Quick Answer
Alternative Trading Systems (ATS) register as broker-dealers under Regulation ATS. ECNs are the displayed, "lit" kind; dark pools and crossing networks are separate, non-displayed types, not sub-types of ECNs. Regulation NMS backs it all up, requiring trading centers to prevent trade-throughs and limiting quote-access fees.
A large and growing share of equity volume never touches a traditional exchange floor, so the exam expects you to know exactly what each electronic venue is and is not.
Electronic Communications Networks (ECNs)
- Electronic systems that automatically match buy and sell orders
- Provide an alternative to traditional exchange trading
- Display their orders (a "lit" venue), so their quotes can appear in the public quote (NBBO)
- Are one type of Alternative Trading System (ATS) registered under Regulation ATS
- Dark pools and crossing networks are other types of ATS that do not display quotes publicly (not sub-types of ECNs)
Dark Pools
- A type of ATS that does not display quotes publicly before execution
- Used primarily by institutional investors for large block trades to avoid market impact
- Trades are reported after execution to the consolidated tape (post-trade transparency only)
- Provide anonymity but have raised regulatory concerns about transparency and fairness
Why dark pools exist: When a large institution wants to buy or sell millions of shares, displaying that order publicly would move the market against them. Dark pools allow execution without revealing intent.
Exam Tip: Gotchas
- Dark pools do NOT display pre-trade quotes publicly. However, trades executed in dark pools ARE still reported to the consolidated tape after execution.
- The exam may test the difference between pre-trade and post-trade transparency. Dark pools provide post-trade transparency only.
Regulation ATS
Securities and Exchange Commission (SEC) regulation that governs Alternative Trading Systems:
- ATS operators must register as broker-dealers and comply with fair access, capacity, and reporting requirements
- ATS that reach certain volume thresholds must provide fair access to their system (cannot discriminate among qualified participants)
| Requirement | Threshold | Exception |
|---|---|---|
| Fair access | 5% average daily volume in a security, during at least 4 of the preceding 6 calendar months | Nondisplayed customer-order systems |
| Capacity, integrity, and security | 20% average daily volume, for qualifying municipal-securities and corporate-debt ATSs | Certain nondisplayed customer-order systems |
- FINRA's ATS record-and-transmit rule is narrower than it sounds: it applies only to ATSs that accept security-futures orders, requiring detailed order and execution records and next-business-day reporting to FINRA. It is not a blanket equity-ATS reporting rule.
Exam Tip: Gotchas
- ATS operators must register as broker-dealers, not as exchanges.
- Fair access requirements only apply once an ATS reaches the applicable volume threshold (5% for equities, 20% for qualifying muni/corporate-debt ATSs). Below those thresholds, an ATS can restrict participation.
- The FINRA ATS record-and-transmit rule covers security-futures orders only, not all ATS activity. Do not assume it is a general equity-ATS reporting requirement.
Regulation NMS (National Market System)
Comprehensive SEC regulation governing the structure of U.S. equity markets:
| Component | What It Does |
|---|---|
| Order-protection (trade-through) requirement | Requires trading centers to prevent trade-throughs: executing orders at prices inferior to the best available price, known as the National Best Bid and Offer (NBBO), displayed by other trading centers |
| Access requirement | Limits the fees that trading centers can charge for accessing their quotations |
- Ensures that customers receive the best available price regardless of which market center displays the best quote
- The order-protection requirement is the backbone of NBBO enforcement
Exam Tip: Gotchas
- Reg NMS prevents trade-throughs, meaning no trading center can execute an order at a price worse than the NBBO displayed elsewhere.
New York Stock Exchange (NYSE) Automatic Execution Systems
- Current NYSE Pillar rules (Rules 7.31, 7.32, and 7.37) govern order entry, execution, and routing
- Eligible market and limit orders can be executed or routed electronically under those current rules
- Older exam-outline labels for NYSE's original automatic-execution and buy-minus-zero-plus-order rules are legacy and retired; NYSE replaced them with the current Pillar rules when it moved to the Pillar trading platform, so do not treat the old labels as current requirements
What Should You Check on Exam Day?
- Do you know dark pools and crossing networks are separate ATS types, not sub-types of ECNs?
- Can you distinguish pre-trade transparency (ECNs, lit venues) from post-trade-only transparency (dark pools)?
- Can you explain what the Reg NMS order-protection (trade-through) rule and access rule each require?
- Can you state the volume threshold that triggers ATS fair-access requirements, and the narrower threshold for capacity/integrity/security requirements?
- Do you know NYSE's current electronic order-entry and routing rules are the Pillar rules, not the old automatic-execution rules the exchange retired?