The business of stock exchanges has been making news for some time. The issue of market structure and market practices in the US has been a topic of much discussion for the last 18-24 months, especially since the launch of Michael Lewis’ book Flash Boys, and the subsequent bid by the IEX to launch a new exchange in the US. Across the Atlantic, the possible merger between the London Stock Exchange and the Deutsche Borse groups has reignited the discussion on further consolidation in the exchange space and more broadly its implications for the future of exchanges. Largely unnoticed amidst this fanfare, a new exchange has been launched (or relaunched) in the US that could also have significant and far reaching impact on the industry. This is the story of a group of industry veterans, discontent with the current market practices and lack of actions to remedy them, who have come together to found a new exchange that looks to address the issues with a market based solution.
This is the story of the National Stock Exchange (NSX) even though it sounds a lot like that of IEX, its more publicized competitor that is currently waiting for regulatory approval. The NSX is actually one of the oldest stock exchanges and was originally founded as the Cincinnati Stock Exchange in 1885. It became fully electronic in 1976, moved to Chicago in the 1990s when it took the name NSX, then moved to Jersey City, NJ, was acquired by the Chicago Board of Exchange in 2011 before shutting down operations in 2014 due to failure to attract adequate volumes. A group of individuals with experience in the capital markets came together and formed National Stock Exchange Holdings in 2014 and took over the ownership of NSX. Leveraging the NSX’s existing technology assets but with new ownership and management team and fresh round of capital, the NSX was relaunched in December, 2015.
In a marketplace already crowded with 11 stock exchanges and many more alternative trading venues, NSX has identified a clear differentiator for its business model: access fees. The issue of access fees charged by the exchanges has been a topic of contention for some time now. In particular the issue of exchanges offering rebates to broker-dealers for providing liquidity has raised questions around conflicts of interest and investor protection. While there have been a lot of debates on this topic, concrete measures to address this have not been forthcoming. This is where NSX is looking to differentiate itself by offering a simple flat fee structure at significantly lower rate by simply charging liquidity takers 3 cents for every 100 matched shares and zero cents for liquidity providers. Notably, the exchange also looks to maintain a level playing field by not offering co-location facility, in a significant departure from current market practices where other exchanges offer members speed advantage charging a co-location fee.
The success of any trading venue depends on the amount of liquidity it is able to garner by bringing both liquidity providers and takers together on the platform. Many market participants, including some of the largest asset managers, have been asking for some time for a trading venue with low fess and level playing field for all investors. While NSX has taken the initial steps towards establishing such a marketplace, its success will greatly depend upon its ability to attract an array of participants to create a viable liquidity pool. Still in its early days, the exchange has been focusing on this issue and talking to a number of market participants to get them on board. If it gets traction in the market, it would be interesting to see how the incumbent players react. The large exchange groups of late have been busy focusing on numerous areas of the business, such as adding new asset classes, expanding into clearing services, growing market data and index business, as well as driving economies of scale through large scale mergers and acquisitions. As a result, focus on innovation in the traditional equities trading business has failed to keep pace with some of the other priorities exchanges have been focusing on lately. NSX’s initiative, along with that of IEX’s (with somewhat similar goals but different means), has the potential bring the focus back on the equities exchange business and re-ignite the next round of evolution in this space.