Planned Texas stock exchange may offer competition, but will it work?

Texas is, by some criteria at least, the eighth largest economy in the world, sandwiched between France and Brazil, with a gross domestic product of approximately $2.3 trillion.

The Lone Star State is also second only to California in hosting the headquarters of Fortune 500 companies, equaling New York as of 2024.

Now, some investors in the state want to see such economic heft and what is viewed as a business-friendly climate to be reflected in a new Texas-based stock exchange. The Dallas-based exchange, the TXSE, would be a fully electronic national securities exchange, and its backers plan to submit a registration for it with the Securities and Exchange Commission later in 2024.

Most of the people sourced for this article welcomed the competition the TXSE might offer the established exchanges such as the New York Stock Exchange and the Nasdaq.

“We are always in favor of competition because it makes everyone better,” said J.J. Kinahan, CEO of IG North America, the parent company of online brokerage firm tastytrade, where he is president. “If TXSE comes out with an interesting offering and can help improve our clients’ experience, we applaud that.”

Lower costs amid volatility

The recent market volatility could also help make the proposed exchange more attractive to investors because it could offer lower costs, including less onerous listing standards than established competitors.

“While these major exchanges may view TXSE as a new competitor, the current market volatility could make TXSE an appealing option for investors seeking stability and transparency,” said Robert Hodgins, CEO of fund manager Sandhill Investment Management.

Smaller companies may also benefit from the proposed exchange because of the expected lower costs involved.

Such smaller companies form the backbone of the U.S. economy and may need such a venue to help them grow, sources said. By offering such a venue, the new exchange could compete with the Toronto Stock Exchange and TSX Venture Exchange to provide listing and financing opportunities for smaller domestic and foreign companies.

“The value that small- and medium-sized business contribute to the general economy is significant, and many of today’s SMBs will be tomorrow’s market leaders,” said Michael Ashley Schulman, partner and chief investment officer for El Segundo, California-based multifamily office company Running Point Capital Advisors. “Therefore, the establishment of exchanges that promote SMB development is fundamental to the healthy development of capital markets.”

The listing standards and compliance issues of the established exchanges have also been criticized by some — for example, the so-called environmental, social, and governance standards for companies at the NYSE.

It should be noted there is no actual regulatory standard for such ESG criteria on the NYSE. Largely, implementing such governance comes from the companies themselves.

At the Nasdaq, there are requirements to disclose the makeup of companies’ boards in an effort to broaden diversity, but companies are also not barred from listing if they haven’t made sufficient progress in that field.

“TXSE will differentiate itself by offering reduced regulatory expenses and streamlined processes for listed companies through more lenient listing criteria compared to NYSE and Nasdaq,” Schulman said. “By presenting itself as a more flexibly regulated alternative, TXSE should attract businesses discontented with the higher compliance costs and demands from the other exchanges.”

Such moves by the established exchanges have even been termed “social engineering” and go against the main reason behind the existence of companies — namely, to make money, some say.

The establishment of the Texas exchange could blow such standards out of the water, said David Materazzi, CEO at trading platform Galileo FX.

“The Texas Stock Exchange isn’t just a new player,” he said. “It’s the battering ram that’s going to break down the outdated, monopolistic fortresses of the NYSE and Nasdaq.”

Anti-woke?

Materazzi went further.

“The TXSE is here to strip away the layers of self-serving bureaucracy that have turned our so-called free markets into playgrounds for the elite,” he said. “Texas, with its no-nonsense, business-first approach, is the perfect battleground for this revolution, where companies tired of kowtowing to ‘woke’ policies can find refuge.”

Such “woke” policies include the diverse board criteria at the Nasdaq and the ESG incentives at the NYSE, he added. These policies go against the essential bottom line, which is making a profit, he said.

“This isn’t about business. It’s about social engineering, with the SEC as the enforcer,” Materazzi said. “The TXSE is the lifeline for businesses ready to break free from the ‘woke’ mandates and get back to what really matters: driving the bottom line.”

While pro-TXSE players such as Materazzi are betting the proposed exchange will be a surefire success, others are more skeptical.

There isn’t a lot of historical evidence that such new exchanges can really make much of a difference to the status quo. For example, the Investors Exchange, founded in 2012, exited its listing business seven years later.

The Texas exchange is going to have to show some unique selling points to help encourage companies to list on it, and while its lower costs and supposed greater transparency could help such differentiation, it will be an uphill task, sources said.

“If the product is good, financial firms will use it, and if it doesn’t offer a differentiator, they will struggle,” said Kinahan at tastytrade. “That is the bottom line for each and every firm in the financial services industry.”

Investors have raised approximately $120 million for the proposed exchange, according to a June press release from the entity behind it, the TXSE Group.

Heavyweights BlackRock and Citadel Securities are known to be among the backers.

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“Corporate issuers and exchange-traded product sponsors are demanding more stability and predictability around listing standards and associated costs,” according to the release. “TXSE intends to expand access to US capital markets for all investors, while providing greater access and alignment for public companies and those seeking access to public capital.”

Both the NYSE and the Nasdaq declined to comment for this article.

Nick Thomas is a writer based in Denver, Colorado.