Definition
An Alternative Trading System (ATS) is a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. It is often utilized for trading securities that aren’t listed on a formal exchange. ATSs are regulated as broker-dealers rather than as exchanges in many jurisdictions.
Key Takeaways
- Alternative Trading System (ATS) is a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions, instead of trading on traditional exchanges. They are usually operated by a broker-dealer and regulated as such.
- ATS are designed to match buyers and sellers and often specialize in specific types of securities, such as equities or bonds. They may offer lower costs, increased confidentiality, and faster execution times for certain trades.
- While ATS do provide certain advantages, it’s also important to note they may lack the same degree of regulatory oversight as traditional exchanges, which can potentially lead to issues such as pricing transparency and fairness in trades.
Importance
Alternative Trading System (ATS) is crucial in the financial sector because it provides a viable alternative to traditional exchanges for trading securities. It offers a platform for matching the buy and sell orders of its subscribers, outside of traditional stock exchanges.
Users, often professional investors, can greatly benefit from the increase in competition, flexibility, and anonymity that an ATS provides. Through such systems, businesses are often able to lower transaction costs and improve trade execution speed.
Moreover, an ATS contributes to market fragmentation, which can improve liquidity and encourage more efficient pricing. Hence, ATS’s importance lies in its capacity to enhance market efficiency, reduce transaction costs, and provide investors more options in trading platforms.
Explanation
The primary purpose of an Alternative Trading System (ATS) is to provide a platform for buying and selling securities outside traditional trading venues such as stock exchanges. The ATSs are especially advantageous in facilitating transactions for less liquid securities, which might not otherwise be readily traded on traditional exchanges.
They aid in fostering added efficiency and liquidity to the marketplace, often allowing for automated trading and the potential for lower trading costs. The implementation of an ATS can avoid the cost of listing on a formal exchange and allow for more anonymity as information about placed trades is typically only shared amongst system participants and not disclosed to the general public.
Moreover, some ATSs may provide potential price improvement and faster executions. They are commonly used for trading stocks, but can also handle other types of assets such as currencies and commodities.
Thus, they offer a streamlined and often efficient alternative to traditional exchanges, assisting a wide variety of participants including private investors, broker-dealers, and institutional investors.
Examples of Alternative Trading System
NASDAQ: One of the most known examples of an Alternative Trading System is NASDAQ, which operates globally. It provides a platform for trading various types of securities such as stocks, bonds, and commodities by offering due transparency, liquidity, and price discovery mechanisms that ensure adequate protection to the investors.
Instinet: One of the earliest alternative trading systems was Instinet. It was originally a private network among brokers, but it later became available to the public. Instinet played a key role in democratizing the trading industry, as it allowed more participants and provided much-needed competition for stock exchanges.
Direct Edge: Previously an alternative trading system, Direct Edge launched two exchanges in 2010, EDGA Exchange and EDGX Exchange. Before getting full exchange status, it operated as an ATS and grew to become one of the largest players in the U.S equity market. Direct Edge pushed the boundaries of what an ATS could become and demonstrated how these systems can innovate and create competition in the financial marketplace.
FAQs about Alternative Trading System
What is an Alternative Trading System?
An Alternative Trading System (ATS) is a trading system that is not regulated as an exchange but operates by matching the buy and sell orders of its subscribers. They match orders in a process that may be computerized or manual, depending on the specific trading system.
How does an Alternative Trading System work?
Subscribers to an ATS enter their orders for processing. These orders are then compared to other orders in the system. When a match is found, a trade is executed. The operators of ATS typically receive a fee for each trade that is made through the system.
What are the advantages of an Alternative Trading System?
The primary advantage of an ATS is its ability to increase liquidity and improve the potential for price improvement. They often operate at a lower cost than traditional exchanges, making them attractive to investors.
What are the disadvantages of an Alternative Trading System?
Possible drawbacks of ATS include the potential for reduced regulatory oversight compared to traditional exchanges, and the risk of trades not being executed if there is no match for the order in the system.
What is an example of an Alternative Trading System?
Dark pools are a type of ATS where the specifics of each order (like size and price) are not revealed to the other participants in the system. This system is commonly used to provide anonymity for large-scale investors.
Related Entrepreneurship Terms
- Dark Pools
- Electronic Communication Networks (ECNs)
- Direct Market Access (DMA)
- High-frequency Trading (HFT)
- Over-the-Counter (OTC) Trading
Sources for More Information
- Investopedia: An online source of financial information and investment dictionary with comprehensive, reliable financial analyses.
- U.S. Securities and Exchange Commission (SEC): The official website of the U.S. Securities and Exchange Commission, where you can find legal reports and statements about alternative trading systems.
- Bloomberg: A leading financial, software, data, and media company, provides news on alternative trading systems.
- Financial Industry Regulatory Authority (FINRA): A not-for-profit organization authorized by the U.S. government to regulate member brokerage firms and exchange markets.
