Given that there are currently more than a dozen U.S. equity exchanges, why launch new ones?
One reason is to lower costs, but another is to have a voice in governance and market structure, according to Jonathan Kellner, CEO of MEMX and Tom Gallagher, chairman and CEO of the MIAX Exchange Group, both of whom launched new equity exchanges in September.
MEMX was built as a start-up with the help of member investors with more than $135 million from firms including Charles Schwab Corp., Citadel Securities, Goldman Sachs Group Inc. and Virtu Financial Inc. MIAX added an equity exchange to its three options exchanges.
Kellner noted MEMX is focused on the trading side of the business and not on listings. MEMX will initially give away data and connectivity. “But the plan is not to lose money,” Kellner said. When we reach a higher volume of trading, we will begin to charge, he said. The questions will be what are the right margins and costs.
“We focused on building it (MEMX) around a data-centric model to leverage great technology and have a leaner footprint. And that is an area where we can compete,” Kellner said. “It’s not just about lower costs, but also about bringing newer technology to improve interactions in the market.”
In the meantime, a big percentage of MEMX revenue will be a share in SIP revenue, which represents about a $400 million pool, Kellner said. That share is based on quoting and trades, and “as long as we contribute to market share we will get our fair share,” he said.
Gallagher said MIAX launched MIAX PEARL Equities to give its members the opportunity to cross asset prices versus options, much like Cboe Global Markets and Nasdaq do, and also to be recognized as a global exchange operator. As for costs, MIAX already had the trading infrastructure in place, he said.
Like MEMX, MIAX seeks to establish itself as a low-cost exchange, and it will be “aggressive in pricing,” but once they get people in the door and get them used to trading MIAX equities and build their market share, “eventually we will charge for the things others charge for,” Gallagher said.
Both Kellner and Gallagher acknowledged that the bigger equity exchanges will likely react with price changes to compete, but Kellner said, “I hope it spurs innovation across the industry. Hopefully competition benefits all the members.”
Taking a long view, Keller said MEMX members were motivated to invest in the new exchange to “have a seat at the table” at meetings with exchange regulators. The big exchanges, which are publicly traded, have shareholders they have to respond to, he noted. “Our business model is members only so our focus is on the members.”
Gallagher agreed, saying a reason why the “Big Three” exchanges (NYSE, Nasdaq and Cboe) collectively own 12 exchanges was to have influence on the vote of the SIPs committee.
“We want to have more transparent and more representative voting on the SIPs (the securities information processors that provide data feeds from the exchanges), which is another reason why we want to be involved,” he said.
NYSE and other big exchanges transmit consolidated equity market data to the public but also sell more sophisticated and profitable proprietary data feeds, a practice that has been criticized by investors and scrutinized by the SEC.
Kellner said he hoped an SEC SIP governance proposal goes through and consumers have more control of the data. Sitting at the table in Washington means looking at ways to democratize or get rid of the two tiers between SIPs and direct feeds, he said.
When asked what their target volumes might be in two years, Kellner said “We’re competing for about 45% of the market. We are a price-time priority intraday order flow exchange, so we should be somewhere in the range of 5-15% of market share.”
Gallagher said in two years he was hoping for about 3% of market volumes. “Our goal is 5.5% over the course of about four years. People thought we’d never break through the triopoly in options, but we did.”