FLASH FRIDAY: Too Many is Never Enough

FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instineta Nomura Company.

Are there too many equity exchanges in the U.S.? 

Most market participants would say yes, 16 is a fairly ridiculous number of exchanges; market structure would be better and simpler, and choice and price competition would be sufficient, with half that number. 

But there are always venue operators and entrepreneurs who see room to squeeze in one more exchange business model. 

Just in recent weeks, Members Exchange, MIAX Pearl, and Long-Term Stock Exchange launched. Each claims their own unique ethos: MEMX is meant to drive down the cost of market data, MIAX Pearl will deploy  technology from its options exchanges, and LTSE is meant to connect long-term investors with sustainable companies. 

It remains to be seen which of the upstarts will gain traction and which will languish. But market participants note that each new exchange means higher connectivity costs, a more complex market structure, and more fragmentation of already-fragmented liquidity. For institutional investment managers, more trading venues makes it more difficult to find block liquidity in one place.

The oversized exchange field was a discussion topic at this week’s Security Traders Association 2020 Market Structure Conference.  

The debate has been going on for many years, ever since the dissipation of the NYSE-Nasdaq duopoly enabled new trading venues to emerge. 

From the April 2008 Traders Magazine cover story “Picking Up the Pieces: Traders Deal with Fragmentation of Marketplace Liquidity”: 

“Fragmentation is a huge issue,” says Kevin Connellan, director of equity trading at Northern Trust Global Investments. “It’s a major concern, primarily because you have to use an algorithm; you can’t physically do this yourself anymore. There’s no successful methodology available. And there’s no master key that unlocks everything.”  

A dozen years (and almost a dozen exchanges) later, liquidity fragmentation remains an issue.