An Alternative Trading System, also known as ATS is a marketplace for buyers and sellers of the financial market to interact for making transactions.
The fact that brings uniqueness to this technology is that, unlike stock exchanges, this trading venue is not regulated by any authoritative body.
Moreover, ATS is known to be registered as a broker-dealer. They are like traditional exchanges but have better services and more trading options.
Do keep in mind that ATS, that is, the alternate trading system, is a northern American term. European countries use the term Multilateral Trading Facility (MTF).
This article will cover all the major points on ATS and the factors that bring uniqueness to it.
What is an ATS?
An Alternate Trading System is a special trading platform that is a trading venue for investors and traders to offer and bid on securities.
There are a few benefits to using this system over traditional security exchanges and these are the same characteristics that bring uniqueness to this platform.
Now, this platform enables you to make big transactional exchanges without even displaying the order price and size in the open.
But why stay limited to big transactions only, if felt the need, ATS can also be used for smaller transactions to seek liquidity for private companies.
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Uniqueness of ATS
ATS is less regulated compared to any national stock exchange. But apart from these, a few more characteristics set ATS apart from the usual stock exchanges. They are listed below:
Price: The ATS is a safe zone for investors to trade at a price different from the traditional stock exchanges.
No intermediaries: ATS provides the benefit of saving costs on a third-party broker because to trade on ATS, you will not be needing a broker.
Trading Flexibility: Trading in ATS happens online, thus making it convenient and easy for you. With an ATS you can trade from anywhere at any point in time. It avails trading even outside the trading sessions of traditional security exchanges.
Anonymity: All the trading taking place through ATS is anonymous, that is, this information is not outrightly available to the general public or is reported to the national exchanges.
This feature is majorly beneficial for larger volume transactions. Therefore, when large transactions are made through ATS, the market price will not get affected by such trading.
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Examples of Alternative Trading Systems
To make things easier to understand, let’s consider a few examples of ATS.
Dark pools are usually not seen in the best light among the traders, it is considered to be quite a controversial feat. The reason is that when a dark pool is used for trading, all the transactions are clouded, away from the public eye.
Institutional investors trade through “block trades” as and when they look to conduct any major trading using private exchanges. And at these times, the investors are “Whales on Wall Street”.
The best securities that such institutional investors invest in are mutual funds, pension funds, and insurance companies.
The call market is a subset of the Alternate Trading System. Orders are pooled in this trading system and are not executed until a certain number of orders are received.
When the limit is reached, the transactions are carried out. As a result, in most situations of call market transactions, trading occurs at a predetermined time interval.
The call markets tend to have a “market-clearing price”. It is also known as the equilibrium value of the traded asset where the demand and supply of it intersect. This value is the ideal price at which the sellers and buyers offer and bid for the security.
One of the major players in the call market is the auctioneers. They are the individuals responsible for the matching system, that is, to match the demand and supply of the traded security.
This needs to be done before the equilibrium price is reached because that price will be the final trading price at which the orders will get executed.
Electronic Communication Networks
ECN, short for Electronic Communication Networks is an ATS type that provides benefits to individual traders and brokerages.
Through ECN, both parties will be able to trade directly without the need for any middleman. Therefore, traders even from any part of the world can perform transactions without any hassle.
One disadvantage of traditional exchanges that the ECN mitigates is that of time inflexibility. It is no news to traders that national stock exchanges have a particular trading session, only during which orders can be executed.
However, the case is not the same with ECN. You are free to trade at any time, even after the trading session ends. Moreover, you will be able to utilize the post-trade news to your advantage when taking a position after trade hours.
The cost structure of this system is like a brokerage firm. They charge a fee or commission on a per-transaction basis. So, it might get costly for you if you partake in a lot of transactions.
Crossing networks share the feature of clouding with dark pools. This system also allows you to conduct trading outside the eye of the general public and without showing the impact on the security exchanges.
This results in the security price not appearing on any order books.
In these trading systems, the trading accounts are kept anonymous while putting orders and executing them. Many investors find it beneficial because they are assured that non of their information is open to the public eye.
However, even if the information is limited and multiple media sources claim it to be unethical, crossing networks and dark pools are still considered lawful.
Even though much of the trading done through ATS is concealed from the public eye, it is legal and controlled by the Securities and Exchange Commission (SEC) in the United States.
The SEC is a federal agency equivalent to India’s SEBI. The security market is governed by an official organization in order to defend the best interests of investors and traders.
However, because ATS is not as closely regulated as regular exchanges, they are vulnerable to allegations of less openness and regulatory violations.
However, these are key trading platforms on which huge institutional traders place a significant volume of transactions, and in recent years, retail traders have begun to use this system as well.
The Alternate Trading System is a crucial element in creating more trading markets for more individuals, allowing for the development of additional wealth management alternatives and products over the coming one hundred years.
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