Innovation is the hallmark of the U.S. capital markets, and the exchange world is no exception. In this edition of Forecast 2021, the new exchanges — the ones that don’t trace their lineage back to the Buttonwood Tree or to Bunker Ramo or to a trading floor in the Chicago Loop — bring their fresh legs and ideas into the discussion. This article, written by Sam Belden & Co. at Forefront Communications, interviews IEX, LTSE, MEMX and MIAX .
In our Forecast 2021 series, we bring you reflections and predictions from prominent firms and thought leaders from the industry. Today, we’re highlighting perspectives from the world of exchanges, with thought leaders providing their perspectives on the spikes in volumes and volatility, increasing fragmentation and the surge in retail trading activity.
A U.S. equities exchange
Ronan Ryan, Co-Founder and President of IEX Group
2020 saw record volumes and volatility, in addition to necessitating widespread shutdowns of physical trading floors. What was your experience during that period? What, if anything, might the long-term impact be?
Despite record-breaking high-volume days in March and April, IEX Exchange was resilient. One of the reasons the whole exchange landscape held up as well as it did is because of initiatives like Regulation Systems Compliance and Integrity (Reg SCI), which was designed to strengthen the technology infrastructure of the U.S. securities markets. IEX employees have been working remotely since mid-March and it has worked out surprisingly well.
In fact, we accomplished a lot this year despite not being able to collaborate in person. We launched two new products on the Exchange side, D-Limit and O-Peg, and the IEX Cloud business has also grown. In addition, we hired more than 30 employees since March. So, from our perspective the pandemic hasn’t slowed us down. It has changed opinions about working from home while allowing us to revisit and ensure the effectiveness of our processes and procedures.
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
We welcome more independent exchanges in the equity marketplace. Yes, it means there’s more fragmentation but there’s also more competition, which is good overall for market participants because it encourages innovation in terms of order types and market structure. IEX has traditionally challenged the status quo and raised awareness for issues like the rising cost of market data and the decline in displayed liquidity. These topics will continue to garner attention in the year ahead as this landscape becomes more competitive.
Retail became a much more significant part of the market in 2020. What’s the impact been, and what will it be moving forward?
Retail order flow as a percentage of average daily volume (ADV) continues to climb and the trend is likely to continue into the first quarter of next year. While most retail trading is off exchange, we’re seeing sub-dollar volumes grow because more investors are trading penny stocks, and often in large blocks. Sub-dollar trading recently spiked to 17% of ADV in late November according to NYSE TAQ data. In general, as retail trading continues to grow into next year it will become even more important to have a healthy amount of displayed liquidity so there’s price discoverability on exchanges.
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A national securities exchange
Zoran Perkov, CEO
This year saw record volumes and volatility, and necessitated widespread shutdowns of physical trading floors. What was your experience during that period? What, if anything, might the long-term impact be?
We went live in September, so for us most of the year has been focused on preparing for launch. While we operated as a remote-flexible and distributed team even before the pandemic, we recognized early that the pandemic would impact our people and stakeholders in difficult ways. It also has been a very motivating time for the team at LTSE given our long-term mission. The pandemic has underscored the need for innovation throughout society, for companies and industry leaders to have a multi-stakeholder view and to value resilience in times of crisis. We are excited to be part of accelerating that change.
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
We believe that competition drives innovation in markets. Our focus is not on complicating market microstructure. We’re creating an exchange to bring value to both companies and investors. That includes new standards for listing and a simple, transparent model for trading that works for all stakeholders. Our goal is to create space for long-term focused companies to thrive in the public markets, not to compete with other exchanges for market share. We hope that outcome benefits the whole ecosystem.
Retail became a much more significant part of the market in 2020. What’s the impact been, and what will it be moving forward?
Retail traditionally ebbs and flows with market activity, but unlike the past, access to markets has become easier and more affordable with zero commissions. I think that it will take some time to be able to determine if this is the new normal or just an outcome of the current circumstances. Off-exchange trading has largely benefited from the change in retail behavior and other exchange operators are looking to absorb it through their retail incentive programs. At LTSE, we believe in enhancing the retail stakeholder experience, whether indirectly as a result of greater price discovery from our fully displayed market or directly through future offerings.
