What is a multilateral trading facility (MTF)?
A multilateral trading facility is a type of trading venue where financial instruments are exchanged. They are similar to traditional stock exchanges, but can offer a wider variety of securities – including turbo warrants, and many other financial instruments.
Brokers, market makers, banks, hedge funds and asset managers can connect to MTFs directly – becoming ‘members’ – while retail traders can only access the markets on offer via a provider of their choosing. MTFs are described as ‘multilateral’ because they have multiple members that are capable of interacting with each other to set prices.
They operate under the European Union’s (EU’s) Markets in Financial Instruments Directive II (MiFID II), which stipulates that financial instruments traded via an MTF must be exchanged on a ‘non-discretionary basis’. This means that contracts between buyers and sellers must be formed according to a set of transparent rules that do not discriminate between members or their clients.
As an example, these rules could be based on the time and price at which orders and quotes are entered into the system. MTFs are not permitted to execute client orders against their own capital or engage in matched principal trading – they are simply a venue where buyers and sellers are paired so that a contract can be formed.
Which products are traded on an MTF?
A wide variety of equities and non-equities can be traded on an MTF, including:
Transferable securities such as shares and warrants
Units in collective
Swaps and forward rate agreements
Derivative instruments for the transfer of credit risk
Contracts for difference
A full list is available in Annex I, Section C of MiFID II.
Many of the financial instruments available on MTFs can be listed elsewhere – for example, on traditional exchanges. However, MTFs can also provide a venue for instruments that would not otherwise be available, enabling traders to access more exotic assets.
It is also worth noting that securities can be made available for trading across multiple MTFs, which has led to greater fragmentation of the financial markets in Europe and increased competition.
How does an MTF work?
An MTF works according to a published rulebook, which sets out how and when trades will be executed. They are normally underpinned by software that follows the given rulebook and matches buyers and sellers according to the orders and quotes that are entered into the system. An MTF’s rules must be transparent and non-discretionary, which ensures that all members have visibility of, and are subject to, the same trading conditions – regardless of their size or status.
Multilateral trading facilities are also required to provide pre- and post-trade transparency. The result of this is that orders and quotes are visible on a data feed before trades are executed – enabling users to select the best available prices for their trade volumes – while executed orders are published as close to real time as technically possible. Pre- and post-trade information is publicly available.
MTFs generate revenue by charging the members that use the venue. These financial institutions, in turn, generate revenue predominately from the spread and commissions charged on trades. This structure ensures that there is no conflict of interest between the end trader and the MTF.
Find out more about the advantages of an MTF over a traditional exchange.
What is a regulated market (RM)?
A regulated market (RM) is a European multilateral trading venue where contracts for the exchange of financial instruments are formed. They are very similar to multilateral trading facilities because – under MiFID II rules – both can offer equities and non-equities, must execute orders on a non-discretionary basis, and are prohibited from using proprietary capital or engaging in matched principal trading.
As such, there is a level playing field between RMs and MTFs – both are neutral venues that provide a high level of transparency and supervision.
Differences between an MTF and a regulated market (RM)
The main difference between a regulated market and an MTF is that an RM can only be run by a ‘market operator’, which must achieve this status by subjecting its management team and structure to the scrutiny of the EU member state in which it is based. MTFs, in contrast, can be set up by either a market operator or an investment firm.
Multilateral trading facilities (MTFs) vs regulated markets (RMs)
|Operator||Investment firm or market operator||Market operator only|
|Financial instruments||Equities and non-equities||Equities and non-equities|
|Use of proprietary capital||Prohibited||Prohibited|
|Matched principal trading||Prohibited||Prohibited|
What is an organised trading facility (OTF)?
Organised trading facilities (OTFs) are a type of European multilateral trading venue where contracts for the exchange of non-equities such as bonds, structured finance products, emission allowances or derivatives are formed.
Differences between an MTF and an organised trading facility (OTF)
The main difference between OTFs and MTFs is that the former can only offer non-equities, whereas MTFs can offer equities and non-equities. An OTF can also only be operated by an investment firm, while an MTF can be run by an investment firm or market operator.
Additionally, orders executed on an OTF are carried out on a discretionary basis, unlike MTFs where buyers and sellers must be matched according to non-discretionary rules. OTFs are also allowed to engage in matched principal trading on instruments that aren’t subject to the clearing obligation set out in the European Market Infrastructure Regulation (EMIR), provided they have client consent to do so.
Finally, OTFs are authorised to deal bonds against proprietary capital and on their own account, with this regulation reflecting the fact that the sovereign debt markets are often illiquid.
Multilateral trading facilities (MTFs) vs organised trading facilities (OTFs)
|Operator||Investment firm or market operator||Investment firm only|
|Financial instruments||Equities and non-equities||Non-equities only|
|Use of proprietary capital||Prohibited||Prohibited, except on illiquid sovereign debt instruments|
|Matched principal trading||Prohibited||Permitted on instruments not subject to the EMIR clearing obligation, with client consent|