A look at the fracturing US trading landscape
September 2020 saw the launch of three new stock exchanges – the Long-Term Stock Exchange (LTSE), the Members Exchange (MEMX) and the Miami International Securities Exchange – bringing the total number of US exchanges to 19. In addition, the SEC continues to approve alternative trading systems (ATSs) – also known as dark pools – with 54 currently in operation in the US, according to an SEC list from February 2020.
Last year, IR Magazine reported on statistics from ModernIR that up to 36 percent of trading activity occurs on dark pools, with the rest split across the ‘lit’ exchanges. As more trading venues and exchanges launch, it makes it harder to understand where a stock is traded, by whom and what it means for the price and the likely buyer/seller.
What’s more, there will be fewer experts who can have a detailed understanding of the entirety of the US market to help IR and corporate finance teams understand trading activity across venues.
Joe Saluzzi, partner and co-founder at Themis Trading, says that while many market participants will relish the growing list of trading venues available to them, it’s a less positive picture for issuers. ‘I don’t think this helps the issuer at all,’ he says. ‘Issuers can’t be excited about having so many exchanges trading their stock. The more fragmentation of liquidity, the less color you’ll get.’
The new exchanges and trading venues have clear value propositions, however, and – they believe – a differentiated offering from the traditional exchanges.
For example, MEMX was approved by the SEC as a regulated stock exchange on May 4, and began trading on September 21. It was founded by a consortium of investors, banks, retail brokers, market-makers and institutional firms and, according to Sophie Sohn, head of marketing and communications at MEMX, it will give these market participants ‘a larger voice in the market structure debate'.
On the topic of market fragmentation, Sohn says: ‘While it’s smart to be sensitive to fragmentation, we should also be supportive of competition and new entrants trying to produce better outcomes for the market as a whole. It’s interesting that this question around fragmentation seems to be primarily directed at new entrants, even though many of the incumbents continue to operate, rather than consolidate, their multiple exchange platforms.’
Nasdaq, the NYSE and the Investors Exchange all declined to comment about market fragmentation and the launch of new exchanges. In this article, we profile one of the new exchanges – LTSE – and one of the new trading venues – EQX – and ask why they need to exist.
This is an extract of a feature from the Winter 2020 issue of IR Magazine. Click here to read the full article, in which we interview representatives from the Long-Term Stock Exchange and EQX.