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MEMX is the only independently-owned stock exchange. It is backed by a consortium of financial services firms that includes some of the New York Stock Exchange (“NYSE”) and Nasdaq’s biggest customers: Bank of America Merrill Lynch; BlackRock; Citadel Securities; Citigroup; E-Trade; Fidelity; Goldman Sachs; JPMorgan; Morgan Stanley; TD Ameritrade; UBS; and Vurtu Financial.1 These institutions were motivated to create MEMX after years of complaints about what they considered to be unjustifiably high fees for market data and connectivity.2 They have stated that their goal is to deliver a lower cost, more transparent exchange “that remain[s] focused on its users”3 and that will “drive better outcomes for the investing public.”4
What Securities Trade on MEMX?
MEMX is taking a methodical approach to its rollout. When MEMX launched on September 21, seven securities were available for trading, including Alphabet (GOOG), BlackBerry (BB), Consolidated Edison (ED), and Exxon Mobil (XOM).5 In its first day, 25 firms executed 857 trades on the new exchange.6 By comparison, Nasdaq executed more than 27 million trades on the same day.7 Although MEMX’s trading volume represents only a fraction of its competitors’ volume, since its launch, MEMX’s trading activity has increased each day.8 Additionally, on September 29, 2020, the exchange added 12 new symbols for trading.9 The exchange intends to continue rolling out securities with the goal of having all National Market System securities available for trading on MEMX in October.10
What Makes MEMX Different?
Distinct Market Access Features
In September 2019, MEMX applied to the U.S. Securities and Exchange Commission ("SEC") for approval to operate a national securities exchange under Section 6 of the Securities Exchange Act of 1934 (the “Exchange Act”).11 In its application, MEMX described, among other things, three features that differentiate it from its competitors: (1) a simplified market data structure; (2) a reduction of order types; and (3) a prioritization of displayed orders over hidden or “dark” orders.
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Simplified Market Data Structure
MEMX offers data products comparable to other exchanges, however, MEMX does not charge for its data products.12 Free access to all market data breaks from the “two-tier market data” business model in which an exchange typically provides free access to some data, and charges traders a monthly fee for more granular market data.13 The Wall Street Journal dubbed MEMX’s approach a “lavish promotional- pricing scheme . . . to attract trading activity.”14 MEMX’s Chairman and Chief Executive Officer (“CEO”) Jonathan Kellner acknowledged that the new exchange is prepared to “be aggressive . . . to get people to participate,” but did not specify whether MEMX eventually intends to charge users for access to market data.
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Reduction of Order Types
MEMX also offers a streamlined set of order types. MEMX will accept three order types: Market; Limit; and Pegged. 15 This simplified approach contrasts with the NYSE, Nasdaq, and Cboe Global Markets (“Cboe”), which each offer approximately 10 to 15 order types and dozens of modifiers.16
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Prioritization of Displayed Orders
Importantly, MEMX gives displayed orders priority over hidden or “dark” orders when the orders are equally priced.17 This practice may lead to increased market transparency because it incentivizes traders to place displayed orders rather than hidden orders.
MEMX’s Gender-Balanced Board of Directors
In July 2020, MEMX appointed its first board of directors, which was gender-balanced, consisting of five men and five women. CEO Jonathan Kellner explained that MEMX prioritized selection of a diverse board with a range of expertise. 18 MEMX is the only major exchange to have a gender-balanced board of directors.
Who Benefits from MEMX?
As the Members Exchange, MEMX may focus most on the interests of its membership as opposed to the profitability of stockholders. Although still in its infancy, MEMX already has conferred benefits on its financial backers.
MEMX is a self-regulatory organization ("SRO") with the power to create and enforce the regulations that apply to it.19 By founding MEMX, the brokers and high-frequency traders ("HFTs") backing MEMX gained a coveted seat at the regulatory table. MEMX and its financial backers now have a vote on the self-governing regulatory committee that oversees the public market data stream and determines how much brokers are charged for data.20 By virtue of this role, MEMX and its backers also are privy to financial information that the exchanges have closely guarded.21
This is not the first time brokers and/or HFTs have financially backed a new stock exchange and assumed regulatory responsibility. Commenters have compared MEMX to BATS Global Markets ("BATS").22 BATS, which was ultimately acquired by Cboe, was founded by the former CEO of HFT firm Tradebot.23 BATS also was an HFT-sponsored exchange with aspirations to change the market before “its behavior became indistinguishable from the other parasite exchanges.”24
What Are the Implications for Investors?
While MEMX is nascent, investors should monitor a few ramifications.
First, MEMX’s prioritization of displayed orders may be to the detriment of hidden or “dark” orders. Commenters have suggested that increased transparency from displayed orders could herald the end of “dark” orders altogether.25
Second, MEMX’s provision of market data for free may motivate the NYSE or Nasdaq to respond with aggressive measures of their own to avoid losing market share.26 A competitive marketplace should benefit investors by driving down costs. In particular, MEMX’s lower costs give it the flexibility to pass savings along to investors, perhaps in the form of reduced commissions. However, as one critic put it, “given what we know about [the] Wall Street banks [that back MEMX] and their obsession with generating profits, why on earth would they do something like this?”27 Investors should monitor whether cost savings to exchanges translate into savings for investors.
