Multilateral Trading Facility
Encyclopedia
A Multilateral Trading Facility (or MTF) is a specific type of European financial trading system. The concept was introduced within the Markets in Financial Instruments Directive (MiFID
), a European financial law, and describes a trading venue that brings together buyers and sellers in a non-discretionary way according to a defined set of rules resulting in trades.
trading in stocks and shares was typically centred on large national exchanges, such as London Stock Exchange
(LSE), Deutsche Börse and Euronext
. The rules for operating exchanges varied from country to country, with some exchanges' granted exclusivity over certain services for that country's market. As a result European share trading tended to be conducted on one specific venue, such as the Euronext Paris market for French securities or the LSE for UK securities.
MiFID
classified three types of trading venue:
Permission to run any of the three types of service was required from an appropriate regulator, with the existing exchanges registering as RMs.
Market operators also act as an arbiter for securities. Companies that wish to list upon an exchange undergo a listing process and pay fees; this allows the operator to ensure that only appropriate securities are available for trading. This may involve requirements about the number of shares that are available, standards around how the accounts of the company are maintained or strict rules about how news is released to the market.
Whether or not a security has been "admitted to trading on a regulated market" is a key concept within MiFID
, and is fundamental in how the rules apply to trading in the security. MTFs do not have a listing process and can not change the regulatory status of a security.
lays out a number of obligations for an MTF to operate:
enabled trading venues to compete with one another. The legacy exchanges largely chose to keep to their existing business models and scope, but new entrant MTFs have made a significant impact. Chi-X Europe, the largest MTF by volume, is also the largest trading venue in Europe according to some statistics.
This is part of a process known as fragmentation, where liquidity for one security is no-longer concentrated on one exchange but across multiple venues. This in turn forced traders to make use of more sophisticated trading strategies such as smart order routing.
These all made the new venues highly attractive and to take market share. In turn, existing venues were forced to discount heavily, significantly impacting revenues.
Many consider the MTF business model unsustainable, although Alisdair Haynes, the Chi-X Europe CEO, said "We are not going to raise prices, though most people expect we have to".
Nomura
has converted its internal crossing system, NX, into an MTF. Nomura said its decision was for "commercial purposes". UBS has established UBS MTF, this works in conjunction with its crossing system, UBS PIN. Goldman Sachs
has also announced that it will launch an MTF.
The exact regulatory status of broker crossing systems is a matter of debate and controversy. It is expected to be an area of future regulatory intervention.
MiFID
The Markets in Financial Instruments Directive as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area...
), a European financial law, and describes a trading venue that brings together buyers and sellers in a non-discretionary way according to a defined set of rules resulting in trades.
Origin
Before the introduction of MiFIDMiFID
The Markets in Financial Instruments Directive as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area...
trading in stocks and shares was typically centred on large national exchanges, such as London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
(LSE), Deutsche Börse and Euronext
Euronext
Euronext N.V. is a pan-European stock exchange based in Amsterdam and with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. In addition to equities and derivatives markets, the Euronext group provides clearing and information services...
. The rules for operating exchanges varied from country to country, with some exchanges' granted exclusivity over certain services for that country's market. As a result European share trading tended to be conducted on one specific venue, such as the Euronext Paris market for French securities or the LSE for UK securities.
MiFID
MiFID
The Markets in Financial Instruments Directive as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area...
classified three types of trading venue:
- A Regulated Market (RM) run by a market operator
- A Multilateral Trading Facility (MTF)
- A Systematic Internaliser (SI)
Permission to run any of the three types of service was required from an appropriate regulator, with the existing exchanges registering as RMs.
Difference between MTFs and exchanges
MTFs have been described as a form of "exchange lite" because they provide similar or competing trading services and have similar structures, such as rulebooks and market surveillance departments.Market operators also act as an arbiter for securities. Companies that wish to list upon an exchange undergo a listing process and pay fees; this allows the operator to ensure that only appropriate securities are available for trading. This may involve requirements about the number of shares that are available, standards around how the accounts of the company are maintained or strict rules about how news is released to the market.
