The Catalyst: Recent Market Incidents#

The announcement came out about a week or so after something called T+1 was put in place. It seems like there have been three specific incidents since then that might have pushed this forward.

The Investment and the Goal#

Black Rock and Citadel Securities, along with a bunch of other investors, have already put up $120 million to get this new exchange going. Their stated goal is to make a bid to become a new National Stock Exchange, but based in Texas.

How Stock Exchanges Work#

Think of the NYSE and NASDAQ like marketplaces. They are private businesses. Their job is to provide a safe and secure place where you can trade public company stocks and other financial stuff.

Here’s how they make their money:

• They charge companies that want to have their stock listed on the exchange a one-time fee when they first go public (an IPO fee).
• They also charge companies an ongoing annual fee just to stay listed there.

It’s About Approval, Not Location Magic#

Honestly, besides a mountain of regulatory paperwork, there isn’t really anything magical or super special about these exchange companies themselves. As long as a business gets the okay from the Securities and Exchange Commission (SEC), there’s nothing stopping them from starting their own Stock Exchange pretty much anywhere they want.

There are actually about a dozen different stock markets already operating in the US. But none of them have ever even come close to the size and influence of the NYSE and NASDAQ.

Why the Big Two Dominate#

This happens because of a simple cycle:

• Companies want to list their shares on markets where the most money and the most investors are.
• Investors want to put their money into markets where the most companies are listed.

This cycle makes the market naturally concentrate around the biggest players.

New York’s Advantage: History, Not Convenience#

The fact that the two biggest exchanges happen to be in New York City is really more about history (it’s been the financial center for a long time) than because there are any practical benefits to being in a state that isn’t exactly known for being super business-friendly anymore.

The Regulatory Angle#

The New York Times, when covering this story, pointed out that many companies have been avoiding listing on the New York exchanges. They feel there’s what the NYT calls “regulatory overreach” concerning rules, specifically mentioning things like:

• Board diversity requirements.
• Specific governance rules.

The Texas-based exchange plans to have far fewer restrictions on companies that list there. The announcement was so clear about this difference that some investors have already nicknamed it “Texas’s anti-woke exchange.”

Hindering Companies Going Public#

You can call it what you want, but the combination of federal laws, New York state laws, and the existing exchange rules has reportedly made it harder for many businesses to sell their shares publicly.

• According to the Economist magazine, the number of new companies going public for the first time is currently on its longest “cold streak” since the 1980s.

The Alternative: Private Money#

With the continued growth of late-stage venture capital and private equity, companies often have other options. Unless a company is absolutely massive, the hoops you have to jump through (the regulatory burdens) and the cost of listing on a place like the NYSE just aren’t seen as worth it. They can often:

• Sell shares privately on secondary markets.
• Sell the entire company outright to a big private equity firm.

The Funding Power#

As we mentioned, Black Rock and Citadel Securities are leading the charge. Along with other investors, they raised roughly $120 million to get this exchange registered and started, according to the new company itself.

• This makes the Texas Stock Exchange the most well-funded registration with the SEC ever. These companies are serious.

More Than Just Cash#

Black Rock and Citadel aren’t just throwing money at this. They are also some of the biggest market makers in the world.

• They will provide liquidity to this new market.

Why Liquidity Matters#

Having lower fees and fewer annoying rules than the NYSE is great. But if there aren’t enough investors using the market, no companies will want to list there. Why? Because they won’t be able to get the best price when they sell their shares.

This is where the big backers come in:

• Just Black Rock alone manages $9 trillion in assets. Even if they only direct a tiny fraction of their trading operations through this new exchange, that would be an immense amount of buying power. It would be more than enough to make the market a viable option for most companies thinking about going public.

Citadel: The Market Maker Explained#

Citadel Securities makes its money by trading a lot, really actively, in markets.

• They were a huge part of the story during the initial GameStop trading frenzy.
• The GameStop community accused Citadel and its billionaire boss, Ken Griffin, of being behind the decision by Robinhood (the trading app) to halt the buying of GameStop shares. The idea was that they did this to protect their own short positions.
• A court has since looked into this and found no evidence of collusion. But many people still believe Citadel had both the reason (motive) and the ability (means) to do it.

Citadel’s Incentive#

Anyway, as a market maker, Citadel has a direct reason to want more markets to exist and do well.

• If Citadel is there from day one providing liquidity on the Texas Stock Exchange, both companies looking to list and investors looking to trade can feel confident that it will be a good place to do business.
• For Citadel, the new exchange is another place they can operate to make money. And the more companies that go public and list there, the more assets they’ll have available to trade.

Pressure on the Big Two#

A major new stock exchange in Texas could also put pressure on the established players, the NASDAQ and the New York Stock Exchange. They might have to lower their listing fees and other service prices to stay competitive.

As Sean Tuffy put it in an interview with DL News about the new market, two of the biggest players in the US financial system are trying to shake things up with the existing exchanges. Why? Because it could actually help their own existing businesses. It’s really that simple.

Currently, these two major exchanges have a lot of power. They can basically charge whatever they want because they are the only major markets not just in America, but arguably anywhere in the world. Data from the World Federation of Exchanges, put together by Visual Capitalist, shows that the market value of companies listed on the NYSE and NASDAQ combined is almost as much as every other exchange on the planet combined.

Potential Benefits#

If the TXSE is successful, the benefits for Texas, and Dallas specifically, could be huge. We’re talking about a large influx of high-paying jobs associated with the companies listing and trading on the markets. That sounds great, right?

Potential Downsides#

But here’s the flip side. New high-paying jobs might not do much good for regular Texans if those jobs primarily go to people moving in from more expensive places (what some might call a “Fly-in Finance bro” from New York).

• According to the Federal Reserve Bank of Dallas, home prices in Texas are already among the fastest-growing in the country. A big reason is people moving in from pricier coastal cities.

If this new stock exchange does well, it’s likely only going to speed up this trend. Native Texans could find themselves increasingly priced out of their own homes to make room for industries that they don’t necessarily benefit from directly.

Inevitably, the competitive nature of the world’s biggest hedge fund is probably going to push this through, regardless of the local impact.