Securities and Exchange Commission: Regulation of NMS Stock Alternative Trading Systems

Securities and Exchange Commission: Regulation of NMS Stock Alternative Trading Systems
13.06.2024 Mitko

An Alternative Trading System encompasses electronic platforms or networks facilitating the buying and selling of securities. Unlike traditional exchanges such as the New York Stock Exchange (NYSE) or NASDAQ, ATS operates decentralized structures, allowing participants to match trades directly. These systems utilize sophisticated algorithms and protocols to match buyers An Inside Look Into Finras Crypto Asset Work with sellers, bypassing the need for a centralized exchange. The flexibility offered by ATS empowers market participants to execute trades swiftly and efficiently, catering to diverse trading strategies and preferences. MiFID 1 was adopted in 2007 and covers a broad range of market rules related to market structure, transparency, supervision and investor protection.

Trading in ATSs is also highly concentrated with the largest 1% of the companies accounting for 23.8% of the trading, which
is actually at par with the overall concentration in United States trading volume. The share of the top 5% and top 10% largest
companies in total trading on ATSs was somewhat higher than their share in total United States trading volume. The results
do not change significantly when company size is measured by the total value of assets instead of market capitalisation. Since there are certain pre-trade transparency requirements for Systematic Internalisers in Europe, unlike the US data, they
were classified as part of the lit volume.

This optional tool is provided to assist member firms in fulfilling their regulatory obligations. This tool is provided as a starting point, and you must tailor this tool to reflect the size and needs of the applicant. Using this tool does not guarantee compliance with or create any safe harbor with respect to FINRA rules, the federal securities laws or state laws, or other applicable federal or state regulatory requirements. This tool does not create any new legal or regulatory obligations for firms or other entities. As a result, dark pools, along with high-frequency trading (HFT), are oft-criticized by those in the finance industry; some traders believe that these elements convey an unfair advantage to certain players in the stock market. Alternative Trading Systems have gained traction across global financial markets, catering to diverse asset classes and evolving market needs.

Regulation of Alternative Trading Systems

Transactions executed in the dark
order books of regulated markets are classified as non-visible, on-exchange and exchange hidden. Off-book transactions reported
and executed in exchanges are classified as non-visible, on-exchange and exchange off-order book. Transactions executed in
an MTF’s order book are classified as visible, off-exchange and MTF. Transactions executed in an MTF’s dark order book are
classified as non-visible, off-exchange and MTF. (B) During at least 4 of the preceding 6 calendar months, had an average daily trading volume of 5 percent or more of the aggregate average daily share volume for such NMS stock as reported by an effective transaction reporting plan.

However, the proliferation of ATS has led to market fragmentation, with liquidity dispersed across multiple venues. This fragmentation poses challenges for regulators and market participants, necessitating collaborative efforts to ensure market integrity and stability. The proliferation of Alternative Trading Systems has exerted a profound impact on traditional exchanges and market dynamics. ATS platforms have siphoned liquidity away from traditional exchanges, fragmenting order flow across multiple venues.

Regulation of Alternative Trading Systems

If you would like to delete your account or remove your information from our Website and Services, send an e-mail to (2) Uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade.” Dark pools are another type of Alternative Trading Systems that are considered controversial since the trades are done out of the public eye, clouding the transactions. (C) Such orders are executed at a price for such security disseminated by an effective transaction reporting plan, or derived from such prices. Every alternative trading system subject to this Regulation ATS, pursuant to paragraph (a) of this section, shall comply with the requirements in this paragraph (b).

  • Understanding the nuances of ATS is paramount for investors and market participants navigating the complexities of modern trading environments.
  • It bypasses the need for a centralized exchange, enabling direct matching of trades between buyers and sellers.
  • If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the “My Account” dashboard.
  • Alternative trading systems (ATSs) facilitate large buy and sell orders between parties, usually institutional investors, which helps keep such trades private and limits the impact that such large orders would have on the price of a security in the open, public markets.

Dark pools were in many ways replacing the traditional “upstairs” market, while also providing services conventionally provided only by registered exchanges. In addition to changes in market structure and the business models of stock exchanges, secondary stock markets are today fragmented along two lines. First, trading is fragmented between stock exchanges and a large number of off-exchange venues, such as stock exchange-like alternative electronic trading platforms and OTC centres, including internal trading systems of firms. In the United States, about 30% of all trading takes place in off‐exchange venues and in Europe about 50% of the total trade volume is executed outside of the traditional exchanges. Figure 4.1 shows the number of M&A transactions in the stock exchange industry between 2000 and 2014. The figure covers a total of 169
buy-side deals and mergers involving publicly listed stock exchange operators.

