June 16, 2024

Everything is bigger in Texas, even their ambitions.

The TXSE Group announced last week that it’s planning to launch a Texas Stock Exchange, with $120 million in capital backing from more than two dozen investors, including asset management and liquidity giants BlackRock and Citadel Securities. The group plans to file for registration with the Securities and Exchange Commission later this year, begin facilitating trades in 2025, and holding its first listing the following year.

James Lee, TXSE Group’s chief executive, said the exchange seizes on “Texas’s booming economy and the strong economic and population growth among states in the southeast quadrant of the U.S.” Texas, with its balance-sheet friendly tax rules and ample space for companies to expand, has added more than 300 corporate headquarters since 2015, including Charles Schwab’s in 2021. The Lone Star state has a $2.4 trillion economy whose growth has outpaced that of the U.S. economy for the last six consecutive quarters.

The goal of the exchange, according to Lee, is to create more competition around quote activity, liquidity and transparency, positioning itself as a rival to the New York Stock Exchange (NYSE) and the Nasdaq.

And businesses in the state are buzzing about the prospect of having an exchange based in Dallas, seeing it as both a recognition of the city’s — and the state’s — growing financial services landscape and a boost to its credibility as a burgeoning business center.

“Having the exchange here will add a level of prominence to the capital market segment in view and to the business environment overall,” said Adam Gersting, head of consulting firm West Monroe’s Dallas office. “That may draw more businesses here and may provide avenues for greater growth through public investment, for example, in businesses that are here.”

David Choate, chief operating officer at Capital Institutional Services (CAPIS), an institutional brokerage based in Dallas, shared in the sentiment. The presence of a national stock exchange headquartered in the state “just continues to add to our our story as the financial capital of the Southwest,” he said.

The Texas Association of Business (TAB) threw its support behind TXSE Group’s efforts, lauding the development as a testament to the state’s pro-business policies that have driven an influx of corporations in recent years — making the state an “ideal fit for the nation’s newest stock exchange to compete with the current duopoly of NYSE and Nasdaq,” said TAB CEO Glenn Hamer.

“We are encouraged but not surprised to see top financial services leaders recognize what we have known for years: Texas is quickly becoming an epicenter for the financial services industry,” Hamer said in a statement.

The market for markets

The single biggest challenge any new exchange faces once it’s up and running is not just attracting listings, but attracting trade volume.

Exchange or trading volume is the total number of securities, including stocks, bonds, options, and commodities, traded on an exchange within a specific timeframe. For scale, as of Friday the NYSE had a total volume of 3.7 billion, and the Nasdaq had 4.8 billion.

Outside of those two exchanges, the largest in the U.S., smaller exchanges have a maybe 2-3% market share, according to Halverson. The Silicon Valley-based Long-Term Stock Exchange, which received SEC approval in 2019, has just two listings.

IEX (which received a boost from Michael Lewis’ 2014 book, Flash Boys) and Members Exchange, or MEMX, are among the most competitive new exchanges — and even then, their volume share falls within that 2-3% range. But they’ve been able to survive thanks to key differentiators, like new and faster trading technology.

“The real question is, will [the TXSE] be able to get market share, either in the market for listings or market for order flow? They definitely have an uphill battle to fight,” said Jim Angel, an associate professor at Georgetown’s McDonough School of Business. The TXSE will have to attract listings away from the NYSE and Nasdaq.

“There have been plenty of people who’ve tried to get listings away from New York and Nasdaq — Ciboe, IEX, the Long-Term Stock Exchange and others,” Angel said. “It’s a long string of failures in that category, so they got their work cut out for them.”

There are currently 16 U.S.-based exchanges, all of which operate electronically. In the last two decades, many of the regional stock exchanges outside of New York were either shut down or acquired by bigger players. The Nasdaq acquired the Philadelphia and Boston exchanges in 2008, while the NYSE scooped up the Pacific Exchange. In 2018, the NYSE bought the Chicago Exchange.

The U.S. national market system connects all of the SEC-approved exchanges and essentially requires brokers to carry out a trade on whichever exchange offers the best price, meaning that all traders are automatically tapped into every exchange.

This is both a blessing and a curse for an upstart exchange like the TXSE, according to Angel. The TXSE has touted that it will offer more lax regulatory standards than its larger competitors, but Angel isn’t convinced. Given the SEC’s stringent requirements of all market participants, from a regulatory standpoint, he said, it remains an even playing field.

The communal nature of the U.S. exchange market will also pose even fiercer competition for volume, he said.

“Unless they’ve come up with some extra special wrinkle in technology that they’re not revealing yet, they’re going to have a pretty heavy competitive battle to fight, because once a stock is listed on their exchange, it can be traded everywhere else,” Angel said.

But there’s no harm in trying, according to Angel, who sees the entrant of a new player as a plus when it comes to the development of new technologies and standards within the industry.

“I love to see competition. I love to see innovation,” Angel said. “They got their work cut out for them. They’re entering a very competitive space, going up against a number of very smart people, and it will be a tough battle.”

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