Especially in a bear market, one of the only (nearly) surefire ways to make money in cryptocurrency is by operating a trading platform. By exiting the trading game and instead sitting behind and enabling the action, you could position yourself to profit from every buy and sell that occurs on your platform, regardless of whether prices are going up or down.
In the early, Wild West days of cryptocurrency, creating a trading platform and making huge profits was as simple as making a website. Today, however, with crypto becoming more mainstream as well as being subjected to increasing regulation, you might be considering something more legitimate: Creating an ATS.
If you are considering creating an ATS, you might find yourself on the precipice of an enormous undertaking. To help you with your decision, this article features a list of 3 things to consider before you create an ATS. Before we cover those critical considerations, however, we’ll provide an overview of Alternative Trading Systems.
What is an Alternative Trading System (ATS)?
As implied in the introduction, an Alternative Trading System (ATS for short) is essentially a trading platform. Generally speaking, ATSs do not take up space in the physical world; they are mostly electronic in nature. Trading platforms are services that allow buyers and sellers to agree on prices for which their assets will change hands.
Our introduction also spoke of regulation. Indeed, Alternative Trading Systems are subject to a legal framework of guidelines to be followed that was put out by the SEC (Securities and Exchange Commission). The framework of guidelines is aptly called Regulation ATS.
What is the Difference Between ATSs and Exchanges?
Depending on who is asking this question, the answer could be anything from, “Virtually nothing,” to “There are some substantial differences.”
For investors and traders, ATSs and Exchanges function essentially identically. For the operator of the platform, however, there are important legal and regulatory differences that absolutely must be understood. We’ll go further into these later in this article.
Are All Crypto “Exchanges” ATSs?
Not necessarily. Again, the classification of “ATS” largely refers to the extent of which a trading platform has been registered and categorized by the Securities and Exchange Commission. When trading platforms meet certain criteria, they may be classified as ATSs. As a general rule, however, not every crypto exchange is an ATS. In fact, this very subject – and concern for crypto exchange operators – is evolving rapidly. Earlier this year, the SEC proposed redefining its definitions of “exchanges” in ways that might have serious ramifications for crypto trading platforms.
This is a good opportunity to mention that as a trader, it is critical to only utilize trading platforms that are verified and reputable. Too many people have been burned by unregulated, unprotected, and unscrupulous “exchanges.”
- In the crypto world, ATSs (Alternative Trading Systems) are regulated exchanges.
- While there are many crypto exchanges, many of them are not regulated.
- When exchanges are unregulated, they cannot technically be called ATSs.
- For a crypto exchange to become an ATS requires complying with specific regulations.
With this background knowledge established, we’re ready to get into the 3 things you should consider before creating an ATS.
1. Will Your Trading Platform Fulfill Regulatory Requirements?
As covered in the first part of this article, any trading platform that is to become an ATS needs to fulfill certain regulatory requirements. The tradeoff for going through this process involves upfront costs and ongoing financial and regulatory obligations in return for higher degrees of public reputation and security from looming legal issues.
Indeed, many crypto trading platforms choose to forgo regulation; these platforms avoid the cumbersome process of compliance and some financial costs, but do so at the expense of decreased trust from experienced traders and possible litigation down the line.
If you decide that the process of registering your trading platform as an ATS is worth the upfront costs and ongoing obligations, you’d be wise to seek the counsel of an ATS lawyer that can guide you through the process. Before you get to that step, however, here is a simplified and abbreviated rundown of some things you’ll need to go through to register your trading platform as an ATS:
- ATSs are essentially “exchanges” as seen by the SEC – but they decline to register as exchanges by utilizing Exchange Act Rule 3a1-1(a). This exchange rule provides an exemption for ATSs.
- To qualify as an ATS, a trading platform must adhere to the guidelines laid out in Rules 300-303 as written in Regulation ATS.
- As long as the previous two conditions are met, a trading platform may register as a “broker-dealer” with the SEC, which requires filling out and submitting Form ATS.
Again, it must be stated that the above steps are greatly simplified. The purpose of including these steps is simply to illustrate that registering as an ATS necessitates fulfilling certain regulatory requirements.
2. What Level of Regulatory Compliance is Best for Your Trading Platform?
Now that we’ve spelled out some of the process that a trading platform must go through to become a certified ATS, we can compare this level of regulatory compliance to the alternatives and provide the pros and cons of each. These alternatives have been briefly mentioned previously in this article, but this consideration involves assessing all of the options you have available to you as a trading platform – and choosing wisely.
No Regulatory Compliance: As we mentioned in Consideration #1, many crypto trading platforms opt out of regulatory compliance altogether. It is entirely plausible that many of these trading platforms may operate without any major issues – but there’s always the risk of larger problems.
Moderate Regulatory Compliance: This middle of the road option is where ATSs (Alternative Trading Systems) exist. ATSs are subject to fewer regulatory requirements than fully classified exchanges, but obviously far more compliance than totally regulated exchanges. Many consider ATSs the “sweet spot” for crypto trading platforms for exactly this reason; registering as an ATS represents clear intention to operate a trading platform in a way that complies with regulations while maintaining less obligations than a fully classified exchange does.
However, it must be mentioned that less compliance does open trading platforms to increased possibilities for allegations of violations. Of course, these possibilities are mitigated greatly when compared to those faced by totally unregulated platforms.
Full Regulatory Compliance: Trading platforms that choose to subject themselves to full regulatory compliance register with the SEC as exchanges. The tradeoff for exchanges is the highest level of upfront costs and ongoing obligations with the payoff of maximized protection – especially from violations of allegations and resulting legal difficulties down the line.
Your decision of which level of regulatory compliance to subject your trading platform is an important one. The optimal choice for your platform may depend on things like:
- Potential trading volume.
- Potential number of individuals utilizing your platform.
- Types of assets/securities that will be traded on your platform.
- Likelihood of being targeted for violations.
Again, we would be remiss if we did not recommend seeking professional counsel for this decision. At this stage of your decision, an ATS lawyer will be extremely valuable.
3. What Level of Transparency will your Platform Operate with?
Gaining clarity about exactly what type of trading platform you intend to run can help you greatly with your decision of what type of regulatory compliance you wish to adhere to. While the term ATS represents a legal classification, there are a number of specific types of platforms with classifications that describe their operations. Simply speaking, there are subsets of ATSs.
One of the biggest distinctions between subsets of ATSs is the level of transparency they operate with. In this discussion, “transparency” refers to how public or private the trades that occur on a given platform are.
Dark pools and crossing networks – two notable examples of types of ATSs – operate with very low levels of transparency, specifically for the purposes of allowing larger investors to execute high value trades without alerting other investors. This lower level of transparency benefits high-capital traders by preventing large changes in prices while they execute their trades.
On the other hand, ECNs (Electronic Communication Networks) often operate with a higher level of transparency. As you might surmise from the name, ECNs are online trading platforms. Unlike dark pools, which generally cater exclusively to investors with high amounts of capital, ECNs service everyone. ECNs allow trades of all sizes to occur in real time – usually at all hours of the day.
Alternative Trading Systems are huge money-making and liquidity-providing opportunities for their creators. Successful ATSs provide an important service in the world of cryptocurrency and reap enormous profits as a result. However, creating an ATS is a complicated endeavor that may be fraught with peril for those who do not prepare properly. With that in mind, you’ll be able to minimize your risks and maximize your chances of success by keeping the above 3 considerations in mind. And please, consult a lawyer!
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