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The dramatic increase over the past decade in the percentage of trading that is carried out electronically has given rise to a plethora of technology providers offering a range of services across the trade workflow. While the electronification of the industry presented firms with many benefits, it also created a new challenge; how to differentiate multilateral from bilateral trading, especially when third parties are involved. Electronification added complexity to an already complex marketplace and has made it difficult to determine the trading venue perimeter boundary. This poses a significant regulatory risk to financial services firms and technology providers which, without realising, may be operating a de-facto trading venue.

To ensure legal certainty and avoid divergence in the practical application of the market structure regulatory framework, in March 2021, the European Securities and Markets Authority (ESMA) published its review report on the functioning of Organised Trading Facilities (OTF). The report includes a definition of what constitutes an OTF, considers the definition of a multilateral system and the boundaries of the trading venue authorisation perimeter, and includes a proposal for an opinion on the boundary line. Subsequently, market participants were invited to comment on the proposal, issued in a consultation paper, before the deadline of 29 April 2022.

The consultation paper aimed to clarify the definition of a multilateral system, and the trading venue perimeter, considering the following:

● Technology Providers;
● Communication Tools;
● Order Management Systems (OMS);
● Execution Management Systems (EMS); and
● Request for Quote Systems (RFQ)

In this article, written to help investment firms and technology providers ‘untangle the trading venue perimeter’, GreySpark Partners assesses ESMA’s current position as to what constitutes a trading venue, considers the characteristics of a multilateral system – specifically, where the line is drawn between technology provider and trading venue – and reviews the positions taken in the UK post-Brexit and in the US.

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