Alternative Trading Systems (ATS) are computer-driven matching systems primarily used for transactions between large institutional buyers and sellers that don’t want to trade in public exchanges or don’t have access to them. In contrast to traditional exchanges, ATSs have a different set of requirements, such as buyer and seller anonymity, low liquidity with higher costs, price and order execution transparency, and a limited number of participants.

ATS are used for transactions between institutions and large investors who require more privacy and liquidity than public exchanges can provide. ATSs also offer alternative trading strategies, such as algorithmic trading and dark pools, that can provide participants with a competitive edge.

Unlike the public exchanges, Alternative Trading Systems are not highly regulated by the U.S. Securities and Exchange Commission (SEC). The SEC regulates ATS operations through its Regulation ATS. Regulation ATS sets forth a framework consisting of information-sharing, anti-fraud provisions, and rules regarding pre- and post-trade disclosure and reporting of ATS trades.

One example of an ATS is a “dark pool.” These are closed venues to match large orders of individual stocks that wouldn’t always get filled if they went through public exchanges. Dark pools are private markets that don’t publicly disclose the quotes and trades of the participants, allowing buyers and sellers to execute orders while remaining anonymous.

Another example of an ATS is an Electronic Communications Network (ECN). ECNs are computer-driven markets that electronically match buy and sell orders from various types of market participants, including brokers and dealers, institutional investors, and individual investors. ECNs offer access to quotes from multiple sources and facilitate the execution of large orders.

Although ATSs provide a valuable alternative to public exchanges, it is important for investors to understand the risks associated with trading in these markets. ATSs are not as transparent as public exchanges, so investors may have difficulty understanding differences in fees and order execution between trading venues. SEC Regulation ATS is an important tool for reducing the risks associated with ATS trading and ensuring a level playing field for all market participants.