The aim of this paper is to account for the observation that banks are both owners and clients of Multilateral Trading Facilities (MTFs) which were created in Europe after the implementation of the Markets in Financial Instruments Directive (MiFID). Using a duopoly model of two-sided markets, we show that banks' participation in MTFs crucially affects their objective function shape, pricing policy and profit. We show that when brokerage and trading activities are particularly important for banks' revenue compared to their profit as MTF operators, some market outcomes may emerge, whereby both MTFs include banks' interest as clients in their objective function. In these situations, although they earn negative profit as shareholders, banks benefit from lower fees as MTF's clients. This finally results in larger global revenue. This may explain why banks are at the origin of the creation of MTFs and why they maintain their stake despite negative profit

Lahet, Delphine; Vaubourg, Anne-Gaël

The aim of this paper is to account for the observation that banks are both owners and clients of Multilateral Trading Facilities (MTFs) which were created in Europe after the implementation of the Markets in Financial Instruments Directive (MiFID). Using a duopoly model of two-sided markets, we show that banks' participation in MTFs crucially affects their objective function shape, pricing policy and profit. We show that when brokerage and trading activities are particularly important for banks' revenue compared to their profit as MTF operators, some market outcomes may emerge, whereby both MTFs include banks' interest as clients in their objective function. In these situations, although they earn negative profit as shareholders, banks benefit from lower fees as MTF's clients. This finally results in larger global revenue. This may explain why banks are at the origin of the creation of MTFs and why they maintain their stake despite negative profit

Delphine Lahet and Anne-Gaël Vaubourg ()
Additional contact information
Anne-Gaël Vaubourg: Larefi, Université de Bordeaux

No 1503, Larefi Working Papers from Larefi, Université Bordeaux 4

Keywords: bank; shareholding; multilateral trading facilities; two-sided markets (search for similar items in EconPapers)
JEL-codes: G10 G23 G24 L10 L11 L22 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2015-09
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