Can Texas hold its own against New York as a financial center? Backers of the impending Texas Stock Exchange think so, and they’re betting big. BlackRock, Citadel Securities, and individual investors have thus far contributed $120 million to get the planned electronic exchange, with an accompanying physical location in Dallas, up and running.
The New York Stock Exchange and Nasdaq have been the dominant exchanges for decades. Newcomers such as TXSE have their work cut out for them. The benefits of joining or remaining with the current big players are significant. But compliance costs are rising, and entrepreneurial CEOs could be tempted to embrace alternative platforms.
Stock exchanges perform many services that help financial markets flourish. “Private rules and regulations underpinned all of the world’s first stock markets for hundreds of years,” writes Edward Stringham, a leading scholar of private financial governance. Examples include the Amsterdam Bourse in the 17th century and the London Stock Exchange in the 18th century. Exchanges created rules and provided oversight, giving investors the confidence to trade.
Today’s exchanges continue to support the national and global financial systems. As intermediaries between buyers and sellers, they facilitate trades in primary and secondary markets. They also ensure adequate liquidity, manage the settlement process, and promote good corporate behavior by requiring listed companies to meet quality and transparency standards. To promote trust and anchor expectations, they fulfill trades in the event of counterparty nonperformance. For all these reasons, being a member in good standing comes with significant economic and reputational benefits.
Yet there’s a major difference between modern exchanges and those of yesteryear: entanglement with the government. Increased regulation, more onerous reporting requirements, and transparency pressures are lessening the value of legacy exchanges.
Furthermore, corporate officers increasingly question the value of rules seemingly unrelated to financial market health, such as Nasdaq’s diversity targets for corporate boards. New exchanges such as TXSE can credibly promise to refrain from some of the government-required rules, which only apply to the big players, as well as from unpopular exchange-required rules.
But creating a new exchange isn’t a simple matter of offering more bang for the buck. NYSE and Nasdaq are networks. The value of being a member rises the more members there are. For example, Nasdaq has a reputation as a particularly tech-friendly exchange. Tech companies want to list on Nasdaq, attracting more tech investors, in turn attracting more tech listings.
This positive feedback loop is why starting a network to compete against established ones is so difficult. Cypherpunks looking for an alternative to bitcoin and dictators looking for an alternative to the U.S. dollar have learned this the hard way. TXSE’s backers may yet, too.
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The only way to know whether TXSE can prevail over NYSE and Nasdaq is to launch it. Increased competition is almost always a good thing. Even if TXSE fails to live up to expectations, we will learn that market participants value the current network more than the additional flexibility and choice from transacting elsewhere. That’s useful information, particularly for corporate officers deciding whether continued association with NYSE and Nasdaq is worth the hassle.
Successful or not, TXSE will illustrate the power and permanence of the market test, the ultimate capitalist institution. That’s worth two cheers by itself.
Alexander William Salter is the Georgie G. Snyder associate professor of economics in the Rawls College of Business at Texas Tech University and a research fellow at TTU’s Free Market Institute.