buyers and sellers. The private room follows the law and reports to the authorities, but it is not the official market and has fewer public duties.

An ATS is that private auction room for shares and bonds. A licensed brokerage firm runs a computer system where its members send orders, and the system matches them. It must register with the regulator, keep records and follow fair-dealing rules, but it does not list companies or police the market the way an exchange does.

The SEC adopted Regulation ATS in 1998, allowing systems that meet the definition of an exchange to operate without registering as one, provided they register as a broker-dealer, file a notice with the SEC and meet the regulation's conditions. Key requirements include:

• Registration and disclosure. An ATS files Form ATS, and since 2018 an ATS trading national market system stocks files Form ATS-N, which is made public and describes how the system operates, who may use it and potential conflicts of interest with its operator.
• Fair access. An ATS whose trading volume exceeds set thresholds in a security must not unreasonably deny access to participants.
• Record-keeping and reporting. ATSs keep records of subscribers and orders, and trades are reported to FINRA and, where applicable, other reporting facilities.
• Systems integrity. The largest ATSs fall under the SEC's rules on systems compliance and integrity.

As broker-dealers, ATS operators are also members of FINRA and subject to its supervision, including obligations on order handling and best execution.

• Dark pools. Equity ATSs that do not display quotes before trading, used by institutional investors to execute large orders with less market impact.
• Electronic communication networks. Systems that display limit orders and match them automatically, historically important competitors to exchanges.
• Block-trading and crossing systems. Venues designed to match large block trades, often at the midpoint of the public quote.
• Fixed income ATSs. Platforms for corporate bonds, municipal bonds and government securities, an area where electronic trading has grown strongly.
• Private and digital securities ATSs. Venues for private company shares and, in some cases, tokenized securities.

ATSs increase competition among trading venues and give a range of users, from firms relying on algorithmic trading to pension funds, more ways to execute orders, such as reducing information leakage or trading at the midpoint. In US equities, a substantial share of volume is executed off exchange, partly on ATSs and partly by broker-dealers internalising orders. Critics worry that trading away from lit markets reduces price discovery and that conflicts can arise when an operator's own trading desk or affiliates use the system. Past SEC enforcement cases against dark pool operators have involved misleading subscribers about who traded in the pool or how orders were handled, which helped drive the Form ATS-N disclosures. Many ATSs also host high-frequency trading firms, and some offer segmentation so subscribers can avoid trading with certain counterparty types.

In Europe, a multilateral trading facility (MTF) is a multilateral system operated by an investment firm or market operator that brings together third-party buying and selling interests, often in a central limit order book, under non-discretionary rules, while an organised trading facility (OTF), introduced by MiFID II for non-equity instruments, allows the operator some discretion in how orders are executed. Both are regulated trading venues with transparency obligations, and EU rules restrict dark trading in shares through waiver conditions and caps. A systematic internaliser, by contrast, is a firm dealing on its own account with clients and is not a multilateral venue.