MEMX: Is there an easier way to resolve the dispute over market data fees?

Plans to launch a new equities exchange on Wall Street, rivalling the existing institutions of NYSE, Nasdaq and CBOE, have drawn a lot of attention over the past two weeks. Major US market-makers including Merrill Lynch, Morgan Stanley and Virtu Financial have banded together to propose MEMX, a high-tech low-cost alternative to the existing equities platforms. Why are they doing this? The answer is simple – fees. 

The creation of MEMX is the latest episode in a long-running saga over what many see as the overinflated sums that exchanges demand from participants – including Select Vantage - for access to their proprietary data feeds. Data fees have steadily risen over the years, without market participants are at a loss to see the value they extract from the service rising in turn. With exchanges showing themselves unwilling to listen, the SEC had to get involved, but a roundtable discussion last October did not engender any progress. MEMX – an exchange run by the participants for the participants – is the latest attempt by certain brokerages to circumvent the excessive fees. But will it work?

At Select Vantage, our perspective on MEMX is a little cautious. Firstly, this is a highly expensive and time-consuming project – it will take a minimum of two years for plans to be approved by the SEC. Once the exchange is up and running, any attempt to undermine the fee structure of existing exchanges will have to be incremental. NYSE, Nasdaq and CBOE will complain furiously at efforts to undercut them. The process will be slow and difficult. 

It is also worth noting that new exchanges being born of disputes in the capital markets community is a pattern we have seen before. Less than twenty years ago, a consortium of firms, similar to those supporting MEMX, created the BATS platform to combat the monopoly of the exchanges of the day. Eventually, however, the market was re-consolidated into the three major platforms we see today – and the monopoly is still very much alive. MEMX may succeed in lowering data costs in five years’ time, but another market cycle may leave us in the same situation ten years after that. Effectively, there is no guarantee that MEMX will achieve its aims – and it will be several years before we can gauge its success. 

In all disputes, compromise is often the easiest and most pain-free solution. Yet so far, when it comes to data fees, neither exchanges nor participants have shown a willingness to listen to the other side. At the SEC roundtable in October, Chris Concannon, formerly of CBOE, stated that the dispute had left him with “less appetite for compromise”. This attitude dooms the roundtable to failure before it has started – but it doesn’t have to be this way.

With a fundamental shift in perspective, there is still a possibility to find common ground over data costs. A roundtable, with a genuine commitment from all sides towards engagement and flexibility, has the potential to break the deadlock. This time, the SEC would also need to assume the role of moderator and try to prevent unnecessary bickering and deviation. The answer to data fees could prove a lot simpler than creating a costly and impractical new exchange.   

 

Daniel Schlaepfer - January 17, 2019.