How Organised is your Trading Facility?

Anne PlestedOne of the primary aims of the review of MiFID is to provide more appropriate regulatory coverage for the multitude of different trading facilities and methods of execution that have emerged over the last 4 years. Currently, under MiFID, trading venues or platforms are classed as Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) or Systematic Internalisers (SIs). A new broad definition is heralded that will apply regulation to all organised trading outside of the current set of venue types – Organised Trading Facility (OTF). Broker dark pools and crossing systems are expected to fall into this category, and it’s not just for equities.  There is even mention in the leaked MiFID regulation, of multiple third party buying and selling interests – a Multilateral OTF (MOTF) -for derivatives trading!

So what exactly is an OTF?
An OTF is a trading venue.  Here third party buying and selling interests can meet – the important constraint is that the operator may not trade third party interest against his own proprietary capital.

An OTF has discretion over which clients have access to the system and may refuse access or set counterparty limits.  This ability to refuse access is a perhaps a key differentiator gaining OTFs the potential to keep HFT at bay and provide a safe haven for investors who wish to trade on a venue without all the noise.

In contrast to the RM or MTF, the OTF operator has a best execution obligation to his clients and retains discretion over how a transaction will be executed on the venue, potentially choosing to route a trade elsewhere.

OTFs are expected to be subject to exactly the same pre- and post-trade transparency rules as the RMs or MTFs; so the regulator’s original intention of a level playing field could soon become reality!  And trading in the dark remains within an OTF’s grasp through the use of the same waivers for pre-trade transparency afforded to RMs and MTFs.

Playing the other big trading venue teams though comes with its overheads such as being required to store order data, accessible to the supervisors, for at least 5yrs, or being required to publish separate pre and post trade data on a reasonable commercial basis.  An OTF trading venue would even be able to part take in what the regulators decide the best way forward for deferred publication is, for certain cases depending on the size and type of transaction.

As trading venues, will OTFs come under the same pressure as the main exchanges to add a choice of several clearing houses to their markets? Will an OTF be required to provide access and data-feeds to central counterparties that wish to clear its transactions?…it’s a beautiful game, play on.

One Response to “How Organised is your Trading Facility?”
  1. Ana Herrero-Wallace says:

    “Is it a bird? Is it a plane? No, it’s an OTF”

    There is a bit of confusion as to what an OTF is, I feel that OTFs are defined by the MiFID documents by what they are NOT rather than what they are. The OTF regime will attempt to cover everything that is unregulated. Brussels doesn’t want Broker Crossing Networks (BCNs) to exist. OTFs are quite complex, not asset specific. However, they don’t include OTC trading (bilateral trades carried out on an ad-hoc basis between counterparties and not under any organised facility or system). Many think that the confusion resides in the distinction between the words ad-hoc and organised facility. This is a very fine distinction. If a buyer and a seller happened to appear out of the blue for the same product and match, that would certainly be an ad-hoc, but if they have a bilateral transaction in a regulated market how would that be considered?
    Google OTF and you will find ‘Origins of the Force’ which is an online game. I reckon this is no game and this UFO is here to stay.

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