$M(a,a)=a$$M(a,a)=a\qquad$ (identity)
$M(a,b)=M(b,a)$$M(a,b)=M(b,a)\qquad$ (commutativity).
$M(ac,bc)=cM(a,b)\qquad$ (homogeneousness - see UPDATE)
$a < b \implies a\le M(a,b) \le b\qquad$ (order preservation - see UPDATE)
continuity.
In general (3) does not imply (4) as can be seen in this example for $S=\{a,b,c,d,e\}$:
This counteraxample is wrong. After fixing my gawk code I found that there (3) always implies (4) in a set of 5. Thanks to Eric Wofsey for noticing.
$$ \begin{array}{c|ccccc} M & a & b & c & d & e\\ \hline a & a & a & a & a & a\\ b & a & b & d & c & a\\ c & a & d & c & b & a\\ d & a & c & b & d & e\\ e & a & a & a & e & e\\ \end{array}$$
In general (3) does not imply (4) as can be seen in this example for $S=\{a,b,c,d,e\}$:
where $M(M(b,c),M(d,e)) \ne M(M(b,d),M(c,e))$.
$$ \begin{array}{c|ccccc} M & a & b & c & d & e\\ \hline a & a & a & a & a & a\\ b & a & b & d & c & a\\ c & a & d & c & b & a\\ d & a & c & b & d & e\\ e & a & a & a & e & e\\ \end{array}$$
where $M(M(b,c),M(d,e)) \ne M(M(b,d),M(c,e))$.
UPDATE. If $M(x,y):=f^{-1}\big(\frac{f(x)+f(y)}{2}\big)$ then noticeIt turns out that we can translate and rescale $f$ and the equality still holds. Now we try to build $f$. To start, we are allowed to assume $f(1/2)=1/2$ and $f(2)=2$. The graph of $f$ can then be constructed in the following way, as per Eric Wofsey's comment below: for each 2 consecutive known points $(x_1, y_1=f(x_1))$ and $(x_2, y_2=f(x_2))$ build an intermediate point $\big(M_f(x_1,x_2), \frac{y_1+y_2}{2}\big)$. By density of the dyadics in $\mathbb{R}$ and propertiesneither (56), nor (7) and (8) of $M$, this procedure defines $f$ in the interval $I=[1/2,2]$. Associativity (hopefully in its weak form) should then be used to prove that the same procedure applied to 2 overlapping subintervals of $I$ yields identical results on the intersection. Finally, if that workedare needed anywhere, conclude the proof by defining a second $f$ on $[1/4,4]$. This second $f$ can be translated and rescaled to satisfy $f(1/2)=1/2, f(2)=2$ and must then matchat least for the original $f$questions explored in $[1/2,2]$. Repeating this step will extend $f$ to $\mathbb{R}^+$thread.
This is superseded by Eric Wofsey's answer
UPDATE. If $M(x,y):=f^{-1}\big(\frac{f(x)+f(y)}{2}\big)$ then notice that we can translate and rescale $f$ and the equality still holds. Now we try to build $f$. To start, we are allowed to assume $f(1/2)=1/2$ and $f(2)=2$. The graph of $f$ can then be constructed in the following way, as per Eric Wofsey's comment below: for each 2 consecutive known points $(x_1, y_1=f(x_1))$ and $(x_2, y_2=f(x_2))$ build an intermediate point $\big(M_f(x_1,x_2), \frac{y_1+y_2}{2}\big)$. By density of the dyadics in $\mathbb{R}$ and properties (5), (7) and (8) of $M$, this procedure defines $f$ in the interval $I=[1/2,2]$. Associativity (hopefully in its weak form) should then be used to prove that the same procedure applied to 2 overlapping subintervals of $I$ yields identical results on the intersection. Finally, if that worked, conclude the proof by defining a second $f$ on $[1/4,4]$. This second $f$ can be translated and rescaled to satisfy $f(1/2)=1/2, f(2)=2$ and must then match the original $f$ in $[1/2,2]$. Repeating this step will extend $f$ to $\mathbb{R}^+$.