Alternative Trading Systems

Oct 2009 Source: Goldman Sachs Execution and Clearing

An alternative to trading at a public exchange

Alternative Trading Systems

An Alternative Trading System (ATS) is an SEC-regulated trading venue which serves as an alternative to trading at a public exchange. In some ATSs (also referred to as “dark pools”) buyers and sellers are matched anonymously without pre-trade display of bids and offers, and the trade is publicly reported upon execution. It is important to note that the basic function of a broker-operated ATS is an electronic manifestation of a previously manual trading process, when trading desks would first try to execute trades internally before sending the order to a public exchange. Industry reporting estimates total US “dark pool” volume to be less than 10% of all US stock market transactions (Rosenblatt Securities, 2009). The vast majority of trades still occur at exchanges and ECNs.

ATSs are well-regulated entities

ATSs are affiliated with registered broker-dealers and, accordingly, their activities are governed by the same rules and regulations that govern broker-dealer activities generally, including the provisions of the Securities Exchange Act and SEC Regulation SHO. ATSs also constitute a “market center,” making them subject to the provisions of SEC Regulation NMS. In addition, ATSs are also subject to the provisions of SEC Regulation ATS, a unique set of rules designed specifically to govern the operations of ATSs.

Goldman Sachs supports regulation that enhances post-trade reporting transparency for ATSs

As a first step in the effort to support enhanced public information on ATS trading activity, Goldman Sachs Execution and & Clearing, L.P. (GSEC) recently adopted a standardized method for counting executed trades in its ATS. GSEC is one of the first participants in the FINRA/NYSE Trade Reporting Facility (TRF), an industry initiative for broker-dealers’ ATSs and off-exchange market centers to “print” trades on the TRF and display the daily activity of each trading venue on

Non-displayed or "dark" orders and related trading activity
are part of the price discovery process

When seeking best execution of their orders, market participants use trading tools that shift between providing displayed and non-displayed quotes, balancing the benefits of displaying a quote to achieve an execution versus not displaying a quote in an attempt to reduce market impact and potentially obtain price or size improvement on their order. All ATS trades “print” real-time to a trade reporting facility. This publicly available “time and sales” data is an integral component of price discovery, and ATS trading contributes to this in the same manner that public exchanges do.

ATSs have led to increased innovation and competition

Increased competition among trading venues has led to a broad reduction in explicit trading costs for both institutional and individual investors. For example, retail brokerages take advantage of the lower transaction fees offered by ATSs to provide low trading commission fees to their customers.

Investors are direct beneficiaries of market competition that
ATSs introduce

Institutional investors can improve their trading performance by executing in an anonymous manner that diminishes their “footprint” in a stock’s trading activity. In doing so, the clients of these institutional investors (for example, mutual funds and pension funds, where the bulk of small investors have their money invested) are direct beneficiaries of the lower costs enjoyed by institutions. Individual investors have an opportunity to interact with multiple ATSs by sending their orders to broker-dealers who typically have arrangements with many ATSs.

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