Alternative Trading System

What is an Alternative Trading System (ATS)?

An alternative trading system is a trading venue that simplifies matching buyers and sellers to execute trades in stocks and other securities.

As defined by the SEC, ATSs provide an additional pool of liquidity outside of traditional public exchanges like the NYSE and Nasdaq.

Key characteristics of alternative trading systems include using electronic order matching based on programmable rules rather than dedicated market makers. They allow for anonymity by not displaying orders and employing unconventional trading protocols like call auctions, mid-point pricing, or size/price priority order books.

Regulation of Alternative Trading Systems

ATSs are regulated as broker-dealers by the SEC under Regulation ATS, which requires:

  • Registration as an ATS
  • Compliance with fair access standards
  • Fee transparency
  • Proper supervision
  • Stringent record-keeping requirements

FINRA also provides guidance to member ATSs through Regulatory Notices that establish rules around disclosure, operations, and market integrity obligations.

The regulatory framework aims to create an even playing field between ATSs and public exchanges while still allowing flexibility in ATS trading models.

Types of Alternative Trading System Models

There are several specific trading system models that ATSs may employ.

Those include:

  • Call market/call auction systems that match orders at specific times rather than continuously
  • Mid-point pricing crossing networks that execute at the midpoint of the national best bid and offer (NBBO)
  • Block trading venues designed to facilitate the negotiation and execution of large institutional orders

These models differ from the conventional continuous auction order books used on most public exchanges.

Leading Alternative Trading System Platforms

Some of the largest and most actively traded equity alternative trading systems are:

  • Virtu MatchIT
  • Sigma X2
  • Level ATS
  • CitiBLOC
  • Credit Suisse CrossVest
  • SuperX ATS

Alternative trading systems have proliferated across other asset classes as well, such as MarketAxess and Tradeweb for electronic bond trading. According to FINRA data, ATSs account for approximately 40% of the total trading volume in NMS stocks.

Pros and Cons of Alternative Trading Systems

Let’s take a look at the pros first. Alternative trading systems provide additional liquidity sources, enable large blocks to be traded anonymously, allow customization of order types/priority rules, and offer lower trading fees compared to exchanges.

Criticisms raised include concerns around market fragmentation across numerous venues reducing overall transparency, potential conflicts of interest for ATS operators, and issues around ensuring fair access.

ATS Trading Volume and Market Share

While traditional public exchanges like the NYSE and Nasdaq still make up the majority of U.S. equity trading, alternative trading systems have grown to represent over 40% of volume in NMS stocks as of 2022 FINRA data.

This market share has steadily increased over the past decade as more ATS venues have proliferated. In some actively traded large-cap stocks, the percentage executed on ATSs can reach over 50%.

Alternative Trading Systems vs Traditional Exchanges

The key differences between ATSs and public national securities exchanges include that ATSs are regulated as broker-dealers, not Self-Regulatory Organizations (SROs).

In addition, they are able to use unconventional trading protocols beyond central limit order books, executions can be crossed anonymously internally, and fees/access requirements may differ.

However, they are still subject to similar core rules around ensuring best execution, order protection, and market integrity.

The Future of Alternative Trading Systems

ATSs continue to innovate with new trading models, including frequent batch auctions, conditional order types, and intelligent order routing strategies.

There is an ongoing debate around whether the fragmentation across dozens of ATSs should be consolidated versus continuing to allow competition and specialized venues.

Regulatory bodies aim to strike the right balance between fostering innovation while maintaining fair, orderly markets. Overall, ATSs are expected to maintain their significant role in the future market structure.

For you, as a retail trader, ATSs are less important since you primarily use regular stock exchanges to execute your trades and route orders.

Yet, if you are using a broker who is refinancing itself via payment for order flow, your orders might get routed via one of the ATS venues.

Alexander Voigt, CEO
Article by
Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.