Multilateral Trading Facility

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Swap Execution Facilities Regulation

Guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorities

U.K. Financial Services Authority

European Securities and Markets Authority

Transaction reporting of Chi-X centrally cleared CFDs

A Multilateral Trading Facility is a European entity that enables multiple parties (e.g. retail investors or other investment firms) to buy and sell a variety of financial instruments including shares, bonds and derivatives. These systems can be crossing networks or matching engines that are operated by an investment firm or a market operator. This is done within the MTF operator's platform.

MTFs are operated by regulated market operators or large investment firms. They are based on sophisticated electronic systems and matching software that allow for very fast order execution. They are meant to enhance competition within the European Union trading services market.

In addition to MTFs, the European commission introduced Organized Trading Facilities as part of MiFID II to cover hybrid platforms run by firms which currently do not fall under the current MiFID categories for organized trading.

MTF History

Swap execution facilities (SEFs), a new type of entity created by the Dodd-Frank Act, will be loosely modeled on MTFs.

The Markets in Financial Instruments Directive (MiFID), which also sets the rules for regulated markets and investment firms in Europe, provides MTFs with authorization conditions and regulatory requirements. MTFs, such as Chi-X and Turquoise, sprang up in the wake of the MiFID regulations, which came into force in April 2004.

According to MiFID rules, entities trading with financial instruments must be organized as either a regulated market or a multilateral trading facility. Different standards apply to each. The financial instruments traded on an MTF are not subject to the strict rules that apply in the regulated market.

Regulatory standards for MTFs and regulated markets are broadly the same in terms of transparency and market abuse. The key differences remain in terms of cost and style of regulation. Many banks and large institutions support and see MTFs as an opportunity for forcing exchanges to lower their fees.

As of September 2011, the European Securities and Markets Authority (ESMA) has identified 143 MTFs operating in continental Europe and the U.K. The list includes MTFs owned by BGC Partners, Inc., Cantor, Chi-X, Eurex, GFI Group, ICAP, Liquidnet, MarketAxess, MF Global, NYSE, Nasdaq OMX, Reuters, Tullett Prebon, and Tradeweb.

As of October 2011, MTF has taken more market share at price of declining markets for national stock exchanges. The new facilities offered faster trading and lower costs, as well as benefit of trading shares in markets across the continent in a single platform. Three MTFs that achieved significant market share are: Chi-X,Turquoise, and BATS Europe.

Types of MTFs

Cash equity MTFs: MTFs first developed in cash equity market, particularly for blue chip equities.

Dark Pool MTFs: MTFs also developed dark pool MTFs to propose block equity trading with no pre-trade transparency, which benefited from MiFID transparency waiver for large-in-scale orders. They are designed to accommodate the needs of wholesale participants to be able to execute large orders with limited price impact.

Cash Equity MTFs vs. Exchanges

Cash equity MTFs share many features with existing exchanges (qualified as Regulated Markets). Most of these MTFs have an order-driven market model and operate a centralized order book model in the same way as Regulated Markets, which provides non-discretionary and anonymous matching among participants. However, the main differences between cash equity MTFs and Regulated Markets are: MTFs can be operated by investment firms; MTFs do not provide listing and related issuer services; many lit MTFs allow a certain portion of non-displayed orders such as large-in-scale orders to interact with the displayed order-book; Cash equity MTFs may have organized requirements differing to a certain extent from those of Regulated Markets due to proportionality principles and most MTFs do not offer listings; Many MTFs offer pan-European trading of shares which is less common in the case of Regulated Markets.