Three new stock exchanges launched in September have begun to alter the shape of the world’s biggest equity market, challenging the trio of incumbents that dominate US share trading.
Long Term Stock Exchange in San Francisco, Miax Pearl Equities in Miami and New Jersey-based Members Exchange, known as MEMX, all debuted in the same month and bring the number of US stock markets to 16.
The new bourses have yet to attract significant volumes, accounting for less than 1 per cent of the shares that changed hands in October. But together they threaten to loosen the grip of the New York Stock Exchange, Nasdaq and Cboe Global Markets, which account for more than one in two shares traded in the US across the 12 public exchanges they operate.
The injection of competition has been largely welcomed by fund managers and brokers, which often spar with the established exchanges over their fees, including the price of market data — a flashpoint of debate in recent years.
“Three exchange platforms account for most of the US equity exchange volume right now,” says Vlad Khandros, head of market structure for UBS. “We’d like to see more competition and less concentration.”
The new players have very different aims. LTSE is targeting the listings market, Miax Pearl is hoping to gain market share and build upon its options exchange business and MEMX wants to put pressure on market data fees and give a voice to the brokerage industry in regulatory discussions reserved for registered exchanges.
The new entrants are already having an impact on the market. LTSE has begun approaching companies about potential listings, according to the exchange, challenging NYSE and Nasdaq, which fight to list the world’s biggest companies. The new exchange is hoping its listing criteria, which has a strong focus on corporate governance, will attract companies by acting as a prized stamp of approval for investors. LTSE offers dual listings, which means companies that select the exchange must also list on either NYSE or Nasdaq.
Miax and MEMX focus on competing for a slice of the equity trading market and have attracted big name supporters from the brokerage industry.
Miax is aiming to gain 5 per cent share of the market and has attracted 40 member firms, with 25 trading daily, according to the exchange. It has also raised $22m by selling prepaid blocks of fees to a group of market makers that includes Citadel Securities and UBS. These investments will convert into equity stakes in its parent company — Miami International Holdings — if the market share target is reached.
The three options exchanges run by Miax, which account for about 15 per cent of the US options market, mean it may be able to offer preferential pricing for customers of its stock and options exchanges, which may bolster its appeal.
“Miax has made its name in the options market — they’ve been very successful,” says Mehmet Kinak, the global head of systematic trading and market structure for fund manager T Rowe Price. “People give them credit to see if they can make that model work in equities.”
Miax has waived fees for market data and offers a rebate of 32 cents per 100 shares for market makers to display orders on the platform — a level that sits toward the higher end of what the incumbent exchanges offer.
MEMX, which launched with the backing of leading brokerages including Citadel Securities, Morgan Stanley, Goldman Sachs, Fidelity and BlackRock, is initially offering a lower rebate of 28 cents per 100 shares and will charge 25 cents on the other side of the trade, resulting in a 4 cent loss.
Richard Repetto, an analyst with Piper Sandler, described this approach as “inverted pricing in order to gain market share”. This was the playbook employed by Bats Global Markets, an exchange operator that was launched more than a decade ago and swiftly built market share before selling to Cboe in 2016.
The exchange has waived market data fees and is hoping to attract 2 per cent to 4 per cent market share by the end of next year. MEMX will also give brokers supporting the exchange a chance to press their views on market structure topics with regulators — a factor that helped it amass the support of some of Wall Street’s biggest players.
“As a matter of basic fairness, we think market participants paying substantial market data fees should have a voice during deliberations among US stock exchanges behind closed doors,” Mr Khandros says.
The effects of a group of brokers having a bigger say in developing the rules that govern the market may ultimately be the biggest legacy from this new crop of exchanges, which have little in the way of differentiated offerings compared with the existing exchanges, says Mr Kinak of T Rowe Price.
“MEMX will be the most vocal of the group,” says Mr Kinak. “It allows a consortium of brokers to have a vote about, potentially, how information is disseminated and priced. From that standpoint, I see the benefits.”
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