While Alternative Trading Systems offer myriad benefits, they also pose significant risk management and compliance challenges. Operational risks such as system glitches and cyber threats loom large, necessitating robust risk mitigation strategies and cybersecurity protocols. Compliance with regulatory requirements remains paramount, as ATS operators navigate a complex regulatory landscape characterized by evolving standards and enforcement actions. Failure to adhere to regulatory mandates can result in severe penalties and reputational damage, underscoring the importance of proactive compliance measures.
In order to investigate this, Table 4.2 compares the distribution of ATS and total trading among different industry groups as defined by Thomson Reuters. Columns
2 and 3 show how the total volume traded is split between non-ATS venues and ATS venues. An Inside Look Into Finras Crypto Asset Work The analysis concludes that on average,
each industry group trades around 14% on ATSs and 86% on other venues, mostly stock exchanges. Columns 6 and 7 compare the
distribution of trading in different industry groups for ATS and non-ATS venues.
MiFID 2 aims to ensure that all multilateral trading is executed either on exchanges or MTFs; and that bilateral transactions are carried out on the internal trading systems of firms. Under certain conditions, it will still be possible to carry out trading on a traditional OTC basis. The data is computed
based on firm-level monthly consolidated trading volume for all listed companies, their respective mid-month prices and end-month
market capitalisation. Throughout the 15 year period,
between 70% and 90% of all trading was attributed to shares in the 10% largest companies, indicating rather limited variations
over time.
- Similarly, about 25% of all trading in Japan is in the shares of the 1% largest companies measured by market capitalisation.
- Today [November 18, 2015], the Commission meets to consider a proposal to increase the transparency of alternative trading systems (ATS).
- Moreover, ATS facilitate price discovery by matching buy and sell orders in real-time, reflecting current market conditions accurately.
- Based on this data, we have calculated how the trading is distributed among all the individual trading venues, including exchanges, MTFs and other OTC trading.
Securities and Exchange Commission (SEC), the federal agency responsible for facilitating the operations of the securities market to protect investors and ensure the fairness of transactions. In contrast to call markets are auction markets, which conduct trades as soon as a buyer and a seller are found who agree upon a specified price for the security. A key component of call markets are auctioneers, who are responsible for matching the supply and demand for a traded security before arriving at an equilibrium clearing price, which is the price at which market orders are traded. A trade that is executed bilaterally off the order book of an exchange, but executed subject to the exchange’s rules and reported
to the exchange, is classified as an off-order book on exchange trade. From a company’s perspective, there are two characteristics that make equity capital different from other forms of capital
that the company can use. First, providers of equity capital (the shareholders) are not guaranteed any fixed interest rate
or any given rate of return on the money that they invest.
The new interpretation is intended to capture systems that centralize orders, either by the display or the processing and execution of orders. Orders include «any firm indication of a willingness to buy or sell a security, as either principal or agent, including any bid or offer quotation, market order, limit order, or other priced order,» and are executable without further meaningful negotiation. Over the past 30 years, the SEC has examined how to apply the term «exchange» to systems that have been variously called proprietary trading systems (PTSs), broker-dealer trading systems, and most recently, ATSs.
It describes the fragmentation of the
stock market resulting from an increase in stock exchange-like trading venues, such as alternative trading systems (ATSs)
and multilateral trading facilities (MTFs), and a split between dark (non-displayed) and lit (displayed) trading. Based on
firm-level data, statistics are provided for the relative distribution of stock trading across different trading venues as
well as for different trading characteristics, such as order size, company focus and the total volumes of dark and lit trading. The chapter ends with an overview of recent regulatory initiatives aimed at maintaining market fairness and a level playing
field among investors. An important rationale for MiFID 1 was to promote competition between different trading venues and decrease the costs for investors.
Its purpose was to provide more operational transparency of ATS platforms and regulatory oversights. Following the approved amendment, broker-dealers are required to file form ATS-N to register as an ATS, to file a notice of changes, and to notify SEC of an ATS closure. The Proposal does not directly address platforms — such as decentralized exchanges — that may trade digital assets that are securities. Many of these platforms may already be subject to Reg ATS if they use firm orders in respect of trading digital assets that are securities. As a result, the incremental expansion of Reg ATS to cover the broader category of “trading interest” (rather than just “orders”) would not newly ensnare such platforms using firm orders. Given the difficulties with analysing the trading data in Europe, potentially double-counted trades have been excluded, based
on the explanations provided for each trading category in the dataset, including give up/give in trades.
