WHAT IS AN MTF?

Discover everything you need to know about multilateral trading facilities (MTFs) including what they are and how they work, as well as the differences between a multilateral trading facility (MTF), a regulated market (RM) and an organised trading facility (OTF).

What is an MTF

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.

What is an MTF

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.

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
  • OPTIONS
  • DERIVATIVE INSTRUMENTS FOR THE TRANSFER OF CREDIT RISK
  • MONEY-MARKET INSTRUMENTS
  • FUTURES
  • UNITS IN COLLECTIVE INVESTMENT UNDERTAKINGS
  • SWAPS AND FORWARD RATE AGREEMENTS
  • EMISSION ALLOWANCES
  • CONTRACTS FOR DIFFERENCE (CFDS)

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

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.

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 ARE THE ADVANTAGES? WHAT ARE THE ADVANTAGES?

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.

MULTILATERAL TRADING FACILITIES (MTFS) VS REGULATED MARKETS (RMS)
 

MTF

Regulated market

Operator

Investment firm or market operator

Market operator only

Financial instruments

Equities and non-equities

Equities and non-equities

Execution

Non-discretionary

Non-discretionary

Use of proprietary capital

Prohibited

Prohibited

Matched principal trading

Prohibited

Prohibited

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.

WHAT IS AN ORGANISED TRADING FACILITY (OTF)?

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 ORGANISED TRADING FACILITIES (OTF)
  MTF

OTF

Operator

Investment firm or market operator

Investment firm only

Financial instruments

Equities and non-equities

Non-equities only

Execution

Non-discretionary

Discretionary

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

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.

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