Alternative Trading Systems

Alternative Trading Systems (ATSs)

The alternative trading systems, with presence in many of the world’s main financial markets, were created by rapid advances in information technology. This has enabled the creation of new market places which have no need for physical trading floors.

The main risks to consumer protection are from:

  • difficulties for clients in asserting their rights to best execution where some activity is conducted on non-transparent alternative trading systems; and
  • variations in the extent to which operators provide system and investment
    information, including clarity about clearing and settlement arrangements,
    leading to the possibility of consumers mis-buying alternative trading systems services.

The main risk to the reduction of financial crime objective is the lack of transparency of alternative trading systems trading, and the lack of a systematic approach to the
monitoring and reporting of suspect transactions.


Alternative trading systems, many of which have the basic trading characteristics of an exchange market, have posed new issues for securities market regulators in many
countries. The fundamental issue has been the appropriate way to modify
regulation to underpin market integrity and investor protection. In addressing
this issue, regulators have also been conscious of the need to mitigate risk in a
way that does not discourage innovation and fair competition.

A number of countries have already introduced regulation in this area. Their
general approaches and instruments are summarised below:

  • Australia: A single category ‘financial market’ covering exchanges and significant alternative trading systems (Instrument: Qualifying financial products)
  • Canada: Unified market-place concept, with exchanges and alternative trading systems subject to similar regulation in some areas (e.g. transparency) (Intruments: Exchange-traded securities and government and corporate debt)
  • Hong Kong: Flexible approach with transparency standards in particular tailored to the alternative trading systems (Instruments: Securities and futures)
  • United States – SEC: Incremental regulation, geared to market share (Instruments: Equity and non-governmental fixed income)
  • United States – CFTC: Single market category with three tiers of market, according to degree of retail investors 8Instruments: Financial and commodity derivatives)

In Europe

The Committee of European Securities Regulators (CESR) set up an Experts Group in 2000 to develop Standards for alternative trading systems that member regulators could agree to implement ahead of the revised Investment Services Directive (ISD). CESR published draft Standards in June 2001 and revised proposals in January 2002. It issued its final Standards for Alternative Trading Systems (the CESR Standards) in July 2002. The CESR Standards apply to investment firms and to ‘other entities which are authorised to provide investment services, such as credit institutions’.

The text of the CESR Standards broadly address:

  • issues relating to alternative trading systems operators, such as keeping regulators informed about alternative trading systems, systems standards, and clearing and settlement arrangements;
  • issues relating to trading on the alternative trading systems, including transparency, monitoring and reporting of trading; and
  • issues relating to customers of alternative trading systems, including providing information
    about alternative trading systems and about securities traded on them (conduct of business

CESR left open the possibility of national regulators extending the scope to commodity derivatives.

In the UK

the Alternative Trading System, in the United Kingdom, is a system that brings together multiple buying and selling interests in designated investments (other than life policies or stakeholder pension schemes or rights to or interests in life policies or stakeholder pension schemes), in the system and according to non-discretionary rules set by the system’s operator in a way that results in a contract, but does not include:

  • a system that is operated by an RIE or that is a regulated market or an EEA commodities market; or
  • a bilateral system.

Some notes from the above definition:

  • An alternative trading systems operator is a firm which operates an alternative trading system or which has accepted responsibility for an appointed representative who operates an alternative trading system.
  • A direct user (in relation to an alternative trading system) is a person who directly uses the alternative trading system but not including a client for whom that person is acting when using the alternative trading system.
  • The EEA commodities market is a market that facilitates trading in derivatives relating to commodities (other than a market operated by an RIE) that is operated by an entity that has its head office situated in the EEA and that is regulated as an exchange.
  • “Traded on” (in relation to an alternative trading system) is traded by means of the system including under the rules of, or by means of the protocols or operating procedures of, the system.
  • The user (in relation to an alternative trading system) a direct user of the ATS and a client for whom the direct user is acting when using the alternative trading systems.
  • A Bilateral system is a system that brings together buying and selling interests in the way described in the definition of an Alternative Trading System, where a single person or persons in the same group enter into every transaction effected using the system, on their own account and not as a riskless principal interposed between a buyer and seller, or would enter into every trade in that way but for client orders that are crossed occasionally.