ATS Secondary Markets: The Liquidity Gap in US Digital Securities

The alternative trading system is the regulatory vessel through which the US digital securities market channels its secondary trading ambitions. An ATS — defined under SEC Regulation ATS as a system that brings together buyers and sellers of securities but does not perform exchange functions — is the only currently viable secondary trading venue for digital securities in the United States. There are now more than twelve ATSs operating with digital securities capabilities or explicit FINRA/SEC authorization to trade blockchain-based instruments. Combined daily trading volume across all of them is estimated at $10 to $50 million. The New York Stock Exchange alone processes roughly $20 billion in daily equity volume. The liquidity gap is not a marginal problem. It is the defining structural challenge of the US digital securities market.

The Regulatory Anatomy of a Digital Securities ATS

An ATS operating in the United States must be registered as a broker-dealer under the Securities Exchange Act of 1934 and file Form ATS with the SEC. The regulatory framework, established under Reg ATS (17 CFR Part 242), does not impose the continuous display or market access requirements that apply to national securities exchanges — making ATSs more flexible and faster to establish, but also less integrated into the broader market structure.

The specific requirements for a digital securities ATS include all standard ATS obligations plus the additional compliance layer required for blockchain-based instruments: verified identity and accredited investor status for all participants (given that most digital securities are Reg D instruments with accredited investor restrictions), technical integration with blockchain settlement infrastructure, and custody arrangements that satisfy SEC customer protection rules under Rule 15c3-3 for the digital asset securities held on the platform.

tZERO was the first ATS to receive FINRA approval for digital securities trading, having filed its ATS notice in 2018 and commenced operations in 2019. INX received its ATS registration in 2021 after completing the first SEC-registered initial public offering of a digital security — a distinction that gave INX retail investor access that most digital securities platforms cannot offer. Securitize Markets obtained its ATS registration as part of Securitize’s broader digital securities infrastructure suite, integrating issuance, transfer agent, and secondary market functions under a single regulatory umbrella.

The Bid-Ask Spread Problem: Why Thin Markets Stay Thin

The bid-ask spread is both a symptom and a cause of the liquidity gap in digital securities ATSs. On major equity exchanges, the spread on liquid large-cap stocks is measured in fractions of a cent per share — effectively 1 to 5 basis points of transaction value. On digital securities ATSs, spreads of 200 to 500 basis points are common, and spreads exceeding 1,000 basis points are not unusual for less actively traded instruments.

Wide spreads reflect thin markets: when there are few buyers and few sellers, the bid-ask gap widens as market makers demand compensation for the inventory risk of holding illiquid positions. But wide spreads also cause thin markets: when transaction costs measured in spread run to 2–5 percent of transaction value, investors rationally hold rather than trade, further reducing turnover and volume. This self-reinforcing dynamic is familiar from other nascent securities markets — penny stocks, microcap equities, early-stage bond markets — and it is not easily broken.

The factors that typically break the bid-ask spread trap in securities markets are increased issuer diversity (more securities available to trade), increased investor participation (more potential counterparties on both sides), and the arrival of professional market makers willing to post tight two-sided quotes. For digital securities ATSs, all three factors are constrained.

Issuer diversity is limited by the structural challenges of digital securities issuance — legal costs, compliance infrastructure, accredited investor restrictions — that discourage smaller issuers from using blockchain-native structures. Investor participation is constrained by the accredited investor wall, which excludes roughly 90 percent of US households from legal participation in most digital securities trading. Professional market making is hampered by the absence of standardized digital securities lending markets (needed for market makers to hedge inventory risk) and the custody complexity of holding digital securities on multiple platforms.

The Accredited Investor Wall

The single most structurally significant barrier to secondary market liquidity in US digital securities is the accredited investor restriction. Under Regulation D, which governs the vast majority of digital securities issuances, secondary resale is restricted to accredited investors for a minimum of 12 months following issuance. After the initial holding period, resale remains subject to accredited investor restrictions under Rule 144 unless the security is registered or qualifies for another exemption.

The current SEC definition of “accredited investor” — established under Rule 501 of Regulation D and expanded modestly in 2020 to include certain licensed professionals — covers approximately 13 percent of US households by income and net worth criteria. This means that the natural secondary market for most digital securities is limited to roughly one in eight US households, with the remainder legally excluded from participation regardless of their investment sophistication or interest.

The contrast with the US equity market’s retail participation is stark. Any adult with a brokerage account can trade NYSE-listed or Nasdaq-listed equities. The 2021 meme stock phenomenon demonstrated the enormous liquidity that retail participation provides even for previously obscure securities. Digital securities ATSs are structurally prohibited from replicating this retail participation for any Reg D instrument.

