When you enter an order to buy or sell a stock, what happens next? Simply put, your broker must make a decision on where to go to find someone who wants to sell their stock (if you want to buy) or buy your stock (if you want to sell). This decision is referred to as "routing" your order, and where the trade actually takes place is called the "execution venue."
The most familiar type of execution venue is a traditional exchange, such as the New York Stock Exchange or the Nasdaq Stock Market. However, other execution venues, including alternative trading systems (ATSs), single-dealer platforms (SDPs) and wholesalers, have risen in popularity in recent years. So, what's the difference between these venues? Read on to learn more.
Stock exchanges are defined by the Securities Exchange Act of 1934 and generally include venues that bring together multiple buyers and sellers. Although set up differently from FINRA, national securities exchanges are also categorized as self-regulatory organizations (SROs), meaning they have rules of conduct that apply to their members. National securities exchanges must be registered with the U.S. Securities and Exchange Commission (SEC), and the SEC maintains a list of currently registered national securities exchanges.
Stock exchanges are also where companies go to "list" their shares, a process often referred to as "going public." That means when you see a reference to a "listed" stock, that company has met the standards established by the listing exchange.
Transactions executed on exchanges are reported and published on the consolidated tape. Exchanges are also considered "lit" markets, meaning that pre-trade quotation data—which shows whether there is interest in buying or selling stocks, and at what price—is also published on the consolidated tape for anyone to see.
Alternative Trading Systems (ATSs)
An Alternative Trading System (ATS) is an electronic execution venue that acts much like a stock exchange but is not an SRO. That means ATSs, like exchanges, bring together multiple buyers and sellers. But unlike exchanges, ATSs do not have members (an ATS has "subscribers") nor do they take on regulatory responsibilities. An ATS may trade listed stocks, like an exchange, but an ATS may also trade unlisted stocks (often called OTC equity securities) or fixed income securities, such as bonds, unlike an exchange.
Although not themselves SROs, ATSs are regulated by the SEC under Regulation ATS. Under this regulation, an ATS must be operated by a broker-dealer that is a FINRA member. As a result, ATSs are also subject to applicable securities laws and regulations, including, for example, rules on disruptive or manipulative quoting and trading activity, and to oversight by FINRA.
Regulation ATS also imposes additional requirements on ATSs, including rules relating to the protection of confidential trading information, and, for ATSs that trade large volumes of securities, fair access and systems requirements. ATSs trading listed stocks are subject to heightened disclosure requirements, and the SEC publishes those disclosures—submitted on Form ATS-N—on its website.
"Dark pool" is an unofficial term often used to refer to an ATS that is not lit, meaning it doesn't publicly display pre-trade quotation data the way exchanges do. While dark pools are not required to publish quotations on their platforms, all ATSs—including dark pools—have a regulatory obligation to report information about trades that occur on their platforms.
All trade data for listed stock transactions occurring on ATSs, including dark pools, must be submitted to a FINRA Trade Reporting Facility (TRF), and it is published on the consolidated tape along with trades occurring on exchanges. Transactions in unlisted securities also must be reported to FINRA. Firms must report trades in unlisted stocks to the FINRA OTC Reporting Facility (ORF) or trades in fixed income securities to the FINRA Trade Reporting and Compliance Engine (TRACE).
The SEC maintains a list of ATSs, which changes over time and is updated regularly.
Single-Dealer Platforms (SDPs) and Wholesalers
Instead of routing your order to an exchange, your broker may execute your order itself or may route your order to an execution venue that is not registered as an exchange or an ATS. But all off-exchange, off-ATS activity must take place at a registered broker-dealer, so it is still subject to SEC and FINRA oversight. And while these venues may be considered "dark," all trades must be reported to the appropriate trade reporting facility for the type of security being traded, just like trades occurring on an ATS.
These off-exchange, off-ATS execution venues include:
- Single Dealer Platforms: An SDP is an electronic trading platform operated by a broker-dealer where the firm itself acts as the principal counterparty for every transaction. Unlike an ATS, where subscribers' orders to buy and sell are matched with one another by the ATS, on an SDP, the broker-dealer operating the SDP is always the counterparty to any trade that occurs on the SDP.
- Wholesalers: A wholesaler is a broker-dealer that acts as a market marker, a firm that actively quotes two-sided markets in a particular security, for other broker-dealers. Some broker-dealers, especially retail broker-dealers, route all or a significant portion of their orders to one or more wholesalers. A wholesaler's business is to execute those orders, which may involve executing the orders itself or further routing to other venues.
The Bottom Line
U.S. securities markets have grown more complex over the years. But while there are differences among types of execution venues, they all have an obligation to report post-trade data. All customer trades, regardless of where they are executed, are subject to SEC and FINRA rules and regulations designed to protect investors, including those pertaining to best execution and more. FINRA runs dozens of complex surveillance patterns to detect a wide variety of compliance issues and suspicious conduct to protect investors and to maintain the integrity of U.S. financial markets.
FINRA also publishes equity volume data on its website, which currently includes information on share volume and trade counts for off-exchange trades in listed stocks and OTC equity securities, as well as block trade information. Learn more about OTC transparency data.
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