If you were wondering how many stock exchanges in the US are too many, the answer to the question drifted further away yesterday. A new consortium of financial firms is preparing to launch a competing venue, aiming to make life more difficult for the NYSE and NASDAQ heavyweights.
Nine companies are forming a new equities exchange: MEMX, or the Members Exchange. The project is headed by several broker-dealers, banks, and high-frequency trading firms. The companies are Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS and Virtu Financial.
The mix between three major banks, two high-frequency trading firms and four retail brokers is a surprising one. It was almost 5 years ago when Michael Lewis dropped his bomb, alleging that HFT shops are using predatory practices to the detriment of traders which are not using highly sophisticated algorithmic trading strategies.
At the time the companies have denied the allegations. In the official announcement on the launch of the project, the MEMX founding members emphasize their goals to foster a fair marketplace for retail and institutional investors alike.
Concentration of Power
Out of the biggest 14 exchanges executing stock market transactions in the US, 13 are owned by three companies: InterContinental Exchange (ICE), NASDAQ and CBOE. Shares of all three companies ticked lower yesterday on the announcement of a prospective new entrant into the space.
The only other exchange which isn’t owned by the , founded by the chief protagonist of Michael Lewis’ best-selling book about HFTs, Flash Boys. At present, the exchange handles between 2.5 and 3 percent of average daily volumes on the US stock market.
At the same time, two of the nine companies which are the founding members of the new exchange are generating massive volumes. Virtu and Citadel combined are responsible for more than two-thirds of total stock market trading volumes in the US.
Convincing Clients with Pricing
The founders of the new exchange are claiming that they can run the venue at a fraction of the cost which US major exchanges are currently charging. The main pushback against the big three came after recent data feeds price hikes.
Major banks and brokerage companies have been voicing their concerns about the pricing power of the big three exchanges. Back in October, the SEC ruled that CBOT, NYSE and NASDAQ have failed to provide sufficient rationale for the data fees which they are charging. That said, the US regulator only prevented new increases from happening.
The mix between HFTs, banks and retail brokers will only gain the public’s trust if the new trading venue provides sufficient transparency to its clients. The CEO of Virtu Financial Douglas Cifu said that the founding members of MEMX represent a “diverse array of market participants”.
Indeed, the success of the new stock exchange which aims to announce further details early this year hinges on the ability of the market participants to look after each other’s interests. We are yet to see if HFTs, banks and retail brokers can work together to ensure that their clients are well off in an ever more digitized market.
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