Knowledge Base
Describe the different venues and methods for order execution in financial markets
Which type of execution venue under MiFID II specialises in non-equity instruments and allows discretionary rules to be applied?
The OTF (Organised Trading Facility) is specifically designed for non-equity instruments such as bonds and derivatives. Unlike regulated markets and MTFs, it allows the operator to apply discretionary rules for order matching, introducing an element of human judgement.
Which execution method is particularly suited for less liquid bond markets?
The Request for Quote (RFQ) is commonly used on less liquid markets such as bonds and derivatives. It allows the client to request quotes from multiple dealers, thereby fostering better price competition.
What role do market makers play in market making?
Market makers contractually commit to providing continuous two-way quotes to ensure liquidity. This practice is essential for maintaining an active market and reducing the spread between bid and ask prices.
What is the fundamental characteristic that distinguishes a Multilateral Trading Facility (MTF) from a Regulated Market under MiFID II?
Under MiFID II, a Regulated Market must be operated by a licensed market operator, whereas an MTF can be operated by a market operator or an investment firm. This difference allows MTFs to serve as alternative platforms to traditional exchanges, fostering competition.
Regulated Market (MiFID II)
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A Regulated Market is a multilateral system operated by a licensed market operator that facilitates the meeting of buying and selling interests according to non-discretionary rules. Order matching results mechanically from price-time priority rules, and it must satisfy strict listing admission requirements.
Dark pools are generally considered Multilateral Trading Facilities (MTFs) where post-trade transparency is reduced.
Dark pools often operate as MTFs but with limited transparency, as prices are only disclosed after execution. This allows institutional investors to trade large blocks without revealing their intentions to the market.
A Systematic Internaliser (SI) must publish firm quotes for liquid instruments with a minimum size of 10% of the standard market size.
Under MiFID II, SIs are subject to pre-trade transparency obligations that include publishing firm quotes for liquid instruments. The minimum size of these quotes corresponds to 10% of the standard market size. This rule aims to ensure a certain level of transparency even outside trading venues.