Trading Venues

What is a Trading Venue?

The type of marketplace that facilitates the matching of buy and sell orders for financial instruments such as stocks, currencies, and derivatives is referred to as a trading venue. They provide either a centralized or decentralized environment where buyers and sellers can meet, ensuring transparency, price discovery (the process behind determining the spot price for an instrument), and liquidity. Trading venues are regulated and can be physical locations or electronic platforms and only allow authorized members to carry out trade execution in order to ensure fair trading practices and to protect market participants. They are a fundamental part of the global financial system due to their role in facilitating efficient capital allocation and enabling investors to trade seamlessly.

Three Categories of Trading Venues

There are three types of trading venues that we list below.

Regulated Markets (RM)

RMs are stock exchanges where financial instruments such as stocks, bonds, derivatives and many others are traded. It’s a multilateral system that brings together the interests of multiple third-party buyers and sellers and is run by a market operator. Trades get executed based on customers’ buy and sell orders submitted by investment platforms and only members of the exchange and authorized entities can trade directly.

Stock exchanges must have detailed rules and procedures for trade execution and admission (i.e. listing/delisting rules such as publishing historical financial information covering a specific period as a minimum and/or demonstrating certain revenue-earning track record). In most cases, these rules and any changes to them must be approved by a government authority such as the Ministry of Finance.

Examples of the Major Stock Exchanges

Some of the major stock exchanges include:

• The New York Stock Exchange (NYSE) – it is the world’s largest stock exchange by market capitalization exceeding $28 trillion in July 2024
• The London Stock Exchange (LSE) – one of the most valued stock exchanges in Europe with a market capitalization of over $3 trillion as of July 2024
• The Tokyo Stock Exchange (TSE) – one of the largest stock exchanges in Asia with a market capitalization of $6.93 trillion as of September 2024

Multilateral Trading Facility (MTF)

An MTF is a less regulated trading venue that facilitates the trading of financial instruments between multiple parties. Its admission rules in terms of reporting obligations and operating history are also lighter compared to stock exchanges. It is even possible that shares of a company are admitted for trading without the company’s own consent.

How Does an MTF work?

An MTF can only be operated by a stock exchange, credit institution, investment firm or a branch of a third country. It must have detailed rules, requirements and procedures on trading and admission of issuers, but unlike stock exchanges these rules are not approved by an authority such as local government. To function, it must have at least three active trading parties, which are admitted on a transparent and non-discriminatory basis. MTFs use electronic systems to match buyers and sellers’ orders, which make trading fast and efficient. They also create higher liquidity, which reduces bid-ask spreads and respectively transaction costs for investors.

Examples

• BATS Chi-X Europe – part of Cboe Global Markets since 2017, it is one of the largest European equity trading venues covering more than 6000 securities across 18 markets
• UBS MTF – the Swiss bank UBS is another major operator of an electronic trading venue, which primarily works as a “dark pool” (it large blocks of securities to be traded anonymously without displaying the order details publicly). It offers over 3500 securities across 17 markets

Organized Trading Facility (OTF)

OTFs are another type of trading venue that is less regulated than an MTF and it is not a regulated market. An OTF operator is given more discretion about how orders are matched into trades and trading can be arranged only in the following assets:

• Bonds
• Structured finance products
• Emission allowances
• Derivatives

Similarly to MTFs, an OTF is required to have at least three active trading parties and rules around admission must be transparent and non-discriminatory. OTFs are operated by stock exchanges, credit institutions, investment firms or a branch of a third country and while it must have clear rules and procedures around trading and admissions, they don’t need to be approved by an authority.

Comparing the Three Types of Trading Venues

The below table compares the three types of trading venues.

Are Systematic Internalizers a Type of Trading Venue?

Aside from the three categories above, it is also possible to trade securities in other ways, such as with a systemic internalizer (SI) or over the counter (referred as OTC – a form of off-exchange trading), but these are not trading venues.

Systematic internalizers are investment companies that trade in their own account when executing client orders that fall outside the regulated market, MTF or an OTF, without operating a multilateral system. Unlike trading venues, they are not allowed to bring together third-party buying and selling interests or to use an internal matching system that executes client orders multilaterally. Instead, they should decide in a non-discriminatory way the clients to whom the SI gives access to its quotes.

Advantages of Trading Venues

• Trading venues provide security as they reduce systemic risks and guarantee market stability. They offer tools like stop-loss orders and derivatives to hedge risk), while clearing houses associated with exchanges mitigate counterparty risk.
• Due to the large number of buyers and sellers they aggregate, trading venues create liquidity and allow for the quick and cost-efficient trading of various assets.
• They are transparent and accessible – prices and trading data are publicly available and both institutional and retail investors can participate though investment platforms
• Trading venues allow for cross-border trading and provide wider investment. opportunities to international investors. They are also technologically advanced and offer high trading speed and seamless investor experience.

Conclusion

Overall, trading venues are a fundamental part of the global financial system that facilitates the buying and selling of financial instruments, such as equities, bonds, currencies and derivatives. They provide liquidity, transparency, and efficiency, and ensure fair execution for market participants. Trading venues also play a pivotal role in price discovery and risk management.