What is a multilateral trading facility?

Christian-Hendrik Knappe, German Sales Director, at Spectrum Markets, explains multilateral trading facilities (MTFs) and why on-venue trading is the better alternative.

In Germany, retail investors tend to prefer over-the-counter trading. Why is this?

It’s largely a matter of entrenched perceptions of the possibilities available to retail investors. In general, private customers perceive brokers that use a trading platform for execution to be a more expensive option with inferior conditions. However, this point of view is out of date.

So, what alternatives are there to over-the-counter trading?

Retail investors can choose between the execution options offered by different brokers. Of these options, one is on-venue execution, in which case the broker partners with a venue. In the example of Spectrum Markets, the venue doesn’t charge any transaction fees, a saving that the broker can choose to pass on to their retail investor clients.

Retail investors should be aware of the regulation that the venue in question adheres to. For example, as a regulated multilateral trading facility Spectrum Markets is obliged to meet pre-trade transparency requirements: continuously publishing bid and ask prices.

How exactly do these benefit retail investors?

Firstly, they can see the actual tradable volume at the set limits on the bid and ask side. This kind of pricing transparency is not possible off-venue. The investor can make a fair comparison between venues and to determine which one can provide the highest liquidity.

However, to benefit maximally from this, it’s important that investors choose a venue that doesn’t charge a fee to see market data in real time.

Can retail investors only trade on the main stock exchanges?

In the past few years, new rules have allowed for the establishment of venues such as multilateral trading facilities, which offer an alternative way of trading.

In terms of transparency, security and operational stability, MTFs are subject to the same strict regulations as stock exchanges. And, just like a stock exchange, MTFs have no discretion over the execution of an order, meaning that when a buy and sell order match, they have to be connected. A further benefit to investors is that MTFs are not allowed to conduct proprietary trading, so the MTF cannot position itself between customer orders to make a profit.

Another aspect that should definitely be mentioned is specialization. As relative newcomers, MTFs are free from much of the legacy infrastructure that holds back other parts of the industry. Being leaner and more able to implement the latest technological standards allows MTFs to be a more efficient, cost-effective and innovative alternative to over-the-counter trading.