Relatedly, it is still too early to determine if MEMX’s business model is sustainable. Should MEMX not generate a profit from its trading operations, it likely will attempt to profit from other business segments. MEMX’s pitch about greater transparency and simplicity may be a gimmick to attract investors to other costlier products or services.
Finally, although MEMX ostensibly strives for greater simplicity, the availability of another trading venue may result in a more complex equities market system. The new exchange adds an extra set of rules that are only marginally different from the largest exchanges’ existing rules, without providing an upfront measurable benefit for most of the investing public. The fragmentation MEMX brings could “worsen what some see as a trading environment already defined by complexity.”28 Because MEMX is still in its first month of operation, its lasting impact on the industry is difficult to project. Nevertheless, the exchange presents an interesting challenge to the incumbent stock exchanges and their business models, which may yield some benefits for investors.
Labaton Sucharow’s lawyers are available to address any questions you may have regarding these developments. Please contact the Labaton Sucharow lawyer with whom you usually work or the contacts below.
Rachel A. Avan: ravan@labaton.com / 212-907-0709
Jeffrey R. McEachern: jmceachern@labaton.com / 212-907-0780
Download a copy of this alert here.
1 See John D’Antona Jr., Members Exchange Set to Open But is it Needed?, Global Trading, Jan. 9, 2019; Rey Mashayekhi, Why Citi is the latest Wall Street giant to back the new MEMX stock exchange, launching this fall, Fortune, June 30, 2020; Philip Stafford, JPMorgan and Goldman throw weight behind exchange start-up, Fin. Times, Feb. 20, 2020.
2 See John McCrank, Wall Street-backed MEMX launches in challenge to NYSE and Nasdaq, Reuters, Sept. 21, 2020.
3 See Thomas Franck and Kate Rooney, Shares of NYSE Owner Fall as Morgan Stanley and Fidelity Plan Rival Exchange, CNBC, Jan. 7, 2019.
4 John McCrank, New Wall Street-backed exchange MEMX eyes mid-2020 launch, Reuters, Oct. 31, 2019.
5 Jonathan Kellner, Day 1, MEMX Blog, Sept. 21, 2020. The other securities were Acasti Pharma (ACST), Ford Motor Co. 6.20% Notes Due June 1, 2059 (F-B), and the iShares Ultra Short-Term Bond ETF (ICSH)).
6 Id.
7 See Daily Market Files, Trade Executions on September 21, 2020, Nasdaq Trader.
8 Jonathan Kellner, Rollout Update, MEMX Blog, www. memx.com/rollout-update/, Sept. 25, 2020.
9 The twelve securities are: Nokia (NOK), which is an ADR; SPDR Dow Jones Industrial Average ETF Trust (DIA); United Health Group (UNH); Home Depot (HD); Amgen (AMGN); Salesforce (CRM); McDonald’s (MCD); Microsoft (MSFT); Visa (V); Goldman Sachs (GS); 3M (MMM); and Honeywell (HON).
10 See supra note 8.
11 Securities and Exchange Commission Release No. 34-88806; File No. 10-237, In the Matter of the Application of MEMX LLC For Registration as a National Securities Exchange, May 4, 2020.
12 See Members Exchange FAQ, memxtrading.com.
13 See Securities and Exchange Commission Release No. 34-88827; File No. 4-757, Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data, May 6, 2020.
14 Alexander Osipovich, Wall Street-Backed Exchange Launches as Rival to NYSE, Nasdaq, Wall Street J., Sept. 21, 2020.
15 See Rules of MEMX, Rule 11.8, updated Oct. 22, 2019. (A Market order is an order to buy or sell a specified quantity immediately at the best available price. A Limit order is an order to buy or sell a specified quantity at a specific price or better. A Pegged order is an order to buy or sell a specified quantity at a price relative to another index, such as the national best bid and offer ("NBBO")).
16 See Rule 13 of NYSE; Rules 4702-03 of Nasdaq; Rule 11.3 of Cboe EDGA Exchange.
17 See Rules of MEMX, Rule 11.9(a)(2)(A).
18 See Lananh Nguyen, Wall Street’s Next Big Stock Exchange Has Gender-Balanced Board, Bloomberg, July 28, 2020.
19 See generally Section 3(a)(26) of the Exchange Act.
20 The other voters are: NYSE, Nasdaq, Cboe, IEX, and FINRA.
21 Daren Fonda, New Stock Exchange Better for Wall Street Than for Small Investors, Barron’s, Jan. 11, 2019.
22 Kurt Dew, MEMX Talks The Talk, Will It Walk The Walk?, Seeking Alpha, Jan. 16, 2019.
23 See www.tradebot.com/board-of-directors.
24 See supra note 22.
25 Id.
26 See supra note 14.
27 Wayne Mulligan, Don’t Fall for Wall Street’s Latest “Stock Market Scam,” Crowdability, Jan. 10, 2019.
28 Declan Harty, New Stock Exchange Ventures Say US market is Ripe For Disruption, S&P Global Market Intelligence, July 2, 2019.
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