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A multilateral trading facility (MTF) is a European term for a trading system that facilitates the exchange of financial instruments between multiple parties.
MTFs allow eligible contract participants to gather and transfer a variety of securities, especially instruments that may not have an official market. These facilities are often electronic systems controlled by approved market operators or larger investment banks. Traders usually submit orders electronically, where a matching software engine pairs buyers with sellers.
MTFs provide retail investors and investment firms with an alternative to traditional exchanges. Before their introduction, investors had to rely on national securities exchanges such as Euronext or the London Stock Exchange (LSE).
MTFs have fewer restrictions surrounding the admittance of financial instruments for trading, allowing participants to exchange more exotic assets and over-the-counter (OTC) products. For example, the LMAX Exchange offers spot foreign exchange and precious metals trading.
Faster transaction speeds, lower costs and trading incentives have helped MTFs become increasingly popular in Europe, although the NASDAQ OMX Europe was closed in 2010 as MTFs face intense competition with each other and established exchanges. The introduction of MTFs has led to greater fragmentation in the financial markets since single securities may now list across multiple venues. Brokers responded by offering smart order routing (SOR) and other strategies to secure the best price between these many venues.
MTFs operate under the European Union’s (EU's) MiFID II regulatory environment—a revised legislative framework designed to protect investors and instill confidence in the financial industry.
In the United States, Alternative Trading Systems (ATS) operate similarly to MTFs. ATSs are regulated as broker-dealers rather than exchanges in most cases, but must still be approved by the Securities and Exchange Commission (SEC) and meet certain restrictions.
In recent years, the SEC has intensified its enforcement activities surrounding ATSs in a move that could lead to stricter MTF regulation in Europe. This is especially true for dark pools and other ATSs that are relatively obscure and difficult to trade and value.
The most widely known ATSs in the United States are Electronic Communication Networks (ECNs)—computerized systems that automatically match buy and sell orders for securities in the market.
In the United States, Alternative Trading Facilities (ATSs) are similar to the European MTFs.
Multilateral trading facilities offer multiple advantages for buying and selling securities and other assets. One key advantage is that the operators cannot pick and choose which trades to execute: they must set and follow clear rules, allowing transparency in trades and pricing.
With high-speed trading, MTFs use computer algorithms to match buyers and sellers. This facilitates higher liquidity than over-the-counter trades, resulting in lower bid-ask spreads and more effective price discovery. Moreover, MTFs typically operate on a commission basis, meaning that they have no conflicts of interest with individual traders.
Investment banks and financial data companies can leverage economies of scale to compete with traditional securities exchanges and potentially realize synergies with their existing trading operations.
Some investment banks, which already ran internal crossing systems, have also converted their internal systems into MTFs. For example, UBS Group established its own MTF that works in conjunction with its internal crossing systems.
In 2019, financial data and media company Bloomberg announced that it received authorization from the Netherlands Authority for the Financial Markets (AFM) to operate an MTF from Amsterdam throughout the EU. Bloomberg’s MTF provides quote and trading functionality to eligible participants in products such as cash bonds, repos, credit default swaps (CDS), interest rate securities (IRS), exchange-traded funds (ETF), equity derivatives, and forex (FX) derivatives.
An Organized Trading Facility, or OTF, is a new type of European trading venue for bonds, derivatives, and emissions allowances, but not equities. Multilateral Trading Facilities can trade in stocks and other equity products.
In addition, the operators of OTFs are required to exercise discretion when they place orders. As the Dutch Authority for Financial Markets explains, "The operator of an OTF does have a degree of discretion in deciding whether to place or withdraw an order on its OTF and in deciding not to match a client order with other orders available in the systems of the OTF."
The largest Multilateral Trading Facility is the London-based Chi X-Europe, which is passported across the European Economic Area and regulated by the Financial Conduct Authority. Other notable entities include Liquidnet Europe, Currenex MTF, and UBS MTF.
Bloomberg's Multilateral Trading Facility, or BMTF, can be used to trade bonds, repos, credit default swaps, interest rate swaps, exchange-traded funds, equity derivatives, and foreign exchange derivatives.
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