The path to expanded investor access runs through regulatory action. INX’s fully registered initial public offering — which subjected the INX digital security to SEC review and qualification, enabling retail investor purchase — demonstrates that retail-accessible digital securities are legally possible under existing law. But the registration pathway is expensive, time-consuming, and impractical for most digital securities issuers. A formal expansion of the secondary trading exemptions available to digital securities — perhaps extending Rule 144 resale to a broader category of investors with demonstrated digital asset experience — would materially improve the liquidity picture without requiring full SEC registration.

T+0 Settlement: Necessary But Not Sufficient

A persistent misconception in discussions of digital securities market structure is that T+0 settlement — the simultaneous, atomic exchange of security tokens and payment tokens — is the key that will unlock digital securities liquidity. The argument runs as follows: faster settlement reduces counterparty risk, reduces margin requirements, and makes the market more efficient, therefore attracting more participants and increasing liquidity.

This argument captures a real phenomenon but misjudges its magnitude. T+0 settlement provides operational efficiency gains that are meaningful in high-volume institutional markets — the Broadridge DLR repo platform demonstrates this conclusively. But for thin secondary markets with fundamental investor participation constraints, settlement efficiency is not the binding constraint. The binding constraint is the pool of eligible investors, the diversity of tradeable instruments, and the density of professional market-making activity.

Consider the analogy of a small-town auction house. Making the auction process more efficient — faster payment processing, better lot documentation — may marginally increase the number of bidders and the quality of price discovery. But if the fundamental problem is that only a narrow class of collectors is legally permitted to bid on most lots, operational efficiency improvements do not address the core market failure.

The investor participation constraint must be addressed directly — either through regulatory expansion of eligible secondary market participants or through registration of digital securities that enables unrestricted secondary trading. T+0 settlement will then provide its operational benefits to a market that is liquid because of expanded participation, rather than serving as a partial substitute for the liquidity that only broad investor access can provide.

Interoperability: The Fragmentation Problem

Even within the accredited investor universe, digital securities ATS liquidity is fragmented across multiple incompatible platforms. A tZERO token cannot be traded on the Securitize Markets ATS, and vice versa. Tokens issued on different blockchain networks — Ethereum, Polygon, Avalanche, Stellar — require bridging infrastructure that introduces technical risk and transaction cost. Investor identity verification conducted on one platform is not automatically recognized by another, requiring redundant KYC/AML processes.

This fragmentation compounds the thin market problem. Even if the total universe of accredited investors interested in digital securities were large enough to support meaningful trading volume, the division of that universe across twelve or more non-interoperable platforms ensures that effective liquidity on any individual platform remains well below what would be possible if all participants traded on a unified venue.

The interoperability problem has both technical and regulatory dimensions. Technical solutions — cross-chain bridges, standardized token formats (ERC-1400 and similar security token standards), shared KYC infrastructure — are being developed by the industry. Regulatory solutions require FINRA and SEC guidance on cross-ATS trading protocols and the recognition of identity verification conducted under one platform’s compliance program by other platforms.

The Securities Industry and Financial Markets Association (SIFMA) and the Chamber of Digital Commerce have both published white papers recommending standardized digital securities protocols that would enable interoperability. Implementation requires either regulatory mandate or sufficient market participant coordination to achieve voluntary adoption — neither of which has materialized as of early 2026.

The 2027–2030 Outlook

The structural liquidity gap in US digital securities ATSs will not close without deliberate regulatory action. The most plausible scenario for meaningful improvement involves a combination of: expanded secondary trading exemptions that broaden the eligible investor pool beyond strict accredited investor criteria; SEC guidance on interoperable digital securities standards that enables cross-platform trading; and sufficient institutional issuance at scale to create the instrument diversity necessary for professional market-making activity.

If these conditions are met — optimistically, by 2027–2028 — digital securities ATS volume could plausibly reach $500 million to $1 billion per day across the major platforms. This would represent a 20–50x increase from current levels, bringing digital securities ATS volume into meaningful comparison with other specialized alternative markets (corporate bond electronic trading platforms, for example, which range from a few billion to tens of billions daily).

The longer-term scenario — a fully registered, exchange-listed digital securities market with unrestricted retail participation and DTC-eligible tokenized instruments — requires regulatory accommodations that would probably not materialize before 2030 under the most optimistic regulatory engagement scenario. But the institutional foundation being built in the ATS market today — the legal structures, the compliance infrastructure, the custody solutions — represents the prerequisite for that longer-term transformation.

The investors and issuers who engage with the current thin ATS market are not merely accepting illiquidity as a cost of the tokenization premium; they are building the institutional precedents and regulatory track record that will eventually support the broader market that the technology makes possible.