It is because trading conducted on ATS is not publicly available and does not appear on national exchange order books. Many different explanations have been proposed for the decline in non-financial company IPOs in advanced economies (Isaksson and Çelik, 2013). One of them focuses on the impact of structural changes in stock markets, including the effects of fragmentation and new investment techniques and instruments, such as ETF and high-frequency trading (HFT), on the lower liquidity of small company stocks. It has been claimed that the new market structure encourages a focus on large liquid company stocks and less appetite to hold and trade in small company stocks. As a result, the attention of investors has been diverted away from potential growth companies that in turn have been discouraged from going public (Economist, 2009; Bradley and Litan, 2010; Haslag and Ringgenberg, 2015). As of 1 December 2015, there were 85 trading venues operating as ATSs.6 Of these, 44 venues traded NMS stocks.7 Figure 4.4 displays the distribution of traded volume among the different ATS venues based on data retrieved from FINRA.
Overall, in all the markets featured in Figure 4.9, the share of total trading volume attributed to the largest 10% of companies in terms of market capitalisation was over
70%, with the exception of Indonesia (68%). Moreover, in most markets 20% of all trading was attributed to the largest 1%
of companies. Figure 4.9 does not only show that trading volume is highly concentrated to large companies. It also shows that the share of trading
in large companies typically is proportional to their share of total market capitalisation. The US Regulation National Market System (Regulation
NMS) adopted in 2005 is a collection of existing and new rules issued by the US Securities and Exchange Commission (US SEC).
In the realm of finance, an Alternative Trading System (ATS) stands as a pivotal component, offering a dynamic platform for securities trading outside traditional stock exchanges. This intricate ecosystem serves various participants, including institutional investors, broker-dealers, and high-frequency traders, enabling them to execute trades efficiently. The emergence of ATS has reshaped the landscape of financial markets, introducing enhanced liquidity, transparency, and accessibility. Understanding the nuances of ATS is paramount for investors and market participants navigating the complexities of modern trading environments. Comparing the fragmentation between exchange and off-exchange trading in the United States and Europe is not straightforward.
This overlap between dark trading volume across off-exchange trading venues and exchange trading is identified in Figure 4.5. Adding the volume of dark trading in exchanges to the dark trading in off‐exchange trading venues (including ATS and non-ATS OTC volume) shows that about 42% of the total trading volume in US equity markets in 2015 was in the form of dark trading. As mentioned above, the fragmentation of trading into multiple venues has been accompanied by an increase in dark trading
in the last decade. The difference between dark and lit trading lies in the transparency of trade information. The information
can be transparent either pre-trade, which gives investors access to information about buying and selling interest before
trading, or post-trade, which means that trade information is disseminated to the public after the execution of the trade. In both the United States and Europe, post-trade disclosure is required for all trades, including trades that are executed
on off-exchange platforms and internal trading systems of firms.
This overlap between dark trading volume throughout off-exchange trading venues and change trading is identified in Figure 4.5. As mentioned above, the fragmentation of buying and selling into multiple venues has been accompanied by an increase in darkish buying and selling within the final decade. With respect to the second dimension of fragmentation, Figure 4.5 clearly shows that the demarcation line for fragmentation between dark and lit trading is not necessarily between exchange
and off-exchange trading. The reason is that ATS venues can indeed be lit, for example, in the form of an ECN venue while
part of the exchange trading is actually dark.8 However, ATSs in the form of lit ECNs play an insignificant role in terms of total trading today. On the other hand, there is a significant portion of dark trading on regulated exchanges, which is estimated to be 9% of total trading volume.
While anonymity is great for companies that trade on ATS platforms, it is obviously a double-edged sword for the remainder of the market. Modern ATSs are a product of the rapid technological advances that have revolutionized the way stocks are bought and sold. There are many types of ATSs, and they facilitate the purchase and sale of all types of securities ranging from equities to corporate bonds to Treasuries, and more. Unlike an exchange, which must disclose publicly quotes and prices at which securities transactions occur, an ATS can operate in the dark with only limited information about its operations. The new scheme requires an ATS either to register as a national securities exchange or as a broker dealer and comply with new requirements under Regulation ATS.
For example, a pension fund investor seeking to promote a one-billion-dollar block of stock will face issues making an attempt to sell on an trade. Using this method, the figure shows that the share of on-exchange volume is similar across the three markets, between 48%-52%
of all trading volume, but considerably lower than in Figure 4.6. This also includes on exchange off-order book trading and hidden orders on exchanges, which are both classified as dark volume.