Alternative trading system (ATS) definition

• Updated

A place outside a regular stock exchange where buy and sell orders are matched

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Alternative trading systems offer less regulation but can be a bear trap for small traders – Photo: Shutterstock

What is an alternative trading system (ATS)?

On alternative trading systems, transactions are executed in the same way as they would be on regulated exchanges.

There is a difference, however – ATSs can be registered as a broker-dealer and don’t have to comply with the exchange regulatory framework. Also, ATS transactions are executed online.

Trades on an ATS are not included in the exchange order book. They don’t offer public information about the size of transactions and their respective prices. Therefore, they can’t place any pressure on equity prices on the markets. 

‘Dark pools’ is a term referring to an ATS where large transactions are executed. The aim of these transactions is to hide them from the order book and limit the effects on a stock price.

Participants in dark pools are brokers or dealers, institutional investors, funds and asset managers, professional traders, market makers and individual traders.

ATS pros and cons

There are no rules for traders at the ATS, though they could be penalised by not being allowed to make trades.

Since transactions are performed over the internet, the trading system advantage is that trades can be made from anywhere in the world.

Other characteristics of an ATS is that transactions are executed directly and in real-time. Eliminating the need for intermediaries enables traders to act on news and announcements instantly, with lower transaction costs. 

Also, such systems can ease the process of trading. They are no longer bound to execute transactions during stock exchange trading hours.

By trading on the ATS, a transaction can be completed in after-hours trading. Some types of ATS are electronic communication networks (ECNs), electronic trade matching and crossing networks.

Although an ATS offers a variety of benefits for traders, it comes with certain drawbacks. Namely, the trading system may execute the trades at prices that are different from regular markets.

Different prices

Because of the anonymity, large investors can sell off their holdings in specific assets at prices that are different from the prices reached on traditional exchanges.

Trades can be executed at pre-arranged prices between large investors. This harms individual investors because they may be not aware of the sale or purchase of larger quantities and prices will not reflect fair value. 

Another drawback is also related to anonymity. Traders don’t know who is behind the sale or buy of a specific instrument which creates the possibility of a conflict of interest.

Also, large investors can play the market by creating unrealistic demand or supply for security. As a result, individual investors can be played by large investors.

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