Regulation of Alternative Trading Systems

In Europe the share of dark volume with respect to total trading volume varies between countries from 35% to 48%. Out of the 18 national securities exchanges registered with the US SEC at the end of 2015, 12 exchanges traded equity securities in the United States. These alternative trading systems have grown up and become a major part of the marketplace. The current average trade size of about 200 shares is not significantly different from the average trade size that occurs on exchanges. And the volume of the business done in dark pools has grown so significantly that one must at least consider what, if any, effect it is having on price discovery in the larger marketplace, or perhaps how it could be contributing to a masking of true supply and demand.

It is
important to note, however, that dark ATSs are not covered by the Order Protection Rule of Regulation NMS, which means that
exchanges and ECNs are not required to route orders to dark venues. In January 2014, the US SEC approved a rule that requires all broker-dealers that operate an ATS to report the aggregate weekly
trading information for each security to the Financial Industry Regulatory Authority (FINRA). (B) With respect to corporate debt securities, 20 percent or more of the average daily volume traded in the United States. (D) With respect to corporate debt securities, 5 percent or more of the average daily volume traded in the United States. (iv) The alternative trading system shall promptly file an amendment on Form ATS correcting information previously reported on Form ATS after discovery that any information filed under paragraphs (b)(2)(i), (ii) or (iii) of this section was inaccurate when filed.

Regulation of Alternative Trading Systems

With respect to off-exchange venues, the market share of MTFs is around 12% in the United Kingdom, 10% in France and 8% in Germany, while the lion’s share of the off-exchange volume was executed on non-MTF OTC centres. In advanced economies, stock exchanges were traditionally established as member-owned organisations or government institutions. Since the mid-1990s, however, most stock exchanges have been transformed into privately owned for-profit corporations. Today,
all major stock exchange operators in advanced economies have their shares listed and traded on their exchanges, while the
mutual form based on brokers’ membership has almost disappeared. The adoption of Alternative Trading Systems transcends geographical boundaries, with these platforms gaining traction across global financial markets. ATS cater to a diverse array of asset classes, including equities, fixed income securities, and derivatives, catering to the evolving needs of market participants.

Transactions operated at a crossing network are not concerned in nationwide trade books, and these networks can also provide participants with anonymity if wanted. is a website operated by Realized Technologies, LLC, an entirely owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be supplied by way of Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. (“Realized”), a broker/dealer, member FINRA/SIPC, and registered investment adviser. Regulation ATS was originally adopted in 1998 by the SEC to provide an ATS framework and basic investor protections.

Commission estimated the aggregate initial, one-time burden on all ATSs would be
120 hours; it also estimated the total aggregate, ongoing burden per year for
all ATSs would be 348 hours. Similar to dark pools, crossing networks allow trades to happen outside of the public eye. Since the details of the trade are not relayed through public channels, the security price is not affected and does not appear on order books.

These violations may be more common in ATSs than in national exchanges because ATSs face fewer regulations. This amendment was a monumental change from the original Regulation ATS, which only required broker-dealers to register and be approved as an ATS by the SEC. Following the adoption of the amendment, broker-dealers are still required to file form ATS-N to register as an ATS, however, now it is also used to report any changes to an ATS business, and make the SEC aware of an ATS business closure. Most importantly, the amended Regulation ATS established a formal process the SEC will use to review and approve/reject submitted ATS-N forms. Form ATS-N has been made publicly available by the SEC and can be accessed using its EDGAR system.

A new key rule was the “Order Protection Rule” which requires trading centres to enforce policies and procedures that prevent
the execution of trades at prices inferior to protected quotations displayed by other trading centres. The objective is to
ensure that investors receive an execution price equivalent to the best price available in all trading venues. A second change
was the “Access Rule” which was aimed at ensuring a level playing field among trading venues by improving access to quotes
in different trading venues. The third major change was to amend the market data rules to further promote market data availability
and to allocate market data revenues to those Self-Regulatory Organisations1 that produce the most useful data for investors. Dark pools entail trading on an ATS by institutional orders executed on private exchanges.


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