What is a Multilateral Trading Facility (MTF)?
A multilateral trading facility (MTF) is a financial trading venue that serves as an alternative to a traditional trading exchange, such as the New York Stock Exchange (NYSE). MTFs connect multiple buyers and sellers through computerized systems in accordance with rules prescribed by Europe’s Markets in Financial Instruments Directive (MiFID).
Multilateral trading facilities are operated by investment firms, such as an investment bank, or by an independent market operator. In contrast with a regulated market, such as a typical stock exchange, an MTF typically does not impose listing requirements. An MTF exerts no direct control over transactions, which are handled by software programs using non-discretionary rules in matching buyers and sellers.
MTFs were originally opened as alternative trading venues for trading stock shares. Since then, they have expanded their operations to include trading of additional asset classes, such as precious metals, exchange-traded funds (ETFs), futures, and currencies.
Multilateral trading facilities are unique to the European Union. The closest similar operations in the United States are Alternative Trading Systems (ATS). However, the Securities and Exchange Commission (SEC) places much more strict operating restrictions on ATS than the EU’s MiFID does on MTFs. Thus, MTFs in the EU are much more widespread and commonly used than ATS are in the United States.
- Multilateral trading facilities (MTFs) are electronic/computerized trading venues for financial instruments that offer an alternative to traditional trading exchanges.
- While MTFs must operate under rules set out by the MiFID, they are less restrictive than traditional exchanges.
- By providing additional trading venues, MTFs allow the trading of financial securities to be more competitive, and thus, more favorable for investors.
Example of a Multilateral Trading Facility
Chi-X Europe is the largest operating MTF and one of the largest trading venues worldwide. It is headquartered in London and is regulated by the Financial Conduct Authority (FCA). It supports the trading of equities, exchange-traded funds (ETFs), contracts for difference (CFDs), and International Depositary Receipts (IDRs).
Other multilateral trading facilities include Liquidnet Europe, Currenex MTF, and UBS MTF. Nearly half of the EU’s multilateral trading facilities are based in the United Kingdom.
Rules for MTFs
The operating rules for an MTF are laid out by Title II of the MiFID, including:
- Pre-trade transparency – Buy and sell prices are clearly available through data feeds to traders prior to placing a trade.
- Post-trade transparency – Trade results are immediately shown in real-time.
- Clear operating procedures – The MTF must include a written rulebook that details how it operates.
Advantages of MTFs
Multilateral trading facilities are considered to offer traders several advantages. The most prominent ones include the following:
- MTFs allow high-speed trading, as the result of using computer systems to match buyers and sellers.
- They are characterized by increased liquidity, which leads to lower bid-ask spreads and, thus, lower trading costs for investors.
- MTFs come with fewer restrictions than traditional exchanges, thereby providing access to additional financial instruments, such as over-the-counter (OTC) products.
- They earn money solely through commissions; therefore, there is no conflict of interest with individual traders.
- Overall, MTFs offer more competitive pricing of financial securities by providing additional trading markets.
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