Alternative plans are commonly known as Plan B in modern times, applicable across all fields. When committing a payment in business, one cannot rely solely on a single source; having an alternative plan ensures that commitments are met, thereby enhancing credibility in the market.
In cricket, captains always have a Plan B when trying to curtail a batsman’s scoring or take a wicket. If a fast bowler fails, the captain may switch to a spinner. Similarly, in chess, champions always strategize with alternative moves to counter their opponents. The film industry, too, relies on backup plans—when a director or producer cannot secure an actor’s call sheets, they turn to alternatives, which sometimes outperform the original choice. In warfare, when an offensive strategy fails, defense can yield better results.
Similarly, alternative trading is a powerful concept in stock markets. Alternative Trading Systems (ATS) provide a marketplace for securities trading outside traditional stock exchanges. ATSs, typically regulated as broker-dealers rather than exchanges, match buyers and sellers without setting the rules that govern subscribers beyond their trading activities.
Understanding Alternative Trading Systems (ATS)
An Alternative Trading System (ATS) is a US and Canadian regulatory term for a non-exchange trading venue that finds counterparties for transactions. It must be approved by the U.S. Securities and Exchange Commission (SEC) and serves as an alternative to a traditional stock exchange. In Europe, the equivalent term is a Multilateral Trading Facility (MTF).
Key Features of ATS:
- Loosely regulated compared to stock exchanges.
- Used for matching large buy and sell orders among subscribers.
- Includes Electronic Communication Networks (ECNs) that automatically match market orders.
- Allows trading large blocks of shares away from normal exchanges, preventing price fluctuations.
Importance of ATS:
- Provides alternative access to liquidity.
- Used by institutional investors to find counterparties for large transactions.
- Helps conceal trading activities to prevent market price disruptions.
Regulation and Transparency:
- Regulation ATS (introduced by the SEC in 1998) establishes a framework to protect investors.
- ATSs must register as broker-dealers and comply with reporting requirements.
- The SEC has increased enforcement on ATSs due to concerns about transparency and trading against customer order flow.
Examples of ATS:
- Electronic Communication Networks (ECNs)
- Call Markets (orders grouped and executed at specific times)
- Crossing Networks
- Dark Pools
Criticism of ATS:
- ATSs operate with lower transparency than national exchanges.
- Dark pools, often used by institutional investors, facilitate private trading but face criticism for lack of public information.
- Regulators have taken enforcement actions against ATSs for potential market manipulation.
Differences Between ATS and Exchanges:
- Stock exchanges are heavily regulated marketplaces that trade listed securities.
- ATSs trade both listed and unlisted securities but do not set regulatory rules.
How ATSs Make Money:
- ATSs charge fees and commissions for transactions.
- Higher trading volume increases their revenue.
Alternative Trading Systems play a crucial role in modern financial markets by providing alternative liquidity and trading solutions beyond traditional exchanges.
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By K.S. Chari
Editor-in-Chief, News Bureau, Markets Today, Bangalore
