STA 2022 Takeaways & Drivers of Alternative Trading Systems and Single-Dealer Platforms

With the annual STA conference now behind us and Q4 in full swing, we caught up with Arthur Bunyatov, who heads Sales & Business Development for Nasdaq Execution Platform (previously known as Ocean), to discuss the latest developments impacting the world of alternative trading systems (ATS) and the wider markets ecosystem. 

1. 2022 is shaping up to be one of the more memorable years for global markets in recent memory. Looking at the world of alternative trading systems (ATS), what are some of the external factors driving the interest and development of this expanding landscape lately?

Probably one of the bigger factors that has had an impact on the US Equities trading and ATS world is retail trading. Retail trading has driven record volume growth in the capital markets over the last few years. This phenomenon, coupled with geopolitical uncertainty, inflation and the war in Ukraine, has added to market volatility. These dynamics are pushing many firms to find different liquidity strategies to have a more consistent and clean trade execution.  

To meet this need, we’ve seen more adoption of different workflows offered by dark pools and the ATS community. We can summarize the goals and objectives of the ATSs into four main categories: 1) create better liquidity for their customers during moments of volatility, 2) limit information leakage 3) have better interaction controls with their customers flow, and 4) internalize existing flows to save on fees and generate revenue.

2. What are some of the big market structure developments that are top of mind for the ATS space?

From our discussions with clients and prospects, the SEC proposal earlier this year on expanding the definition of what is a trading venue and whether protocols may fall under the definition of an ATS is absolutely top of mind. As part of this proposal, significant Treasury markets platforms may also be included within Regulation ATS, not to mention the possibility of inclusion of other asset classes, such as digital assets.

Latency will always be top of mind. However, ATSs are also looking for new innovative ways to improve the overall trading workflow while creating a more level playing field is certainly also taking center stage. As mentioned previously, an external factor like market volatility may be a key driver in the adoption of these innovations that are taking place.

3. A lot of alternative trading systems emphasize very specialized value propositions. Are workflow and operational processes universally the same? Or do they vary ATS by ATS?

Probably the easiest and quickest way to fully grasp the various value propositions across the ATS landscape is just visiting the SEC website and reviewing the ATS-N filings. This provides a unique view into the technology, external vendors used and the differences in the workflows of an ATS. 

Regardless, compliance and regulatory requirements make all ATS platforms adhere to the same rules and obligations. Currently, there are 33 registered ATS platforms that trade NMS stocks and are in full operation, according to SEC.  

However, some banks operate more than one ATS, and these platforms can have different types of order books, workflows, matching logic, or participants. This means criteria for participation and workflows of an ATS pool may also be different. For example, an independent ATS like PureStream will meet all regulatory and operational obligations, but PureStream has a specialized approach to matching workflow between two sides of the trade when compared to other registered ATS.

4. How crucial of a role does technology play in the industry adoption and/or success of an ATS? 

Technology is absolutely central to the success of an ATS. They need a platform that is ultra-low latency combined with a flexible design that is highly performant, always compliant with the latest regulatory obligations and have no room for error.

The technology that drives the workflows behind an ATS is different and historically has been built internally. However, we’re seeing the trend increasingly shift from build to buy.   

More specifically, in the technology partnerships we’ve built in the ATS community with our Nasdaq Execution Platform, the focus has typically been to address the need to maintain rigorous operational, compliance, and technology standards that are trusted by top-performing banks and innovators in the space. It gives the ATS the ability to focus their efforts on their business model and executing for their clients.

5. From conversations with industry participants, do you have any predictions on how you see the ATS landscape evolving in 2023?

There are certainly a few trends that are here to stay for the foreseeable future.

I would say payment for order flow (PFOF) remains a prominent, ongoing debate around if retail clients would be better served if their order flow was competitively bid on instead of directed to a predefined set of wholesalers that execute the trade.  

Also, tick sizes. The notion that wholesalers and ATS can execute at sub-penny price vs. lit exchanges that adhere to a penny price increment. (Non-exchange venues generate their revenue off the spread of the NBBO, often at a sub-penny level.)

And odd lots. With the recent explosion of volume coming from retail investors that typically trade in odd lots (i.e., sub-100 share lots), the ongoing debate continues to center around whether the protected quote (NBBO) should be expanded from round lot (i.e., 100 share increments), as well as running a separate “odd lot” orderbook. This debate has been particularly fueled by the recent explosion of retail and notional trading, which may be shifting the market.

Lastly, as crypto and the wider digital asset ecosystem continues to rapidly evolve with growing institutional adoption, this will likely have a major impact on expanding the ATS landscape to meet client demand.

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