Understanding Multilateral Trading Facilities (MTF): A Complete Guide

What Is a Multilateral Trading Facility (MTF)?

Multilateral Trading Facilities (MTFs) are electronic platforms offering an alternative to traditional exchanges for trading financial instruments. Operated by market operators and banks, MTFs connect buyers and sellers efficiently, often for exotic assets and OTC products, under the MiFID II framework. They provide faster, cost-effective transactions with transparent pricing.

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.

How Multilateral Trading Facilities (MTFs) Operate

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.

Comparison: MTFs vs. ATSs in the United States

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.

Key Advantages of Using Multilateral Trading Facilities

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.

Real-World Applications of Multilateral Trading Facilities

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.

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