Introduction to Alternative Trading Systems

Not all secondary market trading takes place on an exchange. There are a number of alternative trading venues that are owned and operated by broker/dealers, exchanges, banks, and private companies. These venues can take many different forms and be called by many different names. In the United States, such venues are generally referred to as alternative trading systems, whereas in Europe, they are commonly called multilateral trading facilities. Many alternative trading venues permit only certain traders or types of traders to use their trading systems, and each of them has its own rules. Most alternative trading venues allow institutional traders to trade directly with each other without the intermediation of dealers or brokers, which makes them lower-cost trading venues. Some alternative trading venues operate electronic (computerised) trading systems that are similar to those operated by exchanges. Others operate innovative trading systems that suggest trades to their clients based on information that clients share with them or that they obtain through research into their clients’ preferences. One type of alternative trading venue is a crossing network, which is an electronic trading system that matches buyers and sellers who are willing to trade at prices obtained from exchanges or other alternative trading venues. Crossing networks are popular with investors who want to trade large blocks of securities without risking moving the price of those securities by submitting an order to an exchange. Some alternative trading venues are known as dark pools because of their lack of transparency. Dark pools do not display orders from clients to other market participants. Large institutional investors may transact in dark pools because market prices often move to their disadvantage when other traders know about their large orders. Note: Dark pools are not legal in India.