Texan stock exchange start-up draws sceptical industry response

A new Texas stock exchange’s bid to break New York’s dominance of US equity markets has been met with scepticism from rivals, traders and investor advocates in spite of backing from BlackRock and Citadel Securities.

TXSE, the Dallas-based group behind the planned Texas Stock Exchange, said on Wednesday it would apply for approval from the US Securities and Exchange Commission to become a new hub for listed companies and the $8.6tn exchange traded funds industry.

It has raised $120mn from investors including the two investment heavyweights to meet the needs of companies and other issuers that were “demanding more stability and predictability around listing standards and associated costs”. 

James Lee, its founder and chief executive, added that TXSE would ultimately “create more competition around quote activity, liquidity and transparency, resulting in more consistent and reliable markets” to the benefit of investors, issuers and liquidity providers.

The exchange talked up the attractions of Texas, noting that the Lone Star State has more Fortune 500 companies than any other US state. Its comments on listings were interpreted by many as a plan to offer standards less onerous than those required by the New York Stock Exchange or its rival Nasdaq. But market participants questioned TXSE’s ability to make headway in a crowded market.

There are already 24 regulated US securities exchanges — a group that includes options and stock markets — but while all offer trading, the two New York-based bourses dominate the business of listing new companies and maintaining standards for those they already host. A host of others, including IEX, have tried to break the duopoly in the last decade, but to little success.

“We’ve tried it. We’ve done well on the [exchange traded fund] side, but on the corporate listing side, it’s hard,” said Fred Tomczyk, chief executive of Cboe Global Markets, the US’s third-largest stock market. “If you’re going to try to do it on a lighter regulatory touch, I don’t know how you do it because we do have a regulator.”

“Does the world need another competitive listings venue for companies? My answer is probably not, but I wish them luck,” Doug Cifu, CEO and co-founder of Nasdaq-listed market maker Virtu, told Piper Sandler’s annual exchanges conference on Wednesday.

Cifu said he had turned down the chance to invest in TXSE because he was not convinced by its listings push.

“I think Nasdaq and [the] New York [Stock Exchange] do a wonderful job. They’re highly competitive,” he added.

Nasdaq and the NYSE, part of Intercontinental Exchange, declined to comment. One senior New York-based exchange official pointed to the history of failed attempts to break the NYSE-Nasdaq stranglehold, adding: “Most of that regulation isn’t coming from the exchanges; it’s the regulator.”

The San Francisco-based Long Term Stock Exchange launched in 2020 with the aim of attracting buy-and-hold investors and has so far listed two companies. It did not respond to a request for comment.

IEX, which launched trading in 2013 and a listings business in 2017, only attracted a single listing by the time it closed the unit in 2019 to focus on trading. That company, Interactive Brokers, returned to Nasdaq.

“Nasdaq and NYSE ask a lot that isn’t necessarily the best for companies. I understand their intentions are good but it’s a lot to force people to do,” Thomas Peterffy, Interactive Brokers’ billionaire founder and chair, told the Financial Times on Wednesday.

A 2021 Nasdaq rule requiring board diversity disclosures by companies, and an explanation if their board is not diverse, has come under particular attack. In February, the US Court of Appeals for the Fifth Circuit agreed to rehear a case brought by conservative groups seeking to overturn the rule.

Investor advocates, however, expressed wariness about a new exchange offering more company-friendly listing standards.

“Great companies from around the world list on NYSE and Nasdaq because they know it will help generate investor interest,” said Tyler Gellasch, president of the Healthy Markets Association, who noted that companies had complained about onerous listing standards “for decades”.

“It’s easy to see why companies want lower and friendlier listing standards,” he added, “but why would investors?”

Dennis Kelleher, president of financial reform advocacy group Better Markets, said: “Chief executives already have too many friends tilting the playing field to their favour; investors need more friends if the US is to continue to have the deepest, most liquid markets in the world.”

TXSE declined to comment beyond its press release. Citadel also declined to comment further, while a BlackRock spokesperson said it was “proud to be a founding investor in the Texas Stock Exchange to increase liquidity and improve market efficiency for BlackRock’s clients and other investors in the US capital markets”.

Both Citadel Securities and BlackRock have a history of investing in start-up trading venues, including the 2020 launch of Members Exchange, which trades stocks.