MEMX Goes with Nasdaq for Market Surveillance

While the Members Exchange (MEMX) and Nasdaq will look to potentially start competing this summer, that doesn’t mean that they can’t also partner.

MEMX is in the process of integrating the Nasdaq Market Surveillance platform—which was formerly known as Nasdaq Smarts. Tom Fay, the chief operating officer of MEMX, who joined the startup from Nasdaq last June, tells WatersTechnology that the two companies are currently working on establishing connectivity and that they’re waiting for the delivery of the final hardware, which MEMX will host.

“We’ll be hosting this ourselves,” he says. “So that’s another facet of the competition structure: because of that competition, we’re not having Nasdaq host it—MEMX is taking on that responsibility. So that’s also in our timeline, for them to train us up on how to do that, so operations folks are fluent in that.”

MEMX aims to have the popular surveillance platform fully integrated by the time that the exchange launches, which is scheduled for July 24. Fay says that despite the disruption caused by the coronavirus outbreak and subsequent enactment of business continuity plans across the industry, he does not anticipate they will have to hold back the launch date.

“We’ve had that discussion on the Nasdaq side; they are staffed and able to function and support us. They are kind of remote anyway—they have a team in Australia and a team in Toronto. So we’re working effectively with those folks over that geographic distance. They are fully staffed, so there’s no concern there with regard to what’s going on,” he says.

“We feel pretty comfortable that for the plan we have in place, we will be able to execute against that successfully.”

Eye Toward the Cloud, Machine Learning

MEMX, the US-based equities market operator that was founded at the start of 2019 by a consortium of financial institutions, will use Nasdaq Market Surveillance for anomaly and market abuse detection, analysis, visualization, and for certain reporting needs. But Fay says that a big reason the exchange selected Nasdaq was because of its embrace of cloud technology and its use of machine learning for surveillance.

“There were a few things that were top of mind when we started looking, and one of the main things was the fact that Nasdaq’s solution was built, conceived, and matured through the lens of exchanges,” Fay says. “There are many other products out there that were done so through the lens of a broker-dealer, but we had some unique needs being an exchange and the fact that Nasdaq uses this solution for its own exchanges, as well as markets around the world, it gave us a good feeling around the stability and fidelity of the solution.”

Additionally, as Fay and MEMX CEO Jonathan Kellner noted on the Waters Wavelength Podcast this past January, MEMX set out looking to make the exchange mobile because as they grow, they will need to move offices a couple of times.

“Nasdaq is moving this into the cloud and is also looking to augment the solution with things like machine learning. We can take advantage of that as they roll it out, and it future-proofs us to a certain extent,” Fay says. “Longer term, we’re building this so that we could lift it and put it into the cloud, or migrate it to the cloud at some point, and Nasdaq is aware of that, as well. So we’ll start taking that up as a Day 2 item, and once we get on the cloud, we can scale a whole lot easier there. We can also start taking advantage of some of the stuff that Nasdaq is doing with respect to bringing machine-learning algorithms to bear on that data, as well.”

Last November, Nasdaq announced the launch of its new AI-powered market surveillance tools for finding patterns of abusive behavior. Underpinning the new technology are subsets of machine learning (ML): deep learning, for analyzing extremely complex relationships and understanding hidden insights within massive data sets; transfer learning, which involves training new models based on older ones to allow scale and save time; and human-in-the-loop learning, which requires human interaction to weed out noise from signal, especially where it’s not cut and dry.

Friend and Foe

As to the fact that these two exchanges will be competing for order flow once MEMX officially launches—and MEMX’s original backers include Bank of America, Charles Schwab, Citadel Securities, E*Trade, Fidelity Investments, Morgan Stanley, UBS, TD Ameritrade, and Virtu Financial—Nasdaq was largely positive in its comment letter to the US Securities and Exchange Commission.

John Zecca, Nasdaq’s chief legal and regulatory officer, did note, though, that “Nasdaq hopes that MEMX, as it strives to save money for its member-owners, will not do so by forgoing the investments in technology, the allocation of resources, and the imposition of safeguards, that are needed to regulate and surveil its market rigorously.”

Fay notes that Nasdaq has firewalls built in between their markets technology and surveillance teams, but also that in addition to MEMX hosting the platform, it will also use an API to ensure an extra layer of security.

“They exposed to us a standard API to capture all of this information [that MEMX will feed into Nasdaq Market Surveillance], and we’re going to be using that rather than exposing any internal MEMX transactions or portfolio [information],” he says. “We’re giving them exactly what they need in the format that is the most easily consumable by them, and not exposing anything that might fall into the realm of information that would be proprietary to MEMX.”