One of the main differences between an exchange and an alternative trading system is that an alternative trading system:

An alternative trading system, or ATS, is characterized primarily by its lack of regulatory authority over its subscribers. Unlike traditional exchanges, which are subject to rigorous regulations and oversight from entities like the SEC, ATSs generally operate in a less regulated environment. This means that while they may facilitate trading and serve as avenues for buying and selling securities, they do not actively regulate or supervise their participants in the same manner.

This distinction is important because it reflects the flexibility and potential for innovation that can occur within ATSs compared to traditional exchanges. For example, ATSs may cater to specific trading strategies or market segments that traditional exchanges do not, providing opportunities for trading that may not be as easily accessible through regulated venues.

In contrast, other options present common characteristics of ATSs but do not encapsulate their defining feature of lacking regulatory authority. ATSs can indeed operate electronic trading systems, may serve institutional investors, and might offer competitive transaction costs, but their primary distinction lies in the regulatory framework and oversight, or lack thereof, that underpins their operation.