Could you be operating an MTF without even realising it?

This week, I had an interesting conversation about RFQ trading that sparked a lively debate on regulatory boundaries in trading—specifically the infamous Trading Venue Perimeter regulations. The scenario? A buy-side trader at an institutional asset management firm requests quotes from multiple dealers and compares them on a screen. The trader selects the best quote and executes the trade. It seems straightforward. But here’s the question that threw a curveball into our discussion: Could a buy-side trader be inadvertently operating a multilateral trading facility (MTF)?

The idea that a buy-side trader could be running an MTF in this scenario sounds unbelievable at first. After all, you’re trading assets your firm manages, using a system you control. You’re not allowing third parties to interact with one another's quotes, so how could this be classified as an MTF?

Defining an MTF: What’s at stake?

To dig deeper, we need to clarify the regulatory definitions set out by the FCA and ESMA. According to MiFID II, an MTF is a multilateral system that brings together multiple third-party buying and selling interests in financial instruments and allows those interests to interact in a way that results in a trade.

An MTF is essentially a platform where multiple third parties—such as brokers, dealers, or other market participants—come together to trade. It’s a highly regulated setup designed to ensure fairness, transparency, and oversight in the market. If you’re running such a platform, even unintentionally, you’d need to adhere to strict regulatory requirements, including obtaining authorisation, reporting transactions, and ensuring compliance with market rules.

So, does requesting multiple quotes and comparing them on your screen qualify as operating an MTF? In theory, you’re engaging with multiple dealers and gathering their quotes in a single system. But the real question is: are these quotes truly interacting?

Understanding "Third-Party Trading Interests"

The concept of third-party trading interests is essential to determining whether you’re operating a multilateral system. According to both the FCA and ESMA, a multilateral system involves multiple independent participants (third parties) engaging in the system, where their buying and selling interests can interact. These participants can include buy-side firms, dealers, or other market players.

Now, on a typical MTF, the key is that the system allows multiple third parties’ trading interests—whether from dealers or buy-side firms—to interact within the platform, which could result in trades. For example, a dealer might post quotes or offers that multiple buy-side firms can respond to, or a buy-side firm might post an order or quote request that multiple dealers can match.

In your scenario, however, this is not happening. When you, as a buy-side firm, request quotes from dealers, those quotes are provided directly to you alone. Each interaction is bilateral, meaning it’s just you and one dealer at a time, without any other parties (or their trading interests) involved. Importantly, the quotes are not interacting with each other or being shared with other market participants, as they would be in a true multilateral system.

This absence of interaction between multiple participants’ trading interests is the crucial factor. In an MTF, the platform itself is designed to allow multiple participants—whether buy-side or sell-side—to submit, view, and act upon each other's interests, leading to a trade. In your case, however, you’re operating what amounts to a bilateral RFQ workflow tool (similar to Virtu Financials’ RFQ-hub), where each dealer responds individually to your requests, and you make a decision based on those quotes.

Therefore, while you are engaging with multiple dealers, this engagement remains bilateral—there’s no broader interaction among third-party trading interests within the system. This distinction is why your system does not qualify as a multilateral system, and thus, you’re not operating an MTF.

Why your trading system isn’t an MTF

Let’s take a closer look at your setup. You’re using a trading system, likely an Execution Management System (EMS), to request and compare quotes from multiple dealers. The system allows you to efficiently evaluate those quotes side by side, helping you choose the best one for assets your firm manages. However, this system is internal—you control and operate it solely for your own trading purposes.

Here’s why this matters: the quotes you receive from dealers are provided directly to you. Each dealer is interacting bilaterally with you as the buy-side firm, but there is no interaction between multiple participants’ trading interests within the system. On a typical MTF, the system would facilitate interaction between multiple participants’ orders and quotes (e.g., dealers and buy-side firms) through the platform itself, making it multilateral in nature.

In your case, the interaction is bilateral—it’s just between you (the buy-side trader) and each dealer separately. The quotes are not shared or visible to any other participants, and no other buy-side firms are interacting with the same quotes. This is why your system does not qualify as a multilateral system, which requires multiple third-party interests to interact in some form.

Since there’s no multilateral interaction, your setup does not meet the criteria for a multilateral system, and thus, it’s not an MTF. You’re operating a bilateral trading process, in the same way you’d do this as voice trade with a dealer, in this scenario, you are using technology to enhance your decision-making and execution of the trade, not running a platform where multiple parties come together to trade.

The regulatory boundary: Why it matters

Understanding the difference between bilateral and multilateral systems is essential for buy-side traders and firms, especially as trading technology evolves. The FCA and ESMA have been clear that systems involving only bilateral interactions—like yours—are not considered MTFs. As long as you’re using the system to trade for the assets your firm manages and there’s no interaction between third parties within the system, you’re operating outside the MTF perimeter.

But here’s a question: Are you confident that your trading systems provide the control, flexibility, and efficiency needed to stay compliant in an ever-evolving regulatory landscape and increasingly fragmented market? An EMS should empower traders with complete control over their trades, allowing them to adjust strategies seamlessly based on market conditions and preferences, while leveraging diverse trading models and protocols. 

With features like direct bilateral dealer connectivity, algorithmic execution, and AI and rule-based automation, an EMS enables traders to execute trades with greater efficiency and precision. It reduces market impact by streamlining workflows and automating complex tasks, ensuring that trades are optimised for the best possible execution.

Whether you're executing trades directly with dealers bilaterally or across different venues, the EMS should offer a smarter, unified experience through a single blotter, allowing you to manage all your trading activity in one place. This integration simplifies processes, enhances transparency, and gives you a clearer, real-time view of the market, helping you make faster, smarter, more informed decisions.

At FINOV8, we specialise in helping firms optimise their trading capabilities and systems. We ensure that your EMS is not just innovative, but also compliant and aligned with your strategic goals. We help you navigate the complexities of the markets, providing solutions that give you the flexibility and precision needed to succeed.

Ready to elevate your trading capabilities? Schedule a consultation and explore how we can help you maximise technology to improve efficiency, execution quality, and stay ahead!