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Alternate (Alternative) Trading Systems

On December 1, 2001, Canadian Securities regulators approved the introduction of Alternate Trading Systems (ATS) to the Canadian trading markets. U.S. markets had been exposed to these systems long before; however they remained virtually unregulated.  As a result, Regulation ATS was introduced by the SEC in 1998 and is designed to protect investors and resolve any concerns arising from this type of trading system.

In a policy paper, Mark Jickling states, "The ATS is the product of two factors: (1) the desire of institutional investors to cut trade execution costs and avoid the market impact of their trades, and (2) advances in data processing and electronic technology."  Designed to increase competition, improve the efficiency of trades and increase liquidity in capital markets, ATSs bring together orders from buyers and sellers using predetermined, established methods or rules under which the orders interact.

Investopedia says:ATSs are trading systems that are not regulated as an exchange, but are  venues for matching the buy and sell orders of its subscribers. Alternative trading systems are gaining popularity around the world and account for much of the liquidity found in publicly traded issues. In 1999 ATS accounted for 15% of stock volume. According to the SEC nearly 40 per cent of the dollar volume of trading in Nasdaq shares had migrated to ATSs by the year 2000.

Types of ATS

1) ECN - Electronic Communication Networks which trade equities and currency.  From Investopedia: An ECN connects major brokerages and individual traders so that they can trade directly between themselves without having to go through a middleman. Terra Nova Trading www.terranovatrading.com.and Instinet www.instinet.com are examples. Instinet, Wall Street's oldest and largest electronic communications network (ECN) founded in 1969  was a system that  developed into a kind of parallel Nasdaq market.

The advantage of an ECN is that it displays orders in real time, whereas on the NYSE for example, most investors are limited to only viewing the best bid and ask prices. "Generally, buyers and sellers using the ATS are anonymous. ECNs increase competition by lowering transaction costs, giving clients full access to their order books and offering order matching outside the traditional exchanges." Investopedia

2) Dark Pools began in the US with the approval of the SEC. Traders started linking up with each other and creating dark pools. The London Stock Exchange and Euronext are launching their own dark pools. A 2007 article in the NY Sun states "As the name suggests, dark pools lack transparency: They are used by institutional investors seeking to trade large blocks of stocks without creating the price wobbles that routinely accompany such moves. The trading is done away from the traditional exchanges, offering unprecedented anonymity." The bulk of dark pool liquidity is represented by block trades facilitated away from the central exchanges.

Learn more about ATS and ECN  and Dark Pools in        Books  |   Articles   |   Websites



Books

Aran Hemendra and Alpesh B. Patel.Global financial markets revolution : the future of exchanges and global capital markets  BUS stack HG4523.A72 2006

Audet Nicolas, Toni Gravelle, and Jing Yang. Alternative trading systems : does one shoe fit all? ARCCCA1 FN71 2002P33

Banks, Eric. Exchange-traded derivatives. BUS HG6024.A3B363 2003

Jickling Mark. Alternative trading systems: will computers replace stock exchanges? (e-book)

United States. General Accounting Office. On-line trading : investor protections have improved but continued attention is needed : report to Congressional requesters  (ebook)

United States. Securities and Exchange Commission. Electronic communication networks and after-hours trading. (e-book)

United States. Securities and Exchange Commission. On-line brokerage: keeping apace of cyberspace (ebook)

 

 

Articles

    • LeveL ATS Attains Significant Reach
      Anonymous. Business Wire. New York: Mar 17, 2009.
    • Portfolio Trading Dark Pool To Launch
      Anonymous. Wall Street Letter. New York: Dec 8, 2008.
    • Alternative trading systems: Crossing comes to Korea
      Peter Koh. Euromoney. London: May 2008.
    • Exchange competition: It's a win-win game, for now
      Peter Koh. Euromoney. London: May 2008.
    • Operations, trading & technology: Dark pools - Europe enters new dark age
      Anonymous. Mandate. London: Apr 2008.

 

 

Websites

From the Securities and Exchange Commission website:

Special Study: Electronic Communication Networks and After-Hours Trading

Report to the Congress: The Impact of Recent Technological Advances on the Securities Markets

Ontario Securities Commission:

Search results for Alternative Trading Systems

Bank of Canada:

Search results for Alternative Trading Systems

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