Multilateral Trading Facility (MTF) Definition

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Multilateral Trading Facility (MTF) Definition

What Is a Multilateral Trading Facility (MTF)?

A multilateral trading facility (MTF) is a European word for a trading system that allows several parties to trade financial assets.

MTFs enable authorized contract participants to collect and transfer a wide range of securities, particularly those that do not have an established market. These facilities are often regulated by authorised market operators or bigger investment institutions through electronic systems. Traders often place orders online, and a matching software engine matches buyers and sellers.

Key Takeaways

  • A multilateral trading facility (MTF) offers ordinary investors an alternative trading platform for financial assets.
  • MTFs are often run by market participants and investment banks.
  • MTFs operate inside the EU’s MiFID II regulatory framework.
  • MTFs often provide more unusual trading instruments as well as over-the-counter (OTC) items.
  • In the United States, MTFs are referred to as Alternative Trading Systems (ATS).

Understanding a Multilateral Trading Facility (MTF)

MTFs provide an alternative to established exchanges for regular investors and investment corporations. Investors had to depend on national securities exchanges such as Euronext or the London Stock Exchange prior to their establishment (LSE).

MTFs offer less limits on financial instruments that may be traded, enabling participants to exchange more exotic assets and over-the-counter (OTC) goods. The LMAX Currency, for example, provides spot foreign exchange and precious metals trading.

MTFs have grown in popularity in Europe due to faster transaction speeds, reduced prices, and trading incentives, albeit the NASDAQ OMX Europe was discontinued in 2010 due to fierce competition from other MTFs and traditional exchanges. The advent of MTFs has increased financial market fragmentation since single securities may now be listed in various venues. Brokers reacted by providing smart order routing (SOR) and other ways to acquire the lowest price among these several venues.

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MTFs operate under the MiFID II regulatory environment of the European Union (EU), a new legislative framework aimed to safeguard investors and create trust in the financial sector.

MTFs in the United States

Alternative Trading Systems (ATS) function similarly to MTFs in the United States. In most situations, ATSs are regulated as broker-dealers rather than exchanges, although they must still be licensed by the Securities and Exchange Commission (SEC) and satisfy specific requirements.

In recent years, the SEC has increased its enforcement of ATSs, perhaps leading to tougher MTF regulation in Europe. This is particularly true for dark pools and other ATSs that are difficult to trade and value.

In the United States, the most well-known ATSs are Electronic Communication Networks (ECNs), which are computerized systems that automatically match buy and sell orders for securities in the market.

Alternative Trading Facilities (ATSs) in the United States are comparable to MTFs in Europe.

Benefits of MTFs

Multilateral trading facilities provide several benefits for purchasing and selling securities and other assets. One significant benefit is that the operators cannot select which transactions to execute: they must establish and adhere to explicit regulations, providing for openness in deals and price.

MTFs employ computer algorithms to link buyers and sellers in high-speed trading. This allows for more liquidity than over-the-counter transactions, resulting in reduced bid-ask spreads and more effective price discovery. Furthermore, since MTFs normally operate on a commission basis, they have no conflicts of interest with individual traders.

Real-World Examples

Investment banks and financial data businesses may compete with conventional securities exchanges by using economies of scale and perhaps realizing synergies with their current trading activities.

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Some investment banks that formerly operated internal crossing systems have turned their internal systems into MTFs. UBS Group, for example, built its own MTF that operates in tandem with its internal crossing systems.

Bloomberg stated in 2019 that it has gained permission from the Netherlands Authority for the Financial Markets (AFM) to run an MTF from Amsterdam across the EU. Bloomberg’s MTF offers quotation and trading capability in products such as cash bonds, repos, credit default swaps (CDS), interest rate securities (IRS), exchange-traded funds (ETF), equity derivatives, and currency (FX) derivatives to qualifying participants.

What Is the Difference Between an MTF and an OTF?

An OTF is a new sort of European trading venue for bonds, derivatives, and emissions permits, but not for shares. Stocks and other equity products may be traded using Multilateral Trading Facilities.

Furthermore, OTF operators are expected to use discretion while placing orders. “The operator of an OTF does have a degree of discretion in determining whether to put or remove an order on its OTF and in opting not to match a client order with other orders accessible in the OTF’s systems,” according to the Dutch Authority for Financial Markets.

What Are Some of the Largest Multilateral Trading Facilities?

The Chi X-Europe Multilateral Trading Facility, situated in London, is the biggest Multilateral Trading Facility and is overseen by the Financial Conduct Authority. Liquidnet Europe, Currenex MTF, and UBS MTF are other important entities.

What Products Can Be Traded on Bloomberg’s Multilateral Trading Facility?

Bonds, repos, credit default swaps, interest rate swaps, exchange-traded funds, equity derivatives, and foreign currency derivatives may all be traded on Bloomberg’s Multilateral Trading Facility, or BMTF.

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Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Investing entails risk, including the possibility of losing money.

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