Brokers Announce New Stock Exchange: What We Know

A new stock exchange was announced on Tuesday. Normally, this would not be particularly noteworthy for most individual investors. What differentiates the Members Exchange (MEMX) is who the founding members are: discount brokers Charles Schwab, E*Trade, Fidelity Investments and TD Ameritrade. Joining them are full-service brokers Bank of America Merrill Lynch, Morgan Stanley and UBS. Market makers Citadel Securities and Virtu Financial round out the group of nine.

An application to operate as a national securities exchange will be filed with the U.S. Securities and Exchange Commission (SEC) in “early 2019.” Because of the approval process along with the various logistical, technical and compliance issues involved with launching such a venture, the exchange will not be operational this year.

MEMX will be joining an already crowded field. Once launched, it will be the 14th stock exchange. All but one is owned by Intercontinental Exchange Inc. (ICE)—the NYSE’s parent company—Nasdaq or Cboe Global Markets Inc. (CBOE), according to The Wall Street Journal. There are also other outlets for executing trades. A 2015 SEC report noted the existence of more than 40 trading venues plus more than 200 broker-dealers that fulfill client trades internally.

Many of you probably have questions about what this means for your buy and sell orders. Details are still sparse, but I’ll share what I know so far.

The exchange is being launched to reduce costs and increase transparency. The mission given by MEMX is to “increase competition, improve operational transparency, further reduce fixed costs, and simplify the execution of equity trading in the U.S.” Data costs have long been an expense for brokerage firms; MEMX’s website says the exchange will “lower pricing on market data, connectivity, and transaction fees.”

Whether these cost savings will be passed on to individual investors (e.g., through lower commissions) is unknown. MEMX will be a for-profit entity with all nine founding firms having a minority ownership stake in it.

The types of orders will be limited. A spokesperson for MEMX couldn’t elaborate, but my expectation is that those used most by individual investors (such as limit orders) will be allowed.

Founding members will not be required to exclusively use MEMX. The spokesperson I talked to anticipates that the founding members will prioritize MEMX while continuing to seek out the best price for their clients. Rather than changing the existing model of orders being filled either with internal inventory or sent out to one of the existing exchanges or trading venues, MEMX will serve as another venue for fulfilling trades. (We, as individual investors, currently don’t know where our buy and sell orders are routed to for execution. I don’t expect this to change.)

MEMX will initially handle trades for U.S. stocks, but not bonds. It is unclear whether the exchange will facilitate the trading of exchange-traded funds (ETFs). Barron’s says MEMX will not seek to make money from listing public companies, like the NYSE and Nasdaq currently do.

Notably absent from the list of founding members are BlackRock and Vanguard. It is not publicly known why these two large firms are not participating. They will have the ability to direct trade orders to MEMX, as will other third parties, should they choose to do so.

Whether MEMX will have a significant impact is uncertain. IEX—the exchange featured in Michael Lewis’ “Flash Boys: A Wall Street Revolt” (W.W. Norton, 2014)—is reported to have a market share of only about 3%. A decade ago, various brokers banded together to create the alternative exchanges BATS and Direct Edge. Both ended up merging together before eventually being acquired by Cboe Global Markets, according to Reuters