Multilateral Trading Facility

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)^[1], 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 MiFID 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:

• 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"^[2] 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, 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

MiFID 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^[3], 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. MiFID 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^[4], 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 traders;
• 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^[5], 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^[6], however Nasdaq OMX Europe was shut down in 2010^[7] 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"^[8].

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 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^[9].

See also

• Alternative Trading Systems - the US equivalent
• Electronic Communication Networks
• Crossing networks
• Dark pools
• Electronic trading platform

Notes

1. ^ "Directive 2004/39/EC". Official Journal of the European Union. 2004. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:02004L0039-20060428:EN:NOT. Retrieved 2008-03-20. 
2. ^ Grant, Jeremy (17 December 2010). "Whose move in the Chi-X end game?". The Financial Times (London). http://www.ft.com/cms/s/0/6438a722-0a03-11e0-9bb4-00144feabdc0.html. 
3. ^ Waivers from Pre-trade Transparency Obligations under the Markets in Financial Instruments Directive (MiFID), 20 May 2009, http://www.cesr-eu.org/popup2.php?id=5754 
4. ^ "Market Share by Index". BATS Europe. http://www.batstrading.co.uk/market_data/market_share/index/. 
5. ^ Taylor, Edward (16 February 2010). "Deutsche Boerse swings to first ever quarterly loss". Reuters (UK). http://uk.reuters.com/article/idUKLDE61E0PQ20100216. 
6. ^ "Chi-X Europe posts another record quarter" (Press release). Chi-X Europe. 12 July 2010. http://www.chi-xeurope.com/chi-x-press-releases/chi-x-europe-q2-2010-trading-stats-draft-v0-3.pdf. 
7. ^ "NASDAQ OMX to Close Its Pan-European Equity MTF NASDAQ OMX Europe" (Press release). Nasdaq OMX. 28 April 2010. http://ir.nasdaq.com/releasedetail.cfm?ReleaseID=464105. 
8. ^ Baird, Jane (14 February 2010). "Chi-X Europe CEO plans to keep low-fee strategy". Reuters (UK). http://www.reuters.com/article/idUSLDE61B17320100215. 
9. ^ European Commission (8 December 2010), Review of the Markets in Financial Instruments Directive (MIFID), http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf