New York politicians, watch out. A new stock exchange based in Texas could soon challenge Nasdaq and the New York Stock Exchange—and the Empire State’s status as America’s financial capital.
The TXSE Group on Wednesday announced it has raised $120 million for a new electronic trading platform dubbed the Texas Stock Exchange (TXSE). Its investors, including BlackRock and Citadel Securities, “represent a significant portion of the equity volume on U.S. lit exchanges and together comprise a majority of all U.S. listed retail volume,” the group said. (A lit exchange is an open and public one, in contrast to a so-called dark pool of capital.)
That’s a strong vote of confidence in the Texas exchange—and of frustration with the New York duopoly. TXSE CEO James Lee explained that the new exchange’s goal is to “create more competition around quote activity, liquidity and transparency.”
For years public companies and brokers have complained about high fees at Nasdaq and the NYSE, but they’ve paid up for access to America’s deep capital markets. Even so, the duopoly’s fees have helped drive some 40% of trading volume off the two exchanges, resulting in less liquidity and worse pricing on the exchanges.
Securities and Exchange Commission Chairman Gary Gensler’s solution? Force brokers like Robinhood to funnel small retail orders into public auctions operated by the exchanges, where market-makers like Citadel would compete for the best price with institutional investors. His proposed regulation, like other SEC rules, would strengthen the duopoly.
TXSE investors have a better solution: Reduce fees and create other incentives that make exchange-based trading more attractive, improving liquidity and prices for all investors. The Texas Stock Exchange also seeks to offer public companies and exchange-traded product sponsors more “predictability around listing standards and associated costs.”
Ah, listing standards. Nasdaq has mandated boardroom diversity quotas for companies that list shares on its exchange. Starting this year, they must have a woman, “underrepresented minority” or “LGBTQ+” member—or publicly explain why they don’t. Boards of bigger companies must include at least two “diverse” directors by the end of next year.
Nasdaq’s goal is to shame companies into adopting the political left’s values. The duopoly enjoy nearly carte blanche authority to regulate corporate governance of listing companies, subject to the approval of the SEC. Nasdaq’s diversity diktat has raised concerns about what next could be required. Net-zero climate commitments?
The Texas exchange is also a form of political arbitrage. New York Democrats have long taken Wall Street for granted, imposing punishing taxes and regulation. Progressives in Albany recently threatened to revive a long-dormant stock transfer tax to pay for their migrant and mass transit messes. Go ahead, make the Texas exchange’s day.
New York, the home of Alexander Hamilton and J.P. Morgan, has been losing ground to Sun Belt states for some time. New York’s finance jobs have grown 1.6% since the start of the pandemic compared to 12.2% in Florida and 12.4% in Texas. Goldman Sachs, Wells Fargo and Bank of America have expanded in Dallas.
TXSE says Texas and the southeast “lead the nation in economic expansion and population growth,” adding that the Lone Star State is “home to more Fortune 500 companies than any other state and more than 5,200 private equity-sponsored companies, many of which are preparing to access the public markets.”
These and the more than 1,500 publicly traded companies in the Southeast might prefer listing shares closer to home. Workers on Wall Street might also prefer relocating to a state with lower taxes, an affordable cost of living, and safer, cleaner streets. The top state-and-city income tax rate in New York is 14.8%. Texas has no income tax.
Because Wall Street accounts for a large share of New York tax revenue, the Texas Stock Exchange could pose as much a threat to the state’s tax-and-spend politicians as to the NYSE and Nasdaq. There’s no guarantee the Texas exchange will succeed, but it’s notable that markets are seeking to correct a lack of competition. Mr. Gensler, take note.
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