Morgan Stanley, Fidelity Investments, Citadel Securities LLC and a host of other financial companies plan to launch a low-cost bourse that will compete with the New York Stock Exchange and Nasdaq.
Brokers and traders have complained for years about what they say are unjustifiably high fees charged by the big U.S. stock exchanges for data on stock trades. The news of the new exchange on Monday pushed down the share prices of the parent companies of the NYSE and Nasdaq.
“The announcement is the latest salvo in the ongoing fee battle between exchanges and other market participants, and one which should be taken seriously at least from the perspective of the potential earnings pressure on existing exchanges,” said Nathan Flanders of Fitch Ratings.
In a joint statement on Monday, the companies creating the new exchange said it would look to increase competition, improve operational transparency, reduce fixed costs and simplify equity trading in the United States. Data fees are one of the biggest costs for brokers.
The venture will be called Members Exchange, or MEMX, and will be funded and controlled by nine institutions: Bank of America Merrill Lynch, Charles Schwab Corp, E*TRADE Financial Corp, TD Ameritrade Holdings Corp, UBS, Virtu Financial, Morgan Stanley, Fidelity and Citadel.
This is not the first time that industry giants have taken on the established exchanges. A decade ago, a group including Citi, Credit Suisse, Deutsche Bank, JPMorgan, Lehman Brothers, Morgan Stanley and Merrill Lynch backed a low-cost exchange called BATS. Around the same time, other industry heavyweights launched an exchange called Direct Edge with a similar goal of slashing trading costs. The two exchanges quickly gained market share, later merged and are now owned by Cboe Global Markets.
Banks tried a similar move in Europe by setting up Turquoise to trade cross-border shares as a stick to persuade incumbent exchanges to cut data fees. Turquoise partly succeeded in its aim, but ended up being bought by the London Stock Exchange.
Last year, the U.S. Securities and Exchange Commission asked stock exchanges to do a better job justifying their fees for public market data. It also repealed two data price changes last May for public feeds for Nasdaq and New York Stock Exchange-listed securities for the first time.
MEMX, which plans to offer a simple trading model with basic order types and the latest technology, will also represent the interests of its founders’ collective client base of retail and institutional investors.
It will offer “lower pricing on market data, and connectivity and transaction fees,” it said.
The big three U.S. exchanges have faced criticism for surging fees for services like data feeds that brokers use to monitor movements in stock prices.
Intercontinental Exchange Inc (ICE) owns the New York Stock Exchange, Nasdaq is run by Nasdaq Inc and the other exchange is Cboe.
Shares of ICE were down 2.6 per cent and those of Nasdaq Inc were 2.8 per cent lower.
In early 2019 MEMX will file an application with the SEC seeking approval to operate as a national securities exchange, according to the statement.
The World Federation of Exchanges (WFE) hit back against criticism of bourses on Monday, saying price feeds would not exist but for the role they play.
“The price at which information is licensed is accordingly a commercial matter for each individual consumer and exchange. The WFE stands ready to assist any regulators who are concerned about the role and nature of market data,” the WFE said.