Is it Live, or Is It MEMX?

The best thing about the statement announcing the Members Exchange, a consortium of retail brokers and liquidity providers, is the absence of any super cool buzzwords like blockchain, cryptos, artificial intelligence, or big data. No one needs to research any of the terms used in the press release. We don’t not need to look up the names of the companies involved and figure out if this is something that matters or just another run-of-the-mill industry announcement. Its name is unbearably pure. It exists for the benefit of its “Members.” It evokes the image of a black leather jacket that you didn’t pay too much to get. 

This effort is real and should surprise no one. The most puzzling thing is why it took so long. I thought it would happen after BATS and DirectEdge merged. Maybe the divergence of the industry’s economics hadn’t reached a boiling point yet. The Members Exchange (I guess we will be calling it the “Mem-Ex” eventually) is simply taking part in a decades-long process of lowering the cost of US equity transactions and will use a proven playbook to achieve its goals: 1) utility consortium ownership, 2) dramatic cost savings, and 3) regulatory goodwill. Michael Lewis isn’t going to write a book about it, but it could become part of a business school textbook. 

The language and tone of the release and the website would lead one to believe that the operations of the Exchange will be as simple as possible. Here are a few of our assumptions:

  • The matching logic will not leave any room for incumbents to oppose it.  No copper wires or black box prioritization.

  • Transaction fee schedule will be no more than a 6x6 grid and will be a pure Maker/taker model.

  • Connectivity, co-location, and market data fees will be so low as to be proof of the new Exchange’s value to the marketplace

  • The first letter of the first name of the CEO will be J. Maybe R. 

It is hard to understand why anyone would think this would be bad for the marketplace. The argument that the founders are only doing this to lower their own costs and will not pass it back to their investors is irrelevant. If the MEMX is successful, it should lower the costs for all the brokers that connect to the US Exchange market. Remember that US institutional equity commission rates have been falling for years, unlike Exchange connectivity and market data fees. And can anyone seriously complain about increased fragmentation? Fragmentation is like having kids – after you have three of them, you just go numb to the pain.

Between the specter of the US research unbundling, the market access rebate pilot, the promise of a new stock Exchange, and 3,000 or more pages of ATS-N documentation, this year shows that US Market Structure can still be fun.

Even without an AI-powered, crypto-funded blockchain.

Ellen Gordon