LMAX Exchange: MTF vs Exchange vs ECN?
About LMAX Exchange:
The award-winning LMAX Exchange, an FCA authorised MTF, operates several platforms, including LMAX InterBank, an execution venue for spot FX for banks only. Established to deliver the benefits of exchange quality execution, LMAX Exchange offers complete pre and post-trade transparency, precise execution and a level playing field for all market participants.
About LMAX InterBank:
LMAX Interbank is a spot FX execution venue for banks only, part of LMAX Exchange, an FCA regulated MTF.
What is an MTF?
MTF is defined under MiFID, a European financial law, as "a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments - in the system and in accordance with non-discretionary rules - in a way that results in a contract in accordance with the provisions of Title II of MiFID"
MiFID lays out a number of obligations for an MTF:
- It must be pre-trade transparent (subject to certain exceptions);
- It must be post-trade transparent (deals published as close to real time as possible);
- Prices and charges must be public and applied consistently across all members;
- There must be a Rulebook advising how system works and how to apply for membership.
Is LMAX Exchange similar to an Exchange? How does it differ?
MTFs have been described as a form of "exchange lite" because they provide similar or competing trading services and have similar structures, such as rulebooks and market surveillance departments. Most Exchanges operate in equity and futures markets offering additional services such as listings and exchange central clearing.
The main difference is that MTFs do not have a listing process for securities or offer central clearing services.
The definition of an MTF by MiFID broadly fits with the SEC's definition of an Exchange, which is "any organisation, association, or group of persons that: (1) brings together the orders of multiple buyers and sellers; and (2) uses established, nondiscretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade".
What are the differences between LMAX Exchange and an Electronic Communications Network (ECN)?
ECNs, are electronic trading systems that automatically match buy and sell orders at specified prices. Most ECNs register with the SEC, in the USA, as broker-dealers. ECN’s exist for different asset classes including equities e.g. Nasdaq market, and currencies. The ECN charges fees by either charging commission on trades or by adjusting order prices.
LMAX InterBank runs a single order book with binding limit orders. There's no ‘last-look’ by price providers, no opportunity to requote, no spreading of prices to cover fees, and no routing around a network of possible counterparties to find a price. LMAX InterBank charges commission on traded volume, as all Orders are matched at submitted prices. As a result, a Bank’s ability to hit an advertised price is only constrained by competition from other banks, offering reliable and consistent order execution.
There's nothing to stop an ECN from operating in the exactly same way as LMAX Exchange, but many ECNs do offer price routing, ‘last look’, price adjustment, adding a degree of unpredictability to order execution. The regulatory constraints on an ECN are also less clear because it depends on what exemptions they've agreed and what level of market share they've acquired. There's much less negotiation around the regulatory requirements for an MTF.