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MEMX Is a Cautionary Tale for Market Operators: Ignore Customers at Your Peril

Traders Magazine Online News, February 11, 2019

Roger Rutherford

The launch of new member-owned stock exchange, MEMX, is a concrete example of the collective power market participants can wield in the face of opaque pricing and a lack of transparency – and a cautionary tale to incumbents that refuse to listen to their customers.

Shares of the biggest exchanges in the US fell early in the trading day on 7 January as news rippled through the stock market that nine major Wall Street firms, disillusioned with complex and opaque fees incurred for market data and other services, had taken matters into their own hands.

MEMX, which promises to drive ‘simplicity, efficiency and competition’ in the equities space, is yet another example of a burgeoning revolution in financial markets. Market participants are stepping up and telling the technology and data providers they once relied upon: if you don’t work with us to resolve the issues we care about, we will resolve them ourselves.

Skyrocketing market data fees have topped the list of these issues for some time. More recently, this has been exacerbated by some exchanges and trading venues unbundling existing data packages and selling them separately to improve profit margins. 

A leading hedge fund trade association likened the practice to ordering a hamburger which used to cost $20 but now costs $7 for the bun, $15 for the patty and $11 for the condiments. Hamburgers aside, this has further increased the divide between firms that can afford to pay for market data and those that cannot. 

Last year, frustration levels reached new heights and the distribution, cost and – most importantly – the transparency of market data packages were placed under more scrutiny than ever before. End-user investors made their views clear, and the regulators started listening closely. 

Market operators – those charging trading and market data fees in other sectors – need to show that they too are listening to these concerns and adapt their approach to market data accordingly, or they risk losing business to an MEMX-style competitor. 

There is nothing wrong with charging for market data, but there needs to be greater transparency in the pricing and availability of market data packages so counterparties know what they are paying for, how that compares against their peers and whether they are getting value for money. 

This is not an issue unique to US equities – we have been raising awareness of similar practices in FX for some time – but it is in the US equities market where the feud between market participants and exchange giants Nasdaq, ICE/NYSE and Cboe has reached fever pitch.

The trend is common across asset classes. Institutions are being forced to purchase expensive data packages to match their competitors. If they do not, they risk losing out to those competitors – who effectively gain a competitive advantage. 

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