A Multilateral Trading Facility (MTF) is a platform designed to facilitate the exchange of financial instruments between multiple parties, offering an alternative to traditional stock exchanges. MTFs provide a space where eligible participants can interact and trade securities, even those that may not have an official market. These facilities are typically electronic systems managed by authorized operators or major investment banks, with computerized matching of buy and sell orders.
Key Insights
- MTFs provide retail investors with an alternative platform for trading financial securities.
- They are usually operated by market operators and investment banks.
- MTFs are governed under the EU’s MiFID II framework, aimed at protecting investors.
- These platforms offer trading in more exotic instruments and over-the-counter (OTC) products.
- Known as Alternative Trading Systems (ATS) in the United States.
The Functionality of MTFs
MTFs give retail investors and firms an alternative to conventional exchanges like Euronext or the London Stock Exchange (LSE). Less restrictive in the types of financial instruments they admit for trading, MTFs allow for the exchange of more unique assets and OTC products. For instance, the LMAX Exchange allows trading in spot foreign exchange and precious metals.
Enjoying faster transaction speeds, lower costs, and various trading incentives, MTFs have gained popularity in Europe. Despite the closure of NASDAQ OMX Europe in 2010 due to intense competition, MTFs continue to thrive, leading to increased fragmentation in financial markets. Brokers have adapted by offering smart order routing (SOR) to secure optimal prices across multiple venues.
MTFs largely operate under the European Union’s revised MiFID II framework, designed to instill confidence in the financial market and protect investors.
MTFs in the U.S.
In the United States, Alternative Trading Systems (ATS) function similarly to MTFs and are regulated as broker-dealers instead of exchanges. However, they must be approved by the Securities and Exchange Commission (SEC) and meet specific standards. Recent SEC actions targeting ATSs, particularly dark pools, could foreshadow stricter MTF regulations in Europe.
Prominent ATS examples include Electronic Communication Networks (ECNs), which are computerized systems that automatically match buy and sell orders for security trades.
Advantages of MTFs
MTFs present several benefits for trading securities and other assets. Notably, these platforms uphold transparency as their operators must adhere to set rules for executing trades, preventing conflicts of interest. Utilizing high-speed trading algorithms, MTFs offer greater liquidity and lower bid-ask spreads, leading to more effective price discovery. Typically operating on a commission basis, MTFs maintain neutrality with traders by avoiding specific trade selections.
Real-World Applications
Investment banks and financial data companies can leverage economies of scale to compete with traditional exchanges, potentially integrating their operations for synergy. An example is UBS Group’s integration of its internal crossing systems with its MTF.
In 2019, Bloomberg received authorization from the Netherlands Authority for the Financial Markets (AFM) to operate an MTF from Amsterdam. Bloomberg’s MTF facilitates trading in products such as cash bonds, repos, credit default swaps (CDS), interest rate securities (IRS), exchange-traded funds (ETFs), equity derivatives, and FX derivatives.
Distinguishing MTFs from OTFs
An Organized Trading Facility (OTF) is a Europe-specific venue for bonds, derivatives, and emissions allowances but not equities, whereas MTFs can trade stocks and equity products. OTF operators have discretion in placing or withdrawing orders, unlike MTFs where trades follow clear rules without operator discretion.
Leading MTFs
Among the largest MTFs is Chi-X Europe, based in London and regulated by the Financial Conduct Authority. Other significant MTFs include Liquidnet Europe, Currenex MTF, and UBS MTF.
Products Tradable on Bloomberg’s MTF
Bloomberg’s MTF allows trading in bonds, repos, credit default swaps, interest rate swaps, exchange-traded funds, equity derivatives, and foreign exchange derivatives.
Stay informed and safeguard your investments by understanding the detailed functioning and benefits of Multilateral Trading Facilities.
Related Terms: Alternative Trading Systems, MiFID II, Electronic Communication Networks, retail investors, investment banks, dark pools.
References
- European Markets and Securities Authority. “MiFID II”.
- NASDAQ. “NASDAQ OMX to Close Its Pan-European Equity MTF NASDAQ OMX Europe”.
- U.S. Securities and Exchange Commission. “Alternative Trading System (‘ATS’) List”.
- U.S. Securities and Exchange Commission. “Exemptive letter: UBS Group AG - Holding Company Reorganization”, Page 9.
- Bloomberg. “Bloomberg MTF Receives Authorisation from the Netherlands Authority for the Financial Markets”.
