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Alternative Trading Systems: Peculiarities & Examples

ATS is an Alternative Trading System that emerged at the public markets as an alternative to traditional stock exchanges. In its simplest terms, it is a venue that matches counterparties (buyers and sellers) for conducting high-volume transactions.

There are few features that make alternative trading systems a demanded venue for investors and professional traders:

  • anonymity;
  • less regulation;
  • inaccessibility for the public.

Let’s look at these features in detail and clarify what are the functions and peculiarities of alternative trading systems, how to choose a company if you want to build a trading system, and what core features must be implemented there.

What is an alternative trading system (ATS)?

As we already mentioned, an alternative trading system is a non-exchange venue that enables buyers and sellers to trade online in large quantities.

Here are their main distinctions and edges over traditional stock exchanges:

  • Trading conducted at ATS is not available to the public and not included in national exchange order books. Non-provision public information on the size of the transactions enables traders to avoid affecting the market’s price.
  • ATS trading system is less regulated than traditional stock exchanges though it is registered as a broker-dealer. They do not establish rules that determine the actions of those subscribers who are not related to the transactions within these systems, and the only penalty they can impose on subscribers is restricting access to trading.
  • Counterparties can be matched anonymously, which helps traders improve their trading performance.

Peculiarities of Alternative Trading Systems

There are a few peculiarities of ATS that set them apart from traditional stock exchanges. Let’s consider the most essential ones.

Online transactions

All transactions at an alternative trading platform are conducted online. It facilitates trading and provides subscribers with the freedom to operate from anywhere in the world and at any time regardless of the exchange working hours.

No middleman

Trading at ATS does not involve third-party mediation, which enables traders to respond to news and announcements about lower transaction costs instantaneously.

Anonymity

Anonymity is advantageous for professional traders and investors who would like to leave no marks in a stock’s trading activity. However, anonymity is a two-sided coin as it may lead to a conflict of interests and enable large traders to affect the market demand.

Prices

ATS arms subscribers with the opportunity to trade at prices different from those on traditional exchanges. However, large investors can collude and predetermine prices before the transaction. In this case, prices won’t reflect the fair value for the asset, which harms individual investors.

Examples of ATS

There are several types of trading platforms – we’ll consider the most common ones.

Electronic communication networks (ECN)

ECN, or electronic communication network, is a digital system that matches counterparties for trading securities and enables them to perform operations without third-parties. ECN guarantees lower commissions and fees and provides subscribers with flexibility allowing them to conduct transactions outside the normal trading hours.

Another important feature of electronic communication networks is the ability to ensure anonymity to those subscribers who desire it – for example, investors aimed to make a large transaction.

The most significant disadvantage of ECN is the access fees and commission charges taken for each transaction – these costs can negatively affect trading profitability.

Call markets

Call markets, also known as call auctions, are the type of market mechanism. Its distinct feature is that the transactions are operated in certain time intervals when the system aggregates and transact bid and ask orders at specified times, not one at a time continuously. In contrast to an auction market pricing, the price at a call market is built on the number of securities offered by sellers and bid on by buyers. 

Call markets are used less frequently compared to auction markets, yet they can be useful for illiquid security. The main drawback of call markets is that they expose traders to higher price uncertainty.

Electronic trade matching

Electronic trade matching is a computer system to match bid and ask orders on stock and commodity markets on compatible prices. In today’s trading environment, trade matching is almost entirely automated and usually forms a part of a larger electronic trading system.

Crossing networks

Crossing network is an alternative trading venue that matches sell and buy orders. Its main feature is the opportunity to buy and sell assets out of the public channels without affecting the assets’ price. Another distinct feature of trading at crossing networks is that the pool of the participants who can buy an asset can be limited by the seller.

Transactions operated at a crossing network are not involved in national exchange books, and these networks can also provide participants with anonymity if needed. The biggest advantage of a crossing network is low commission charges.

Dark pools

Dark pools are privately organized venues for trading securities. The word dark implies that such exchanges provide no transparency at all, they are totally unavailable for the public.

Dark pools resulted due to the need for institutional investors to trade large quantities without affecting the market. Traders on such venues do not publicly reveal their intentions and do not disclose either the price of their trade or the number of shares.

All things considered

ATS development is a sophisticated process requiring considerable experience and a robust skill set. Itexus possesses both combining solid expertise with a genuine interest in financial software development. Whatever you are going to create a trading platform or need automated trading system development, our first-class engineers can translate your requirements into deeds, so do not hesitate to contact us.

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