The US equities market structure is certainly complex, and debate rages continually about whether it could be improved, both by regulators and market participants. One thing that cannot be debated is its importance to the US and wider global economy, being the largest equity market by capitalization by quite a distance (3.6x that of China, the next largest, and 41% globally). There are endless sources of literature online to explain the intricacies of the US equities market, a good example being this SIFMA research paper.
A system that controls trillions of dollars in transactions per year and has been built over many decades is certainly not going to change quickly. Commentary ranges from the technical to the commercial regarding how to improve; focus is often placed on the end investor, but many of the practical changes affect the plumbing and technical details, impacting ‘our corner’ of the industry in the front office.
To add to an already complex environment, recent history has seen a boom in new companies launching as trading venues, with the following markets either being created or soon to be created:
Blue Ocean
The Green Impact Exchange
The Dream Exchange
The Texas Stock Exchange
24X
Bruce ATS
This follows in the footsteps of markets established in recent years, including the Long Term Stock Exchange, IEX, MIAX Pearl, MEMX, and One Chronos. The Texas Exchange, in particular, appears to have prompted activity with NYSE and Nasdaq, both making recent public moves to invest in Texas, with NYSE moving its NYSE Chicago business and rebranding it to NYSE Texas.
There are interesting value propositions presented, ranging from the offer of 24-hour trading with Blue Ocean, 24X, and now MOON ATS from OTC Markets, which ideally attracts investment from outside the US, to the Texas offering that may appeal to companies in the southeast quadrant of the US. Dream Exchange is focused on small-cap stocks and the Green Exchange, with an angle to foster investor trust that the companies they invest in meet environmental standards.
As you might expect, these companies are targeting revenue generation through the standard means an exchange would use, including listings, trading fees, connectivity fees, market data fees, and a share of the consolidated tape revenue. The overall revenue pie exceeds $2 billion.
It will be interesting to see just how US equities trading is set to fragment further across these many new markets. Some big-name buy-and-sell-side clients have participated in the funding rounds of these companies, so a base amount of liquidity and participation in all of them seems likely.
To briefly deviate from the subject of Equities, it is not the only asset class experiencing significant changes within the US trading landscape. The US Treasuries market has garnered considerable interest, as documented here, as well as notable shifts in the Futures markets, with MGEX becoming MIAX Futures.
So what does this mean for customers who connect directly to exchanges or the wider vendor community, including Pico?
One positive detail regarding system integration for these new venues is that three of the five listed above have purchased exchange technology from MEMX. In terms of building technology and systems to communicate with the new markets, (assuming you already support MEMX) this lowers the barrier to entry.
One negative detail that will be a sore point among clients and vendors is the cost of network connectivity. In years past, when new venues started up, encouraging more clients and vendors to connect was seen as a critical business development activity, and to facilitate this, fees were low and simply covered the cost of doing business with cross-connect charges. As exchanges gained market share and became more significant in the industry landscape, connectivity fees began to be introduced and increased. Some of these new markets are starting out by charging significant connectivity fees, $150k+ per year, just for the basic cables needed to connect to their systems. With so many new markets emerging simultaneously, assuming the newer venues also follow suit, this detail may break the budgets of some firms considering how to connect to more alternative liquidity sources. Of course, many larger firms will have no choice, given the regulatory necessity to connect to protected markets, where working with a vendor like Pico can assist.
Given the history of the landscape and the deep pockets of some of the bigger players, it's very possible that the successful venues get acquired, and dare I say it, some of these new business ideas might not last the test of time. This medium-term view also challenges budget holders, wondering if the large up-front cost of connecting to all of these new markets will be a wise and long-term use of funds.
With all that said, the deepening complexity of markets and the further proliferation of liquidity amongst new sources further the business case of Pico, which has always set out to simplify access to markets and reduce clients' costs. The 24-hour trading change, in particular, in addition to recent changes to support T+1 settlement, will firmly force operational workflows outside of normal working hours. This new overhead can be made easier by working with an international vendor with 24/7 support.
If anyone is wrestling with the details of managing connectivity to any of the companies listed above, please contact us.