Wall Street's trading behemoths have decided to create a stock exchange of their own — a move that could upend the U.S. equities market status quo.
On Jan. 7, nine banks and broker/dealers including Morgan Stanley, Citadel Securities LLC and Charles Schwab Corp. unveiled plans for a new national securities exchange that will be known as the Members Exchange, or MEMX. The Members Exchange is the trading community's attempt to break through the triad of exchanges that dominate the U.S. stock market. The Intercontinental Exchange Inc.-owned New York Stock Exchange, Nasdaq Inc. and Cboe Global Markets Inc. operate 12 of the 13 national securities exchanges, with IEX Group Inc. owning the sole independent venue.
While competitors have tried to loosen the exchange giants' grasp on the market, the Members Exchange's backers offer something the market has not seen in years from an exchange owner: control over a massive swath of the investor orders that are any exchange's lifeblood.
"It's absolutely a much larger threat," said Larry Tabb, founder and research chairman of consultancy company TABB Group, in an interview. "Mostly because it's done in partnership with the firms that manage a significant portion of retail order flow."
Wall Street's push into the exchange business is the latest rebuke of the three major exchange groups, which faced unprecedented criticism from the industry and regulators in 2018.
The Members Exchange is being branded as a low-cost, simplified market that will feature a limited number of order types. The venue will not include a speed bump, a mechanism popularized by IEX intended to protect investor orders from certain trading practices that prey on slower market participants. The exchange plans to operate with a cost-competitive fee structure once live.
The Members Exchange is in the early stages of its formation. The company has not yet selected a CEO or announced any specific fees for trading on its venue.
But the new competition will likely force the New York Stock Exchange, Nasdaq and Cboe to lower fees related to their market data feeds and connectivity services. That could be a leading driver behind MEMX's creation, industry experts said.
Those products have become a point of contention on Wall Street, with many banks and broker/dealers that pay for them — including the companies backing the Members Exchange — saying that the exchanges' prices are unreasonably high. The exchanges argue their prices are appropriate because of the value they create for traders.
The Members Exchange will also try to chip away at the New York Stock Exchange, Nasdaq and Cboe's massive market shares, which has been proven to be a difficult task in the past.
The nine companies will be able to "put up a lot of flow on their own exchange," given their statuses as some of the largest market makers and retail brokerages, so long as they comply with their best-execution obligations, said Richard Johnson, vice president of market structure and technology at Greenwich Associates, in an interview.
The Members Exchange's owners could raise eyebrows at the SEC, though. With those companies controlling such a sizable amount of orders, the SEC will likely want to take a harder look at their plans to ensure best-execution obligations are being met.
Nasdaq and Cboe encouraged the entry of a new competitor into the space. Cboe co-Head of Markets Bryan Harkins said in a statement that "healthy competition ups the game for all of us."
Nasdaq spokesperson Joe Christinat said in an email that the industry needs to learn how the Members Exchange can add value to an already crowded landscape. A New York Stock Exchange spokesperson did not respond to a request for comment.
IEX co-founder and CEO Brad Katsuyama said in a statement that the Members Exchange is "the latest affirmation that the exchange business is rife with conflicts of interest and market participants can no longer tolerate the abuses of power."
The exchange's creation also signals that Wall Street wants its seat back at the exchange table. Banks and broker/dealers were the primary exchange owners up until the early 2000s.
Yet in spite of that historical precedent, the Members Exchange has a long road ahead of it.
Once the exchange bid is submitted to the SEC in early 2019, the proposal could be up for review and public comment for as long as 240 days. But the ongoing government shutdown, which has limited activity at the SEC, will likely extend that timeline.
Virtu Financial Inc., E*TRADE Financial Corp., Fidelity Investments, TD Ameritrade Holding Corp., UBS Group AG and Bank of America Merrill Lynch are also backing the venture.