Although overshadowed by all things ESG and SPAC related, a new Wall Street backed national exchange, the Members Exchange (MEMX), launched in Q4 2020 with ambitions to rival the NYSE and Nasdaq. In the same month, the long-anticipated launch of the Silicon Valley backed Long-Term Stock Exchange (LTSE) came to fruition. The MEMX, founded as a lower cost alternative to Nasdaq and the NYSE, started small, initially only trading the securities of 7 large cap companies including Alphabet and Exxon Mobil, but has since opened to all exchange traded securities.
The MEMX was backed by Blackrock, Charles Schwab, Citadel, Goldman Sachs, Bank of America, JP Morgan, E-Trade and Virtu, among others. These financial giants invested over $135 million into the platform and as such, have a vested interest in its success. They also have the power to direct significant trading activity onto the MEMX, where others will likely follow. In the 6 months since it went live, the MEMX has already locked in over 1% of the U.S. market share.
Just as retail trading activity has been forced to reduce its fees with the likes of Robinhood and E-Trade offering low-cost electronic alternatives, Wall Street expects the exchanges to reduce fees for market data and other services and is apparently forcing the issue with competition. The MEMX plans to undercut the big exchanges on price, initially giving away its data. Going further, the MEMX will pay out rebates that exceed its transaction fees, forgoing early profits in hopes of building a liquid marketplace.
Founded in 2012 by Silicon Valley heavyweights, the LTSE launched for all companies in Q3 2020. The LTSE is designed to support a longer-term vision for listed companies. All listed companies are required to maintain a series of policies that are designed to provide shareholders and other stakeholders with insight into their long-term strategies, practices, plans and measures. Although the Exchange Act still requires quarterly reporting, the LTSE concentrates on yearly and multi-year performance.
The MEMX and LTSE are not the only new exchanges. Also in Q4 2020, the new Miami based options exchange, the MIAX Pearl Equities, kicked off. The MIAX is a low-cost platform marketing itself as a tech savvy competitor to the NYSE and Nasdaq.
Even though new exchanges are a rarity, those that have developed in the past often fail because it is simply very difficult to move volume and participation from the NYSE or Nasdaq. Simply put, traders want to trade where they have the most counter-party choices. Even the Cboe Global Markets, which owns and operates the former BATS markets and is the third largest U.S. exchange, concentrates on ETF’s and ETP’s, thereby creating a niche for itself. Although the BATS does route approximately 15% of the NYSE/Nasdaq equities trading, it is not an equities IPO competitor. Keep in mind that regardless of what exchange an equity is listed on, Regulation NMS requires best execution and a single market structure for all US securities (see HERE).
The timing could be right for new exchanges as we see huge market shifts and expectations moving away from traditional Wall Street. Investors are frustrated with the existing system and feel it is time for competition, technological innovation and more efficiency. The rise of FinTech-based trading platforms such as Robinhood, social media driven stock picks (Reddit and GameStop), the current focus on all things ESG and the enormous shift into digital currency (Bitcoin) investing, together with the fact that the new exchanges are backed by big players, signals that the street is open to more options.