Alternative trading system (ATS) is a US and Canadian regulatory term for a non-exchange trading venue that matches buyers and sellers to find counterparties.
Table of contents
- Alternative Trading Systems: Description of ATS Trading in National Market System Stocks
- 🟢 Alternative Trading Systems: Peculiarities & Examples
- FREQUENTLY ASKED QUESTIONS
- SEC Tightens Alternative Trading Platform Oversight
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Alternative Trading Systems: Description of ATS Trading in National Market System Stocks
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🟢 Alternative Trading Systems: Peculiarities & Examples
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These cookies will be stored in your browser only with your consent. In addition, the market is uncertain about the future direction of ABC stock. The buy order for , shares tends to persuade the undecided investors that ABC stock is likely to rise. Trading volume may be low because investors believe the stock is rising.
Holders of the stock are waiting to sell at a higher price. In this case, the big buy order reinforces the idea that the stock will continue to rise; consequently, the price rises even more.
FREQUENTLY ASKED QUESTIONS
Seeing the price move even higher, other investors who were thinking of selling become convinced that they can get an even higher price if they wait. At the extreme, a vacuum is created in the market: buyers are lining up to sell at ever-higher prices, but there are no sellers. This phenomenon, known as a liquidity black hole, has been known to occur in the futures markets; now it may become a reality in the stock market because of huge block trades footnote 2.
Our three simplified examples show the consequences of buy orders for large blocks of shares. The possibilities are the same for big sell orders. Here, the worst case scenario, the third example, is a downward spiral of ABC stock, which could cause other stocks to fall "in sympathy," resulting in an overall market decline. The bigger the buy or sell order, the greater the risk of disrupting market prices and provoking an unintentional rise or fall in the market. The individual investor who wants to buy ABC stock is penalized because he or she will have to pay an artificially inflated price for the shares, and the investor who wants to sell ABC shares will have to sell them at an artificially low price.
The solution to these problems was the advent of alternative trading systems. The first ones were established in the United States in Their purpose is to offer their members, essentially institutions that trade large blocks of shares, the possibility of finding a suitable counterparty without disrupting the traditional market, thanks to the competitiveness and additional liquidity they create and the lower commissions they charge.
SEC Tightens Alternative Trading Platform Oversight
To survive, these new markets must offer better prices than the traditional markets; otherwise, institutional clients will return to the old markets. In this sense, the new markets compete with the old markets, which is a positive thing for the investing public, both individuals and institutions. Alternative trading systems are essentially for institutions.
Individual investors access them indirectly via mutual funds, pension funds and, in some cases, brokerage firms. In the latter case, the brokerage firm automatically sends the order to the market offering the best price.