NEW YORK - A bevy of Wall Street brokerage firms is challenging both the dominant U.S. stock exchanges and history. Citadel Securities, Morgan Stanley and seven others on Monday said they are launching MEMX to rival the likes of the New York Stock Exchange and Nasdaq, hoping to cut costs. It’s not the first attempt.
Rather, it is just the latest move in the long-running battle between exchanges and brokers. As technological advances reduced trading costs, investment banks boosted revenue by matching more customers’ orders in-house, only using a bourse to mark the trade as done. One way the NYSE and other incumbents responded was to charge for the data that flowed from all the activity.
As a result, off-exchange activity is now the single largest block of U.S. stock trading, accounting for just over a third of 2018 volume, according to CBOE Global Markets. The Big Board handles a fifth of the business and CBOE’s platforms 18 percent.
Meanwhile, the exchanges have turned data into a business that now accounts for around 12 percent of revenue at CBOE, 9 percent at Nasdaq and 4 percent at the Intercontinental Exchange , which owns the NYSE. Last fall the Securities and Exchange Commission for the first time rejected some proposed price hikes.
It’s understandable that big brokers want to reduce these costs. Because of their rapid-fire trading models, Citadel and Virtu Financial – another MEMX backer – command a disproportionately large share of U.S. stock trades. The trouble is, most of those involved have tried to disrupt the big exchanges before, whether as sponsors, investors or supporters of upstarts.
Some efforts went nowhere or were limited to internalizing order flow. Other ventures achieved some success, but ultimately were snapped up by the incumbents. The NYSE, for example, bought Archipelago in 2006, while two years ago the CBOE bought BATS Global Markets, which itself had subsumed Direct Edge.
IEX, founded some six years ago, maintains its commitment to free or cheap data, but with a market share of just 2.5 percent or so it doesn’t have much clout. Given its backers, MEMX may be able to do much better – though first it needs a chief executive and a license. If all it manages, though, is to create another M&A target, the brokers should call it quits.
- Nine Wall Street firms on Jan. 7 unveiled initial plans to create a new low-cost stock exchange to compete with the New York Stock Exchange, Nasdaq and CBOE Global Markets. The backers of MEMX, as the bourse is to be called, also want to “improve operational transparency, further reduce fixed costs, and simplify the execution of equity trading” in the United States.
- The companies involved are: Ameritrade, Bank of America, Charles Schwab, Citadel Securities, E*Trade Financial, Fidelity Investments, Morgan Stanley, UBS and Virtu Financial.
(Editing by Richard Beales and Martin Langfield)
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