Trade Execution Activities
Once an order is entered, it must be routed to a venue for execution. This section covers the differences between exchanges, over-the-counter (OTC) markets, and alternative trading systems, along with the rules around trading halts.
Exchange vs. OTC vs. ATS Execution
| Venue | How Orders Are Matched | Key Feature |
|---|---|---|
| Exchange (NYSE, Nasdaq exchange) | Centralized order book; auction-based matching | Price/time priority; transparent pre-trade quotes |
| OTC | Dealer-to-dealer negotiation or electronic quotation systems | Dealers trade from inventory; negotiated prices |
| Alternative Trading System (ATS) | Electronic matching of buy/sell orders | Not an exchange; has subscribers, not members; no regulatory responsibilities |
Alternative Trading Systems (Regulation ATS)
- An ATS brings together multiple buyers and sellers electronically but is not a self-regulatory organization (SRO)
- ATSs must register as broker-dealers and comply with FINRA rules
- Dark pools are a type of ATS that do not display pre-trade quotes (no visible bid/ask), designed for large institutional trades to minimize market impact
- ATSs must register with the SEC on Form ATS at least 20 days before beginning operations
- All ATS trades in listed securities must be reported to a FINRA Trade Reporting Facility (TRF) and published on the consolidated tape
- FINRA publishes weekly ATS trading data after a delay for transparency
Key distinction: An ATS has subscribers, not members. Unlike an exchange, it has no regulatory responsibilities over its subscribers.
Think of it this way: An exchange is like a formal auction house with rules, a governing board, and licensed members. An ATS is more like a private matching service: it connects buyers and sellers electronically, but it does not police their behavior the way an exchange does.
Exam Tip: Gotchas
- An ATS is NOT an exchange and is NOT a self-regulatory organization (SRO). It has subscribers, not members.
- Dark pools are a type of ATS. They do not display pre-trade quotes, but trades in listed securities still must be reported to the consolidated tape via a FINRA Trade Reporting Facility (TRF).
Trading Halts (FINRA Rules 6120/6121)
- FINRA may halt OTC trading in any National Market System (NMS) stock when exchanges halt trading
- Halts may occur due to:
- Pending material news
- Regulatory concerns
- Extraordinary market volatility
Prohibition During Trading Halts (FINRA Rule 5260)
During a trading halt, members may not:
- Execute transactions in the halted security
- Publish quotations for the halted security
- Publish indications of interest in the halted security
Violations may result in disciplinary action.
Exam Tip: Gotchas
- During a trading halt, all three activities are prohibited: executing transactions, publishing quotations, and publishing indications of interest. The exam may test whether you know that indications of interest are also banned (not just trades and quotes).