Quick Answer
Exchanges match orders through a centralized, auction-based book; OTC markets rely on dealer-to-dealer negotiation; an ATS electronically matches orders but is not an exchange or SRO. Dark pools are ATSs that hide pre-trade quotes but must still report trades. During a trading halt, members may not execute, quote, or publish indications of interest in the halted security.
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.
How Do Exchange, OTC, and ATS Execution Differ?
| 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 |
What Rules Govern Alternative Trading Systems?
- 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).
What Recordkeeping Applies to an ATS That Handles Security Futures?
A narrower rule applies only to an ATS that accepts orders for security futures, not the general equity-ATS rule above:
- For each security-futures order, the ATS must record the receipt time to the second, product and symbol, contract quantity, buy/sell and order-type designations, prices and time-in-force, modifications or cancellations, execution time and price, executed size, parties or intermediaries, and an account identifier
- The ATS reports this order and execution information to FINRA on the next business day after accepting the order or executing the trade, unless FINRA specifies another period
- Records must be preserved under the applicable SEC record-retention rule
When and Why Do Trading Halts Occur?
- When the primary listing market declares a regulatory halt in an NMS stock, FINRA must halt off-exchange trading in that stock at the same time
- FINRA may also halt off-exchange trading for a severe, continuing market-wide disruption caused by a quotation, communication, reporting, or execution-system malfunction, and may close an affected FINRA reporting facility
- Halts may also occur due to pending material news or other regulatory concerns
- After a halt in a stock subject to the Limit Up-Limit Down Plan, off-exchange trading may not resume until trading has commenced on the primary listing exchange and the member has the applicable price bands (or can calculate them from the plan's reference price while awaiting dissemination)
What Is Prohibited During a Trading Halt?
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).
What Should You Check on Exam Day?
- Match a venue to its matching method: exchange (centralized order book), OTC (dealer negotiation), ATS (electronic matching, no regulatory role over subscribers).
- Remember an ATS has subscribers, not members, and is not an SRO, even though dark-pool trades in listed securities still must be reported to a FINRA Trade Reporting Facility.
- Confirm FINRA halts off-exchange trading whenever the primary listing exchange halts a stock.
- Recognize that all three activities (execute, quote, publish indications of interest) are banned during a halt, not just trading.