If competition is the heart of market forces, then incumbent markets in 2019—in the form of major securities exchanges like the New York Stock Exchange (NYSE) and the Nasdaq—may themselves soon be forced to compete with other exchanges and relinquish some of their monopolistic stranglehold on the buying and selling of company ownership stakes. Two alternative securities exchanges—the Member’s Exchange (MEMX) and the Long-Term Stock Exchange (LTSE)—announced plans to launch in 2019, and the Investors Exchange (IEX) launched in late 2018 with trading just underway. Additionally, active-trader-focused firm Tastyworks announced plans to launch The Small Exchange in Q3 2019, concentrating on futures contracts. All these new alternative exchanges offer unique value propositions, from a focus on long-term innovation over quarterly profits to bucking the high price of market data that incumbent exchanges charge; however, displacing the reigning exchanges may prove difficult.
Despite legitimate complaints on high fees for trade execution and market data, the NYSE and Nasdaq offer features that other exchanges may have trouble competing against, such as the network effect and extremely high trading volume. These two advantages fuel one another cyclically. In this case, the network effect means that buyers want to be where the most sellers are and vice versa, so they tend to concentrate together, resulting in a high trading volume with increased liquidity. If there are not enough buyers to sell to or not enough sellers to buy from on these new exchanges, then low volume price slippage may play a major role in their inability to satisfy traders. But if these new exchanges do succeed, even if only with certain niche investors, they may change the market landscape in the U.S. for good and force brokerages to diversify away from just the NYSE and Nasdaq in order to satisfy clients. This could take the form of service updates to the overall user experience, from new methods of screening for securities to educating clients on all their new investment options. Either way, the end user will likely be the beneficiary of increased competition and a greater range of choice in the marketplace of markets.
The following are brief profiles for these new competitors:
The Investors Exchange received regulatory approval for its launch in October 2017 and listed Interactive Brokers, its first public company, in October 2018. The IEX accuses the NYSE and Nasdaq of creating an unfair playing field to benefit their biggest players and leveraging their regulatory capture. The exchange attempts to increase transparency for its own operations and those of its listed companies as well as more affordable market data, simplified order types, no colocation advantage and no order flow payments.
The Members Exchange—which counts TD Ameritrade, Bank of America Merrill Lynch, Charles Schwab, E*TRADE, Fidelity and Morgan Stanley among its founding members—announced it was seeking regulatory approval in January 2019. Like the IEX, the MEMX seeks to compete with the incumbent exchanges by improving operational transparency and reducing fixed costs for member brokerages executing trades through it.
The Small Exchange, announced by Tastyworks and set to launch in Q3 2019, seeks to offer a more customer-service-centric experience of futures trading to retail investors who may not understand or be able to access derivative products. The exchange plans to charge a one-time payment of $100 for a lifetime subscription, 50% discounted exchange fees and reduced market data fees.
The Long-Term Stock Exchange received regulatory approval on May 10, 2019 and will purportedly have additional rules in place discouraging listed companies from focusing on (and rewarding executives for) quarterly earnings, rather than long-term innovation and value. The new exchange was launched by tech entrepreneur Eric Ries and is expected to begin accepting listings by the end of 2019.