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Capital Markets

Quick read: How and why MEMX could take on the exchange incumbents

Tired of paying what they view as exorbitant fees to the incumbents, some large US brokers, banks and financial services firms have now decided to take the US equity exchanges on at their own game. The names involved and the amount of order flow that they now control mean that – this time – it could just work.

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The new firm’s stated aim is to offer a simple trading model with basic order types, the latest technology and a simple, low cost fee structure; but just how it plans to do so remains unclear. It has nine members: Morgan Stanley, Fidelity, Citadel Securities, Bank of America Merrill Lynch, Charles Schwab, E*Trade, TD Ameritrade, UBS and Virtu. There are many notable absentees, including Goldman Sachs and Citi.

Revenues at the incumbent exchanges have grown by 5.4% per year since 2010, with non-transactional revenue (data, tech, listings and fees) now greater than transactional revenue. The number of brokers in the US has fallen by 24% over a similar period, according to Finra. So, this growth in data revenue is being paid for by a shrinking pool of clients. Larry Tabb, founder and research chairman of New York-based capital markets research and consulting firm Tabb Group, says that the launch of MEMX is understandable.

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