Multilateral trading facility is like a mini-exchange where market participants can trade. An MTF is referred to a self-regulated financial trading venue where orders are executed.

A multilateral trading facility (MTF) is a regulatory term used to identify a non-exchange trading venue for the financial markets. The multilateral trading facility is an alternative exchange to the stock market exchange or a futures exchange, but smaller in size.

The term multilateral trading facility (MTF) is given by the Markets in Financial Instruments Directive (MiFID). This is a directive aimed at harmonizing retail investor protection and allows for investment firms to offer their services in the EU.

The MiFID defines multilateral trading facility as a multilateral system which is operated by an investment firm or a market operator that brings multiple participants to the exchange in accordance with non-discretionary rules resulting in a contract.

How is a Multilateral Trading Facility different from stock exchange?

Similar to a stock exchange, the multilateral trading facility or MTF for short has the same set of rules including an order book, rule book and market surveillance.

  • The difference between an MTF and a stock exchange is that an MTF operation is considered to be an investment service
  • MTF’s do not have a listing process for securities or have a central clearing service
  • The MTF volumes are of course smaller than compared to a stock exchange
  • An MTF can be set up for anything. For example, the LMAX Exchange’s MTF is called a forex MTF exchange where mostly currency pairs are traded

Conditions to operate an MTF Venue

While Multilateral trading facility is the European term for a self-regulated financial trading venue, in the United States, it is referred to as an alternative trading system or ATS. A majority of the European based MTF’s are concentrated in Germany, Italy, Belgium, Norway and Iceland.

A multilateral trading facility must be regulated in order to operate legally. To do so, the MTF must meet certain obligations such as:

  • Provide pre-trade and post-trade transparency
  • Pricing and charges must be public and should be applied consistently across all the members
  • The MTF must maintain a rule book on advising on the system works and must have information on how to apply for a membership.

An important aspect of running a Multilateral Trading Facility is that the market operator is not allowed to execute client orders against proprietary capital and neither should they engage in matched principal trading.

Matched principal trading is where a transaction is filled simultaneously on three aspects.

  1. The facilitator is the go-between for the buyer and seller of the transaction such that there is no market risk at any point in the execution of the transaction
  2. The buy and sell orders are filled simultaneously
  3. The transaction is executed at a price where the facilitator does not make any profit or loss other than the commission that is previously agreed upon

What this means for traders is that an MTF exchange does not take any position in a trade, usually a common occurrence with a market maker.

This eliminates the conflict of interest with the broker such as LMAX Exchange.

What are some of the examples of Multilateral Trading Facilities?

MTF’s are operated by a number of financial businesses, including exchanges, independent market operators, banks and so on.

Here are some of the more common and widely known MTF venues.