On June 5th Houston-based finance entrepreneur James Lee announced $120 million in institutional funding to build a new Texas Stock Exchange (TXSE), to compete with the dominant stock trading duopoly of Nasdaq and the New York Stock Exchange (NYSE). The TXSE will seek SEC approval in 2024 and plans to open for new listings for IPOs, ETFs, and trading in 2025.
Working in favor of the credibility of the TXSE: Citadel and Blackrock are the two biggest reported financial sponsors of this startup. These are both serious financial institutions that would have a deep interest in shaping and owning the infrastructural guts of a new trading platform.
Perhaps not surprisingly, the Texas Association of Business expressed a Lone Star-patriotic thumbs up to this news, noting “Texas is quickly becoming an epicenter for the financial services industry.”
The Wall Street Journal chimed in with hopes that competition for the New York duopoly will lower fees, and curb aggressive regulatory demands on listed companies.
LinkedIn commentary on the announcement expressed kind of what you would expect from fans of the Lone Star State, “Love it. The listings and orders are bigger in Texas!” and “Very exciting news for Texas.”
I mean, ok, sure, competition and innovation is good. But I strongly doubt that this newly announced TXSE is something anyone outside of high-frequency trading firms will be aware of five years from now. It’s astonishingly hard to disrupt successful stock markets.
Through a spokesperson, Lee declined to comment or be interviewed for this column.
I point out Citadel and Blackrock’s sponsorship to acknowledge that they will certainly have the expertise, financial heft and even trading volume to bring to the platform if the TXSE gains momentum in listing companies and facilitating trading.
Most new stock and ETF trading platforms are not transformative. Most new exchanges are merely “meh.” Many regional exchanges are worse than meh.
Convincing issuing companies, or ETF managers, to choose the new TXSE over the tried-and-true NYSE or Nasdaq will be a real challenge. A number of electronic exchanges have popped up over the past decade, even as legacy regional exchanges have disappeared. Unless you are deeply enmeshed in stock markets professionally, you’ve probably never heard of these new electronic exchanges.
Michael Lewis wrote his book “Flash Boys” about the exciting creation of a better electronic stock exchange launched in response to the dastardly takeover of electronic trading by high-frequency trading firms.
Investors Exchange (IEX) – that disruptive startup featured in the Lews book – launched in 2016 and currently reports having 1.7 percent of stock trading market share. It offered to drastically cut prices for companies that wanted to list new shares of their IPOs on IEX. After listing a single company in 2018, IEX announced in 2019 that it would no longer be in that business.
Another exchange called the Long Term Stock Exchange (LTSE) began in 2017 with the intention of breaking up the stock listing duopoly. It appears to have listed exactly two companies since it began.
The Members Exchange (MEMX) launched in 2019 and began trading in 2020. It also had initial backing from Citadel, Blackrock and at least 16 other major financial institutional players.
Big banks and financial institutions frequently seed trading platform startups, in the hopes they can shape the future of markets.
John Hyland is a 19 yr veteran of the ETF industry, created the first oil (USO) and natural gas (UNG) ETFs and has been involved in launching scores of ETFs for multiple different issuers. Hyland speculates that the reason firms like Citadel want to back new electronic exchanges is that it gives them access and leverage into a huge input into their business, which is the cost of acquiring trading data.
One problem he sees is getting companies to list with anyone other than the dominant issuers.
“If you’ve been around for a while as a big company in Texas or the Southeast, with your primary listing in NY, are you going to change away from the NYSE? If you are a tech company based in Texas, being listed on Nasdaq is part of your brand. And finally, if you are a startup, is there something about being on a Texas exchange that is advantageous?”
Hyland offers a quirky but maybe psychologically powerful reason for companies and ETF issuers to choose New York. In his experience “ETF listers are relatively indifferent to their listing venue. People generally do the New York listing so they can do the bell-ringing at 9:30am on the day they launch.”
Another problem that makes Hyland skeptical around ETF listings in particular is that the Texas brand really isn’t an advantage in that space. The largest 28 ETF issuers (like Blackrock, Vanguard, and State Street) control 97 percent of the market with $8.8 trillion in assets. None are based in either Texas or the Southeast states. Texas holds no special appeal to them.
Plausibly, Hyland says, TXSE can enter a crowded marketplace of other electronic exchanges. “As a startup electronic exchange. It has good backing, and credible leadership. They have a shot at it. It will depend on micro-market structure, and the fees they charge.”
Essentially, asks Hyland “Is it a cheaper mousetrap” for market makers and traders on the platform? The real determinant of uptake among trading firms will be how market makers perceive the costs of doing business on this new exchange versus others.
Computer Networks Not Blue Vest Cosplayers
Another thing to think about a Dallas-based stock exchange is that the location of a stock exchange is actually cyberspace. Which is to say, you’re not going to see guys in those blue “NYSE” vests gesticulating and shouting “buy buy buy!” or covered in the confetti of trading tickets scattered on the floor of a downtown Dallas office. You see those photographs every time the Dow hits a new high or drops 2 percent in a day. Those blue vest guys at the New York Stock Exchange photographed by the news at this point in the evolution of computerized trading are nearly cosplayers, not much different from the historical re-enactment dudes at the Alamo, on Battle of San Jacinto day. Stock exchanges are computer networks these days, not open-outcry trading pits.
Stock Exchanges Outside of New York
Also, the recent history of regional exchanges like TXSE isn’t great.
The Boston and Philadelphia stock exchanges were acquired by Nasdaq in 2007 and the Chicago stock exchange was acquired by the NYSE in 2019. They were legacy exchanges that outlived their usefulness.
A “Canadian stock exchange” listed company, to a Wall Street veteran, is basically a red flag shorthand for a “penny stock company that’s probably up to something dodgy.”
A notable exception: The formerly 100 percent Saudi Arabian government-owned Aramco for example is listed itself in 2019 on the Saudi Exchange in the world’s largest IPO, which makes sense as the national champion oil company of Saudi Arabia. It issued additional shares in June 2024. That kind of small regional stock exchange choice is unusual but understandable in limited cases like Aramco.
Companies in the Southeastern United States – the stated target market for the TXSE – probably do not have that same type of incentive to list with a regionally-located exchange, so it’s hard to imagine a company or ETF sponsor choosing the TXSE. Realistically, I’m sorry fellow-Texans, the TXSE is probably a nothing-burger.
A version of this post ran in the San Antonio Express News and Houston Chronicle.
Please see related posts:
Book Review: Flash Boys by Michael Lewis
Book Review: Flash Boys – Not So Fast by Pete Kovac
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