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Traders work on the floor of the New York Stock Exchange (NYSE) as the Federal Reserve Board Chairman Jerome Powell holds a news conference on December 19, 2018 in New York City.
- A group of banks, market makers and retail brokers said on Monday they're teaming up to launch an equities exchange.
- The founding members said they're frustrated with the consolidation of power in the equities markets between three large exchange operators: Intercontinental Exchange, Nasdaq and Cboe Global Markets.
- The Member Exchange, or MEMX, will offer reduced fees for trading, connectivity and market data.
A group of big Wall Street firms including Fidelity, Morgan Stanley and UBS announced a plan on Monday to launch a new equities exchange that will take on the New York Stock Exchange and Nasdaq.
The Members Exchange, or MEMX, will be owned entirely by its founding members and has plans to file an application with the Securities and Exchange Commission in early 2019 to try and gain approval as the 14th stock exchange in the US.
MEMX founding members include a wide range of market participants. Banks (Bank of America Merrill Lynch, Morgan Stanley and UBS), market makers (Citadel Securities and Virtu Financial) and retail brokers (Charles Schwab, E*TRADE and Fidelity Investments) are all represented in the group.
The creation of the exchange after frustration from big brokers and traders over the consolidation of power in the equitities market. All but one of the 13 national securities exchanges are owned and operated by one of the three major players in the space: the Intercontinental Exchange, Nasdaq, and Cboe Global Markets.
"The level of frustration from us, from our clients, has never been greater," Vlad Khandros, global head of market structure and liquidity strategy at UBS, told Business Insider in an interview. "It just seemed like this was a time to further represent the institutional clients, the retail clients, from a policy standpoint and from a pricing standpoint so that there is better alignment and so that execution costs can be further reduced."
Sal Arnuk, co-founder and co-head of equity trading at broker Themis Trading, said the trading volume handled between the nine firms is enough to make the exchange a serious contender in the equities space as soon as it is up and running.
"It really is a tremendous amount of potential migratory order flow," Arnuk told Business Insider. "This should scare the living daylights out of NYSE and Nasdaq."
Specifics regarding the exchange were sparse, as an application has yet to be filed to the SEC. However, the exchange's focus will be on offering a limited number of order types to support a simpler and more transparent marketplace. It will also aim to have reduced fees for trading, connectivity and all-important market data.
A representative from each of the nine founders will sit on MEMX's board, which will now look to recruit and build out its management team. $70 million was raised to launch the exchange among the nine firms.
Membership to the exchange does not include ownership in it. However, Jamil Nazarali, global head of business development of Citadel Securities, said the group is open to raising money from other firms.
"It is almost certain that we will bring on additional investors at some point soon," Nazarali said. "We have enough resources to fund this for the foreseeable future. To the extent that we bring other investors forward, it is really just to tie more members into this and bring on strategic partners."
Despite the significance of MEMX's backers, immediate approval from the SEC isn't guaranteed. The last exchange to do it, IEX, had to wait nearly a year for regulatory approval, all while defending itself from comment letters filed to the SEC criticizing its business plan, most notably Citadel Securities. IEX's application was controversial due to its "speed bump", a mechanism created to combat predatory high-frequency trading firms. While MEMX's proposal is likely to be more traditional than IEX's, it still could draw criticism, including from current exchange operators.
And even if approval does come, success isn't a sure-thing for the new venue.
Exchanges have yet to offer strong opinions, though. A spokesperson for NYSE, which is owned by the Intercontinental Exchange, declined to comment.
Cboe, meanwhile, said it's open to any new competition.
"The U.S. equities markets are among the most vibrant, competitive markets in the world. Cboe believes that healthy competition ups the game for all of us and we welcome new entrants into the space," said Bryan Harkins, Cboe's co-head markets division, in a statement emailed to Business Insider.
Nasdaq questioned the benefit of adding another exchange to a marketplace that, when including dark pools, has a considerable amount of places to trade already.
"We welcome competition to our transparent, highly regulated equity markets," a Nasdaq spokesperson told Business Insider via email. "However, with dozens of equity trading venues already in operation in the United States, we are anxious to learn more about the value proposition of a new exchange."
Steve Quirk, executive vice president of trading and education at TD Ameritrade, said the additional costs market participants might face will be negligible compared to the benefits they'll receive by trading through the new venue.
"Having an option for another, cheaper, more focused alternative would greatly outweigh any initial cost that would be associated with linking to [a new exchange]," Quirk said.