Traders wearing masks work, on the first day of in person trading since the closure during the outbreak of the coronavirus disease (COVID-19) on the floor at the New York Stock Exchange (NYSE) in New York, U.S., May 26, 2020.
Brendan McDermid | Reuters
There’s a spate of new stock exchanges ready to launch to compete for your trading dollar.
The Long-Term Stock Exchange, the LTSE, is set to begin full trading operations Wednesday. The Members Exchange, MEMX, will begin a phased launch on Sept. 21, and the MIAX Pearl Equities, operated by Miami International Holdings, which runs three options exchanges, will debut its equities exchange on Sept. 25.
Do we need more stock exchanges?
Hard to believe, but there are already 13 stock exchanges — five owned by Intercontinental Exchange (owners of the NYSE), four owned by Cboe Global Markets, three by Nasdaq and one by IEX Group.
Do we really need three more?
In theory, it’s a great time for a new exchange: Equity volumes are about 50% higher than last year thanks to the pandemic and the ups and downs in the market partly created by the enormous stimulus efforts from the Federal Reserve and Congress.
But do we really need them?
“We don’t need them, but they will still get created because it is a way to pressure costs lower,” Rich Repetto, who follows exchanges at Piper Sandler, told me.
The new exchanges are being driven by a desire to hit different market niches, from a group that wants long-term investors, to one that is just looking to create a cheaper place to trade.
The Long-Term Stock Exchange
If you are into ESG (Environmental, Social, and Governance) as a goal for corporate America, the Long-Term Stock Exchange is what you have been waiting for.
“We are built for investors who share a long-term vision, to more interest in sustainability, inclusion and diversity, and treating employees fairly,” CEO Eric Ries said.
Ries’ board of directors seems to share that commitment to diversity: Women account for 80% of the board.
“Companies will be required to publish and 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,” he said.
How does this work practically? Ries says that initially, it will target private companies looking to go public and share their values, but he is hopeful that big companies that are already listed will share their vision and switch as well. “It would be an act of very bold leadership for an existing company to make this kind of commitment,” he said, claiming that many who run the largest companies are also fed up with quarterly guidance and short-term thinking.
“If you are just concerned with quarterly profits, there is no need for any of this, because it is always somebody else’s problem in the future.”
Ries also wants the companies that list with the LTSE to make changes at the boardroom level. “Board members should take a mission pledge to support the company’s long-term objectives,” he said. “Most board conversations are terribly short term. I think companies should have a committee dedicated to long-term thinking. It should be just as important as the audit and compliance committees.”
Unlike the other exchanges, Ries said, he is not concerned with gathering market share. “The goal [of the other exchanges] is to maximize trading revenue,” he said.
“This is for companies who can get held to a higher standard.”
The Members Exchange
The MEMX is all about cutting costs. It’s backed by a who’s who of Wall Street firms, including JPMorgan, Goldman Sachs, as well as money managers like BlackRock (which owns iShares, the largest ETF family), and Fidelity. Online brokers Charles Schwab and TD Ameritrade are also backers, as well as global market makers Citadel Securities and Virtu Financial.
These firms are united in the belief that fees charged by the existing exchanges are too high, everything from market fees to connectivity fees.
“We are bringing more competition to the U.S. equity space, and that is what is needed now,” CEO Jonathan Kellner said. “Competition will bring pressure on fees and drive innovation in technology. We also want our members to have more of a voice in market structure. Investors want to be better represented in the conversation about how markets are structured.”
It may seem strange that a consortium of the biggest “buy-side” firms would complain about high costs. Retail investors have seen their overall costs decline. For the sell side — the community that buys and sells stocks — the past 10 years have been terrible. “Volumes have been shrinking, commissions in general have been shrinking, and now they are faced with a tidal wave of indexing and the shrinking of the active manager community,” said Mike O’Rourke, chief market strategist at Jones Trading.
But Kellner says the industry needs to be run more efficiently. “There is frustration from some of the members. They feel if they were running they could keep costs lower,” he said.
Are the NYSE and Nasdaq really gouging their clients? It’s debatable, but their complaints have caught the attention of the Security and Exchange Commission. The SEC has made it clear it wants to boost competition in securities markets and has already been in a legal tussle with the NYSE and Nasdaq over fees those exchanges charge for data.
Members Exchange is planning to launch a Phase One rollout of seven stocks on Sept. 21, with a full rollout on Sept.29.
Like Long-Term Stock Exchange, Kellner said MEMX is not initially going after the lucrative listings business. Instead, it is going after those with the largest amount of trading activity. That, of course, is the members.
“Forty-five percent of the market is price/time priority,” Kellner said, meaning a large part of the market prioritizes price first, then the time they are entered. “If we get 10-20% of that we would accomplish a lot.”
Still, you have to wonder, do we really need another exchange?
Kellner insists we do: “Ninety-seven percent of on-exchange flow are controlled by three companies: ICE, Nasdaq and Cboe,” he said.
And if it succeeds in reducing costs, will the savings be passed on to investors — those who are doing the trading — or is this just an effort to maximize profits for the buy side?
“The goal is to take friction out of the market, so if you reduce the cost for brokers it will ultimately be passed on to the investors,” Kellner insisted.
What, me worry?
With all this competition, you’d think the NYSE and Nasdaq would be worried. If they are, they don’t show it.
“We welcome new entrants, as we have been successfully competing in the US equity markets for nearly 50 years and work every day to add value to our clients,” Nasdaq spokesperson Joe Christinat said in an email to CNBC.
The NYSE declined to comment, but there is reason to believe its sentiment is similar. “This is not like 15 years ago, when the NYSE was a technological laggard,” one person who closely follows the exchange competition told me. “They will fight fiercely for market share,” he said, noting that other exchanges have come up in recent years with similar promises, only to be sold to competitors or struggle to survive.
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