MEMX CEO Shakes Up Stock Markets With Help From Trading Giants

When he was handed a debit card with $70 million in the bank, Jonathan Kellner realized his startup was different. Members Exchange, known as MEMX, started as a protest by banks and market makers against the rising data and connectivity fees charged by U.S. stock exchanges. In the two years since Kellner, 52, signed on as chief executive officer, MEMX Holdings LLC has locked in more than $135 million in funding from 18 stock trading and investing heavyweights, including BlackRock, Citadel Securities, and Morgan Stanley. Since it went fully live in October, MEMX has clinched 1% of the U.S. market share. Kellner, previously the CEO of Nomura Holdings Inc.’s Instinet, spoke with Bloomberg Markets in February about launching during a pandemic and the surge in meme stocks.
(Bloomberg Terminal customers can join a Top Live Q&A with Kellner at 10 a.m. New York time.)

MEMX CEO Shakes Up Stock Markets With Help From Trading Giants

Why did you join?

When I started talking to MEMX about coming on board, my biggest concern was that it was all about [trying to reduce] market data fees and connectivity fees. And I asked, “If all of a sudden Nasdaq, the New York Stock Exchange, and Cboe changed their fees, are you done with MEMX?” [But it became] clear to me that it was much bigger. The investors were incredibly frustrated with the incumbent exchanges and felt it was really important to bring competition, technological innovation, and more efficiency to the ­exchange space and really to be a voice for them around the market structure debate.

Your 18 investors include many fierce rivals in the markets. How do you balance their competing interests?

Fortunately, one thing that seems to be consistent is that all of our ­investors ultimately want a level playing field. We focus on what is fair. And then they all go off and compete based on what is unique about what they bring to the table.

U.S. stock exchanges handle more than $360 billion in trading daily. What’s your edge?

One area where we are really ­differentiated is the fact that we do our whole exchange on one [server] rack. We are able to put a lot of computing, storage, and networking in a small amount of space. A much smaller footprint is much more cost-effective for us. Second, you have fewer hops across the ­exchange, so you have fewer points of failure and a more stable ­exchange. And you also have a much shorter distance from when the ­customer gets to our exchange to when they get to the matched order.

Our operations team can monitor the exchange from the cloud. That’s been a huge benefit. We are able to run our whole firm in a distributed manner because we can get data from the cloud. Part of our mission is to bring some of this ­innovation to the industry. We would be ­encouraged by ­other ­exchanges leveraging the same technology that we’re using.

We ended up having to have a custom-built liquid-cooling setup in NY4 [the Equinix data center in Secaucus, N.J.]. The servers generate an incredible amount of heat, and it’s just making sure that you’re dissipating that heat away so the servers stay cool.

How did MEMX adapt to the pandemic?

Because we were building from scratch, we built everything in the cloud. So from the get-go, any of us could work from anywhere. We didn’t design this because we knew a pandemic was coming, of course, but because we wanted to make sure that we had the flexibility to work from anywhere. We hired experienced people. We really focused on building a culture that was adaptable.

Chief Operating Officer Thomas Fay and Chief Technology Officer Dominick Paniscotti said severe weather was one of the biggest challenges as you were preparing for a user acceptance test (UAT), a milestone that usually requires all hands on deck. What happened?

During a storm in August, right ­before one of our UATs, there were two days where people had power outages all over the tri-state area. We had people working off of their phones. We’ve joked about not ­building an exchange out of a garage, but we did have some of our switches shipped to Nick’s [Ciarleglio, head of member experience] house, and he configured them in his garage before he shipped them out. If we could get people generators, we did. Or we got them backup batteries. So there were a lot of big, heavy boxes going in and out of different peoples’ homes.

How do you and Chief People Officer Lindsay Gilliam keep your 56 employees engaged and productive during these stressful times?

We evolved. There were times when we had to have daily standups with certain groups, or we were doing them too often. We’ve realized that we can run very effectively in this ­remote environment, and we’ve been able to maintain a strong culture in a distributed environment. We do still have Scotch o’clocks on Zoom, but they’re not the same.

You built a new office in Jersey City that’s virtually unused. What does its future look like when the pandemic abates?

We learn more and more every day. I do think in the long run we will end up with some sort of hybrid model where we come together periodically. The frequency of that is still unknown. But I do think there’s a value to coming together. One of the huge benefits we’ve seen is people don’t have to commute. So people can use their time much more efficiently.

How did you fare during January’s rally in meme stocks?

That volatility increased the amount of volume on our exchange, and the important part for us was that we were able to deliver technology that was stable and consistent for clients. Overall, the idea that retail is more involved in markets is a positive. It’s helped the overall market. We as an industry need to continue to work on the issues. We want to make sure that price discovery is robust and that each segment of the market can continue to interact with as much order flow as possible. At the same time, we have to make sure that we don’t harm the new entrants.

What’s your biggest challenge?

We’re incredibly happy with where we are. The biggest challenge is that there are a lot of other things going on in people’s lives. We did this amidst a pandemic that is ­constantly changing—people [market participants] are adapting their work. At the same time, they have to adapt to what we’re doing, monitor our performance, and figure out how they’re going to add us. They also have to deal with ­volatility because of an election or different ­issues around retail volume increasing. Our biggest challenge is distraction, and that’s probably amplified in the environment that we have, where we’re still in a pandemic and we’re going through a new political cycle here in the U.S.

One issue unites the exchanges and many of the big trading firms: opposition to proposed financial transaction taxes (FTT) in New Jersey and New York. Have other states reached out in an effort to lure your business?

We’ve been involved with the other exchanges, as well as our clients, to discuss the impact of FTT and make sure that the regulators and legislators are aware of the negative impact an FTT would have, whether on the state level or on the federal level. We’ve been involved in conversations with other states in terms of what the opportunities are.

Nguyen reports on U.S. financial companies for Bloomberg News in New York.

©2021 Bloomberg L.P.

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