Whether or not a security has been "admitted to trading on a regulated market" is a key concept within MiFID
MiFID
The Markets in Financial Instruments Directive as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area...
, and is fundamental in how the rules apply to trading in the security. MTFs do not have a listing process and can not change the regulatory status of a security.
Rules for operating an MTF
MiFIDMiFID
The Markets in Financial Instruments Directive as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area...
lays out a number of obligations for an MTF to operate:
- It must be pre-trade transparent, the price of existing orders must be made available on market data feeds.
- An MTF may be exempted from pre-trade transparency via use of an appropriate waiver, such as a large in size waiver or price referencing waiver - in this case the MTF will be a dark pool.
- It must be post-trade transparent, any trades carried out on the platform must be published in real-time.
- Prices and charges must be public and applied consistently across all members.
- There must be a rulebook advising how the system works and a means for applying for membership.
Impact of MTFs
New entrant MTFs have had a considerable impact on European share-trading. MiFIDMiFID
The Markets in Financial Instruments Directive as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area...
enabled trading venues to compete with one another. The legacy exchanges largely chose to keep to their existing business models and scope, but new entrant MTFs have made a significant impact. Chi-X Europe, the largest MTF by volume, is also the largest trading venue in Europe according to some statistics.
This is part of a process known as fragmentation, where liquidity for one security is no-longer concentrated on one exchange but across multiple venues. This in turn forced traders to make use of more sophisticated trading strategies such as smart order routing.
Impact on fees
The new MTFs were notable for:- High trading speeds, using technology to make their platforms attractive to high frequency tradersHigh-frequency tradingHigh-frequency trading is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features:...
; - Low cost bases, running their organisations with minimal headcount;
- Maker/taker pricing, paying members to trade on the platform as long as the trading adds liquidity rather than takes it;
- Trading incentives, often called jump-balls, in which stakes are given to trading members in return for volume traded.
These all made the new venues highly attractive and to take market share. In turn, existing venues were forced to discount heavily, significantly impacting revenues.
Limited individual success
Although they have forced significant adjustments within the equity trading markets, the MTFs themselves have had limited success. Chi-X Europe claims to be profitable, however Nasdaq OMX Europe was shut down in 2010 and Turquoise was bought by the LSE.Many consider the MTF business model unsustainable, although Alisdair Haynes, the Chi-X Europe CEO, said "We are not going to raise prices, though most people expect we have to".
Investment bank MTFs
Most investment banks run an internal crossing system. These systems cross clients' orders against one another, or fill the orders directly off the bank's book.Nomura
Nomura Group
The formerly Nomura zaibatsu is a company headquartered in Chuo, Tokyo.Nomura is one of the major industrial and financial conglomerate groupings of Japan. Osaka Nomura bank was founded by Tokushichi Nomura II in 1919 after many successful business ventures; it was established on the Mitsui...
has converted its internal crossing system, NX, into an MTF. Nomura said its decision was for "commercial purposes". UBS has established UBS MTF, this works in conjunction with its crossing system, UBS PIN. Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
has also announced that it will launch an MTF.
The exact regulatory status of broker crossing systems is a matter of debate and controversy. It is expected to be an area of future regulatory intervention.
See also
- Alternative Trading SystemsAlternative Trading SystemsAlternative Trading Systems , are United States Securities and Exchange Commission approved non-exchange trading venues specifically designed to match buyers and sellers to find counterparties for transactions, instead of trading large blocks of shares on the normal exchange, a practice that can...
- the US equivalent - Electronic Communication NetworkElectronic Communication NetworkAn electronic communication network is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. The first ECN, Instinet, was created in 1969...
s - Crossing networkCrossing networkA crossing network is an ATS that matches buy and sell orders electronically for execution without first routing the order to an exchange or other displayed market, such as an ECN , which displays a public quote...
s - Dark pools
- Electronic trading platformElectronic trading platformIn finance, an Electronic trading platform is a computer system that can be used to place orders for financial products over a network with a financial intermediary. This includes products such as shares, bonds, currencies, commodities and derivatives with a financial intermediary, such as a...