The Exchange's Brand Is Fading
Plus: IEX's SEC smackdown, the corporate bond battle, and more
Welcome to another issue of Front Month, a newsletter covering the biggest stories in exchanges & market structure every Friday. If you have questions or feedback, please reply to this email or find me on Twitter. If you like this newsletter and want to follow the exchange industry with me, please hit the Subscribe button below & be sure to share with friends & colleagues:
Bad News, London and New York: Finance Hubs Are Becoming Obsolete: When you think of an exchange, what comes to your mind? My guess would be one of two things:
The floor of the New York Stock Exchange, packed with people as the opening bell rings & CNBC begins a rundown of their top stories.
The colorful, chaotic octagons of the Chicago Mercantile Exchange or the Chicago Board of Trade, overflowing with sweaty, screaming men waving their hands in the air & throwing little pieces of paper on the floor as they go.
You’re likely picturing the romantic side of an exchange’s brand. It’s the brand that made a vibrant exchange synonymous with capitalism & free markets. It’s also the brand of the past, one that doesn’t exist anymore.
In November 2021 CME sold its 288,000 square foot trading floor at 333 S. LaSalle St. for just under $40 million. The buyers plan to turn the building into an electrical substation to help power downtown Chicago. CME will still operate a small trading floor down the street, but it no longer has a use for the hangar-sized space that used to house its iconic pits of the past.
And then there’s this recent Bloomberg opinion piece:
“Today, London’s future as a global financial hub is under threat. In the popular discourse, that’s largely due to Britain’s exit from the European Union and the ongoing fights over trade and regulations. But Brexit is barely half the story, and New York faces similar threats. While JPMorgan Chase & Co. is expanding its Paris office with new trading floors, Goldman Sachs Group Inc. is doing the same in Miami and has been hunting for space in Dallas.
What links these moves is the ways technology and regulations have dramatically changed the flow of information in just the past couple of decades. The Covid pandemic showed just how little physical location now matters for many jobs and businesses in finance and gave executives confidence that more operations could be managed remotely.“
In this new electronic, quarantined, work from home, decentralized era of trading & markets, the entire brand of finance as a profession is shifting, let alone that of an exchange. In five, ten, fifteen years time will we still think of an exchange as a collection of traders shouting over each other in a room? Probably not.
If not the trading floor days of old, what image will come to mind? Will an exchange’s brand become miles-long racks of servers in a military-grade data center? Will it become a tall tower filled with satellite dishes? Or will it simply be a logo splashed across screens in Times Square?
SEC Suspension of IEX Market Data Fee Increase: Who says market structure can’t be funny?
We all know IEX, the “good guy exchange” that launched in 2012 and became the subject of a certain book by a certain author that received national attention. The book - and IEX itself - branded the exchange as an underdog disruptor that sought to protect investors from predatory HFT practices and break the stock exchange monopoly held by Nasdaq & the NYSE. IEX registered as a national securities exchange in 2016 and has maintained 2-3% market share in US equities ever since.
IEX’s path to disruption has been littered with setbacks. It tried to start a listings business in 2017 and was forced to shut it down two years later after attracting - and losing - just one company. It has run numerous marketing & PR campaigns to stress how uncompetitive the US equities landscape is & made its market data free, but hasn’t attracted new market share in years.
November 2021 saw an interesting shift in IEX’s plans. On November 1 it filed a proposed change to its market data fees, seeking to charge for a service it previously gave away for free. On one hand, raising prices for market data makes IEX look like the very exchanges it says are price gouging & taking advantage of customers. On the other, IEX’s proposed prices are still very cheap compared to competitors & help cover its infrastructure costs. Given the SEC lets IEX’s rivals charge obscene amounts for market data, a small price increase from a minor player in the space shouldn’t ruffle too many feathers, right?
Wrong. Just before the New Year, the SEC announced it had suspended IEX’s proposed price increase pending additional investigation. Here’s the Commission’s explanation behind their decision:
“In temporarily suspending the Exchange’s proposed rule change, the Commission intends to further consider whether the proposed fees are consistent with the statutory requirements applicable to a national securities exchange under the Act. In particular, the Commission will consider whether the proposed rule change satisfies the standards under the Act and the rules thereunder requiring, among other things, that an exchange’s rules provide for the equitable allocation of reasonable fees among members, issuers, and other persons using its facilities; are designed to perfect the mechanism of a free and open market and a national market system and to protect investors and the public interest, and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers; and do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.”
To me, this is a clear example of regulatory arbitrage, a key reason why exchanges like Nasdaq & the NYSE are so hard to disrupt. Making any market structure changes, good or bad, justified or outrageous, are extremely difficult to achieve in the current regulatory environment. I personally don’t know why the SEC decided to suspend IEX’s small fee increase when incumbent exchanges charge so much more for the same service. I don’t see how that’s not a double standard. I do think it’s a pretty amusing example of the intricate, sometimes nonsensical complexities of US market structure.
The SEC will deliberate on IEX’s proposal for a few more months & then give a final ruling whether to let its fee change pass or deny it completely. The story isn’t over yet, and I’ll update you if & when more news breaks.
My latest paid post is live - Into the JPEG Jungle explores the nascent & rapidly evolving market structure of NFTs, combining a top-down competitive view of NFT exchanges, concrete volume & market share data, and my own personal experience in the space. Subscribers get immediate access to this post & a growing archive of past market structure research, plus a repository of exchange data that acts as a low-cost alternative to sell-side research.
Thank you for your support!
Other Stories I’m Reading
Chart of the Week
December marked a break in the electronic corporate bond battle that took 2021 by storm.
The highlight of the year was Tradeweb’s impressive advances in both investment grade & high yield electronic market share while MarketAxess struggled to match its rival’s momentum. At the beginning of 2019, MarketAxess held ~17% market share in electronic IG bond trading, while Tradeweb held less than 5%. At the end of November 2021, MarketAxess held 21% while its rival held 14%, an alarming jump that came with a radical outperformance in Tradeweb’s stock:
Last month, that trend took a breather. December is normally a slow month for volumes - bank trading desks take holiday & liquidity gets thinner for big block trades that normally go through dealers. The allure of an electronic platform like MarketAxess becomes easier to understand in this kind of slow trading environment. Because of this, the exchange’s December market share rose to 23.6%, the second highest month on record:
And its high yield corporate bond share share rose to a record 18.3%:
Will this trend continue into 2022? We’ve seen share tick up consistently during the last few weeks of MarketAxess’s year. I’ll need to see another month or two of market share data before I can start to get excited about the exchange’s prospects in 2022.
Thank you for reading this issue of Front Month. Word of mouth is the #1 way others find this newsletter - If you liked this week’s content, please consider sharing with friends & colleagues. Questions & feedback can be sent via email or Twitter.
Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, NDAQ and VIRT. I am also long Solana.