What’s In Style? Member’s Exchange Brings Together Wall Street Behemoths To Take On Nasdaq, NYSE and Cboe Global Markets

Jim Kharouf

Jim Kharouf

Freelance Writer

So many marketing opportunities, so little time for the latest US stock exchange called the Members Exchange (MEMX).

The newest stock exchange, with its nine behemoth investor banks, brokers and market makers, could get a good deal at the Sears closeout sale on Member’s Only jackets and slip a “best road trip songs” on a Memorex cassette into the vest pocket. You’re welcome, soon-to-be-announced MEMX management and marketing team.

But this isn’t your Ella Fitzgerald’s exchange. The new owners are tired of the legacy exchanges’ grip on things like data fees and are looking to provide an easier, cleaner trading experience for traders. MEMX is made up of a Who’s Who on Wall Street and represent a sizeable amount of daily stock market volume. The MEMX investment roster includes: Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS and Virtu Financial. That makes it a formidable challenger to the likes to the Intercontinental Exchange’s NYSE, Nasdaq and Cboe Global Markets.

As Steve Quirk, executive vice president of trading & education at TD Ameritrade, told JLN, data fees are one of the main reasons markets giants are moving now. He wonders why it is that exchange fees continue to rise even as the overall cost of technology and the commissions on trading have fallen dramatically over the past 20 years.

Do Quick and partners have a point? Perhaps. The Intercontinental Exchange has invested heavily into the data and analytics space in recent years. For ICE’s exchanges including NYSE, the data and listings division is a major revenue source, generating $2 billion in 2017 and $1.5 billion through Q3 2018, (the most recent quarter reported). From that, exchange data revenues in 2017 from all its exchanges totalled $556 million in 2017 and $433 million through Q3 2018.

Nasdaq reported its net revenue in Q3 from its information services division, of which data is part, totaled $588 million in 2017 and $528 million through Q3 2018 (the most recent quarter reported.) That’s 30 percent of its net revenues. In 2017, Nasdaq generated $370 million from market data and another $47 million from investment data and analytics, with the rest from indexes. In the first three quarters of 2018, Nasdaq generated $293 million in market data revenues and $83 million from investment data and analytics.

The Cboe model is a bit different and market data represents a much smaller revenue stream. In Q3 2018, for example, market data revenue totaled $32 million.

Even if the consortium recoups a fraction of those revenues, it may be worth it to them. Of course, exchanges do more than just match orders and send brokers and market makers a bill. The investments in new technology for matching, product development and infrastructure development to make the full trading chain more efficient are substantial, not to mention regulatory responsibilities and the costs that go along with it. And exchanges have been moving further into value-add services such as analytics for growth opportunities as the trading arms race continues to evolve and intensify.

Brokers and market makers have had a hard time getting over the industry belief that it is they who create the market data. And without their order flow, there would be no exchange data to sell. Right or wrong, those member firms, now customers, sold off that part of the business when the exchanges went public and provided handsome returns to them since. Nonetheless, a data fee battle is coming and MEMX intends to win this one.

From a customer’s standpoint, one wonders what will be so compelling for the retail investor. There will be fewer customer orders to choose from, which may streamline things. It may make for a better user experience, although how much better can it be for retail traders – with less than $5 commissions that execute quickly and efficiently. To that extent, it would be fair to say the current environment seems to be working just fine and is getting better. MEMX disagrees and believes there is room for improvement and competition. When asked for comment, Nasdaq and Cboe said they welcome competition and new entrants. Nasdaq was “anxious to learn more about the value proposition of the new exchange.” NYSE declined to comment.

At this point there are still many questions to be answered and history to be overcome. The last consortium-led disruptor was IEX Group, which has struggled to gain marketshare, which hovers somewhere around 2 percent. DirectEdge is another notable, forgettable challenger.

But MEMX is a loaded roster of all-star names for whom a few million bucks a year is a drop in the bucket. They no doubt have done the math and figured that the technology for an exchange is relatively cheap and the reward of routing all that order flow back to their exchange (meeting all NBBO and RegNMS requirements, of course) will be better than paying up at existing markets.

Will this latest competitor be the consortium that truly disrupts the stock market status quo? Can all the big names play well together? We’ll find out when the exchange starts early this year, pending regulatory approval. Then it’ll be time to send out those MEMX Member’s Only jackets.

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