In June 2024, TXSE Group, Inc. announced their intention to file with the US Securities Exchange Commission (SEC) for approval of a new securities exchange based in Dallas, TX [1]. TXSE plans to launch as an all-electronic marketplace, aiming to start trading in 2025, with independent listings beginning by early 2026. BlackRock, Inc., Citadel Securities, LLC., and several anonymous investors have funded TXSE with $120M.

At the very least, it’s a high profile announcement garnering attention beyond traditional investing circles. A tiny fraction of the investing population can explain the finer details of how Securities exchanges operate, but most Americans could name one or both of the firms that dominate the market today. The TXSE announcement gives rise to a number of questions: On what basis will TXSE compete? What are the ultimate goals of BlackRock, Citadel and the other investors? Are listing companies and investors truly looking for alternatives?

In this article, we’ll take a look at competitive forces that will shape what TXSE needs to deliver for long term success.  To provide context, we’ll start by taking a look at the two most dominant securities exchanges in the US.  

A brief history

The New York Stock Exchange (NYSE), one of the world's oldest and largest Exchanges, began in 1792 when a small group of brokers signed 'The Buttonwood Agreement' under a Buttonwood Tree on Wall Street. Twenty-four brokers initially signed the Buttonwood Agreement, establishing trading rules and standard commission rates to develop a stabilized and secure trading environment.  Since then, the NYSE has grown to become one of the world’s most well known Exchanges, hosting countless blue-chip companies, spanning many sectors and industries. The NYSE’s average daily volume is between 4-5 billion shares traded.

In 1971, The National Association of Securities Dealers Automated Quotations (NASDAQ) founded the first fully electronic stock market.  Its aim was to revolutionize the way securities are traded. The NASDAQ enhanced market efficiency and transparency through the use of automated trading systems. 

Like the NYSE, the NASDAQ is host to some of the largest, most well known companies in the world.  Their lower capital requirements, modern technology and innovative approach, makes the NASDAQ an attractive exchange for high-tech/ high-growth companies and industries.  

How Securities Exchanges work

When you buy stock in a public enterprise, you are typically not purchasing it directly from the company but rather from another investor through the exchange, facilitated by market makers.  Designated Market Makers (DMMs) on the NYSE ensure liquidity by managing buy and sell orders for specific securities. Multiple Market Makers (MMM) on the NASDAQ  provide continuous bid and ask quotes, competing to offer the best prices and ensure efficient trading.

These market makers help match buy and sell orders, ensuring there is always sufficient liquidity, so trades can be executed quickly and smoothly. Thus, while companies initially issue stock to raise capital, the actual trading happens between investors in the secondary market (with the help of market makers).

In short, buyers and sellers submit orders, which are matched by the exchange's trading system, whether solely through electronic networks like the NASDAQ or a combination of electronic and human oversight, as seen in the NYSE. 

The exchanges enforce rules and regulations to maintain fair and orderly trading, protect investors, and ensure the integrity of the market. This structure supports efficient capital allocation while enabling businesses to fund operations. 

TXSE can succeed

Prior to launch, TXSE has a number of factors in their favor.  The business environment in the Southeast US, and Texas in particular, is robust and growing.  Texas has the 2nd highest number of Fortune 500 Headquarters of any single state - a distinction it’s traded back-and-forth in recent years with California, who regained the title in 2024.  The Southeast boasts 1500 publicly traded companies, and over 5200 firms backed by Private Equity. Jim Lee, TXSE’s CEO, believes the exchange will draw interest based on the high number of firms operating in the region, and promises to provide ‘more stability and predictability around listing standards and costs’, as well as ‘(creating) more competition around quote activity, liquidity and transparency, resulting in more consistent and reliable markets’ [2].  For investors located closer to the South looking for an advantage in high frequency trading, the TXSE might be more attractive than the other exchanges in the Northeast.  

The field is crowded

Despite the factors listed in the previous section that will benefit TXSE, it still faces significant headwinds if the goal is to remain independent over the long term.  First, TXSE is entering into a field with a significant number of competitors, with two well-known and entrenched providers.  Presuming no entries or exits from the market between now and when it begins trading, TXSE will be the 25th US-based securities exchange.  That number is a bit misleading as Intercontinental Exchange (NYSE’s parent company) and NASDAQ currently dominate the securities trading market.  Between the two of them, they own 11 of the 24 active exchanges, including many, formerly independent regional exchanges (e.g.  Boston, Philadelphia, Chicago) and the exchange formerly known as AMEX.  There are an additional six independent exchange operators, but only one, CBOE, has a combined market volume above 10% [3].  

