What Is a Multilateral Trading Facility?

A Multilateral Trading Facility (MTF) connects buyers and sellers of investments on a market run by a bank, market, or similar entity. This is different from a regulated market, a stock exchange subject to close scrutiny and specific operating rules; the London Stock Exchange, for example, is a regulated market. There are some advantages to operating on a multilateral trading facility, including relaxed regulations and access to more trading options. The primary disadvantage can be fewer controls, because it is not as closely regulated.

Members of such organizations can include individual investors, trading houses, and financial companies with an interest in participating in the market. They can trade a variety of securities, including issues that are not officially listed or marketed. Transactions on a multilateral trading facility allow buyers and sellers to handle securities that are not available on a regulated market. These can include potentially high yield investments, although they may also be risky.

Such systems usually take advantage of electronic matching. Someone with something to buy or sell logs onto the system and provides information to the computer, which anonymously connects buyer and seller after combing for a matching order. If electronic matching cannot find an appropriate trading partner, an alert can be issued. The trader has the option of changing the bid to try again, or waiting to see if prices on the multilateral trading facility shift in response to trading activity.

Like regulated markets, multilateral trading facilities have rulebooks their members must follow, which include a discussion on how people qualify to join the organization. This documentation explains how to make trades, settle them, and report them to the appropriate authorities. Settlement terms can include fees for handling and may vary by exchange. Members of a multilateral trading facility are treated equally in terms of having access to trades and being billed at the same rate for transactions and other activities.

These trading markets were designed to streamline and facilitate trading across the European Union (EU), as part of the Markets in Financial Instruments Directive. This was one among many harmonizing moves intended to encourage the opening of individual EU economies. Prior to the multilateral trading facility, trade tended to be more closely restricted to national markets, each of which also ran under its own regulations and standards. Harmonizing directives of this nature set standards for use throughout the EU to enable open borders and economic cooperation.