The MiFID II reform means that organised trading of financial instruments must shift to multilateral and regulated trading platforms or be subject to transparency requirements where traded over-the-counter (OTC).

What Type of Market Was Created by the MiFID II Regulations?

The Markets in Financial Instruments Directive (MiFID) is a regulatory framework introduced by the European Union (EU) to harmonize and regulate financial markets within its member states. The aim of MiFID is to increase competition, enhance investor protection, and improve market transparency.

MiFID II, which came into effect on January 3, 2018, builds upon the original MiFID regulation and introduces several key changes to the financial markets. One significant development brought about by MiFID II is the creation of a new type of market called Multilateral Trading Facilities (MTFs).

MTFs: A New Type of Market

MTFs are one of the three types of trading venues established under MiFID II, alongside regulated markets (RMs) and organized trading facilities (OTFs). MTFs provide a platform where multiple participants can interact with each other to trade financial instruments, such as stocks, bonds, derivatives, and currencies.

MTFs differ from traditional exchanges or RMs in that they do not have a central order book. Instead, they operate as electronic systems that match buy and sell orders from various market participants. MTFs are typically operated by investment firms or brokers and offer greater flexibility compared to RMs.

Key Features of MTFs

MTFs have specific characteristics that set them apart from other trading venues:

1. Non-discriminatory access: MTFs must provide equal access to all eligible market participants, ensuring fair competition.
2. Price transparency: MTFs must display pre-trade and post-trade information, enabling market participants to make informed trading decisions.
3. Order matching: MTFs match buyers and sellers based on price, quantity, and type of financial instrument in a manner that ensures fair execution.
4. Liquidity: MTFs contribute to overall market liquidity by bringing together a wide range of market participants.
5. Regulation and supervision: MTFs are subject to regulatory oversight to ensure compliance with MiFID II requirements and protect market integrity.

Benefits of MTFs

The introduction of MTFs through MiFID II has brought several benefits to the financial markets:

• Increased competition: MTFs have facilitated greater competition among trading venues, leading to improved pricing and execution quality for investors.
• Enhanced transparency: MTFs provide increased visibility into trade data and market information, enhancing market transparency and allowing for better-informed decision-making.
• Improved access: MTFs have broadened market access for both retail and institutional investors, fostering a more inclusive and diversified trading environment.
• Efficient price discovery: MTFs allow for efficient price discovery as they bring together a larger pool of buyers and sellers, resulting in narrower bid-ask spreads.

In conclusion, the introduction of MiFID II regulations has led to the creation of Multilateral Trading Facilities (MTFs), which are electronic platforms enabling multiple participants to trade financial instruments. MTFs offer non-discriminatory access, promote price transparency, facilitate order matching, contribute to overall liquidity, and are subject to regulatory supervision. The adv