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A customer-centric market operator
Jonathan Kellner, CEO
2020 saw record volumes and volatility, in addition to necessitating widespread shutdowns of physical trading floors. What was your experience during that period? What, if anything, might the long-term impact be?
At MEMX, our experience was informed by the fact that we were in launch mode for much of 2020. As an organization, we were able to adapt fairly seamlessly to a remote work environment because our infrastructure was built to run in the cloud. That said, we were sensitive to the strains this new way of working put on our team, from working parents to younger employees who were now all isolated from each other. To combat this stress, we doubled down on our investment in culture, and our firm grew stronger as a result. When it did come time to launch our exchange, the process was surprisingly seamless, even though it was entirely remote. This was due to the team’s immense efforts and ability to effectively adapt to new ways of communicating and collaborating in real time, despite being geographically dispersed.
If there is a bright side to what we have experienced this year, perhaps it has accelerated trends in our industry which were slowly occurring but needed some impetus to take hold. Firms were forced to think through how to manage compliance and risk issues for people working remotely. The additional level of flexibility a distributed work environment can provide should improve our ability to recruit and retain talent in the future.
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
MEMX was founded with an explicit mandate to foster competition in the exchange space. While additional exchanges do increase complexity and fragmentation, our experience has been that participants intimately understand these explicit and implicit costs. The feedback we received – and continue to receive – is that our members feel strongly that the benefit of the increased competition we are bringing to the market outweighs these costs.
In launching our exchange, we tried to mitigate the expense of adding a new exchange for our members by not initially charging for connectivity or market data fees. Two thirds of our members and over 50% of our top participants by volume are non-investors in the exchange. It’s been validating to see this kind of widespread industry support for the exchange and for our mission.
Retail became a much more significant part of the market in 2020. What’s the impact been, and what will it be moving forward?
Whether it’s due to zero commissions or people being at home more, it’s clear that a new generation of traders has become more invested in our economy, which should in turn have long-term benefits for the market. The level of trading occurring on the TRF has raised questions of accessible liquidity and potential impact to price discovery. Nevertheless, we believe the net result of the growing engagement from retail is positive. These kinds of market segment shifts require all market participants to adapt in some way, whether it’s through how they interact with order flow or how they measure participation, performance and execution quality. Fortunately, over the last several years, there has been an increased focus on market microstructure, so the industry as a whole, from buy side to sell side to market maker to exchange, are all better positioned for these conversations.
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An exchange operator
Thomas P. Gallagher, Chairman & CEO of Intercontinental Exchange
2020 saw record volumes and volatility, in addition to necessitating widespread shutdowns of physical trading floors. What was your experience during that period? What, if anything, might the long-term impact be?
MIAX quickly and flawlessly transitioned to a remote work company-wide. Our technology and trading systems proved their resilience and ability to handle the increased volumes with no disruption. Our staff continued to work efficiently, even launching a new equity exchange during the lockdown.
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
There is not too much fragmentation. Stating there is “too much fragmentation” implies fragmentation is bad and that is misleading. The market is ripe for much needed competition. We have an exchange environment where 12 of the 16 equity exchanges are owned by three exchange groups, who do not compete within their own exchange family. We launched MIAX PEARL Equities to disrupt this dynamic and provide much needed competition in the form of a highly deterministic trading system, top of class technology and lower fees.
Retail became a much more significant part of the market in 2020. What’s the impact been, and what will it be moving forward?
Increased participation from retail investors is indicative of their confidence in the market and that it operates fairly and efficiently. It is good that they view investing as good and investing their money in the stock market is the right thing to do. MIAX welcomed their participation by offering, from day 1, a retail attribution program on MIAX PEARL Equities and will continue to look for way to enhance the retail experience on our equity and options exchanges.
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