TXSE investors BlackRock and Citadel Securities are currently invested in other exchanges  [4], and it’s worth noting that Citadel is one of three NYSE DMMs.  BlackRock stock lists on NYSE and the company has a long history of business cooperation with NASDAQ.  Either firm likely does not want to erode market share for the NYSE or NASDAQ. Their motivation for investing in TXSE remains unclear, but we can speculate. It may be that they are simply looking to broaden their current participation in the business of exchanging securities.  TXSE will be a for-profit enterprise, so BlackRock and Citadel would stand to gain from revenue that TXSE generates.  Most likely, BlackRock and Citadel would see significant return should TXSE be purchased by one of the exchange parent companies, as has been the ultimate fate of most the other independent exchanges.  

It’s all about the Capital  

If the goal is to remain independent and become a viable competitor to NASDAQ and NYSE, TXSE will have to provide a highly-differentiated experience to investors, listing companies and market makers.  Owing to the crowded marketplace, it’s paramount to TXSE’s success that they can attract Capital - companies who want to list, market makers and investors.  Although the 24 current securities exchanges have specific targets and listing requirements, all of them are subject to the regulations and general oversight by the SEC.  Jim Lee has indicated that TXSE listed companies will have a flexible and cost-effective platform to sell shares.  A reasonable goal, but most of the regulatory requirements that all US exchanges must adhere to come from the SEC.  

There are a couple notable exceptions.  NASDAQ has a stated standard that all listed companies should have a diverse board of directors, defined as up to 2 board members that are female or from an underrepresented minority.  Barring that, the company is required to  provide an explanation why the board is not diverse [5].  NASDAQ does not make any guiding or value statements about the listing companies’ explanation for the board make-up.  It simply requires that a publicly available explanation exists for the non-diverse board.  Further, publicly listed companies voluntarily disclose their board members through websites and periodic financial statements, so any investor has easy access to analyze board make-up.

Another point of possible differentiation for TXSE is the Stock Transfer Tax (STT).   As the name suggests, the STT is a tax which is imposed on the sale or transfer of any stock or various other financial instruments.  The STT was enacted in 1908, and remains on the books for New York.  It’s currently inactive, but there’s recent consideration to bringing it back as part of NY’s Inflation Reduction Act effort. It seems improbable, though not impossible, that authorities in New York would be so short-sighted as to attempt collecting the tax again. In any stock sale, the buyer, seller, agent and company are almost certainly located outside New York, so jurisdiction is tenuous at best. In any case, one can’t imagine TXSE or Texas, a state traditionally associated with low individual taxes, would follow suit [6].    

Companies list on exchanges to access capital market resources and utilize other people’s money to grow the business.  There are 5500 [7] public companies in the US alone, with a multiple of that number globally.  Each of these companies is, in effect competing for the trillions of dollars in capital that investors are looking to place.  Transparency and risk-adjusted returns are the primary investment goals.  TXSE promises fewer self-imposed regulations, which translates to less disclosure, but it’s not clear that aligns with the goals of most investors who want as much information as they can consume to evaluate a company's future prospects.  Lower listing fees may be a possible draw. Like taxes - no one ever asserts that higher fees are better.  TXSE will need to generate profits, so there’s a limit on how low the fees can be, while still providing meaningful services to listing companies and investors is a question.  

The success of TXSE hinges on its ability to carve out a distinct space in an already saturated market dominated by established giants like the NYSE and NASDAQ. While the exchange has a promising foundation, with strong backing from influential investors and a favorable regional business environment, the road ahead will be challenging. Competing on listing standards, fees, and transparency will be crucial - but difficult given the regulatory environment and need to generate profits - as will convincing companies and investors that TXSE offers a meaningful alternative. Ultimately, its long-term viability will depend on its ability to attract sufficient capital and provide value that distinguishes it from competitors.

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Sources:

[1] https://www.txse.com

[2] https://www.txse.com/#press-release

[3] https://www.cboe.com/us/equities/market_statistics/

[4] https://memx.com/

[5]https://listingcenter.nasdaq.com/assets/Board%20Diversity%20Disclosure%20Five%20Things.pdf

[6] https://taxfoundation.org/data/all/state/state-income-tax-rates-2024/

[7] https://stockanalysis.com/list/biggest-companies/