Ideas for a new Stock Exchange... in Texas
A new exchange is launching… in Texas, backed by BlackRock and Citadel Securities. That’s the recent news, and it had me thinking about what I would do if I were launching an exchange today. As many of you might know, I had the privilege of working with the original IEX team before starting Street Context. My focus back then was much more on the trading and execution side of the business, so that’s the lens I brought to building an exchange. Today, my focus is much more on the information side of the business, and with that new lens, it had me thinking about building an exchange in a very different way.
I asked myself the following question: if I had no idea how exchanges were structured, how would I build one today? What services/features would I offer?
We’ve seen a lot of other industries rethink the proposition of the incumbent and go back to first principles, with interesting results. Why not run the same exercise with Stock Exchanges?
To start, I then asked myself: what do corporates want from an exchange? Having never been a public company CEO, CFO, or IR professional, I’ll have to guess, but I would say: access to clients (and their capital), prestige of association (who doesn’t like ringing the opening bell?), simplified rules and regulations, and any tools or technologies that help them run as a public company.
So, if I were launching a new Exchange today, what would I offer corporates?
To start with the vanity features around prestige, you need an exciting launch. I would hire some experts (influencers?) and get them to build me a launch plan. On listing day, come out with great video content, short form and long form. Have highlights and recaps that are easy to share. Brand awareness is important: buy a big screen in Dallas (to mimic the one in NYC), but I would also think about buying some screen real estate in NYC, London, Tokyo, and other cities – at least as/when needed. If someone is going to list, they want to be able to share it with their network
Again around prestige, I would think about how you directly engage with the CFO/IR professionals involved. One thing is for sure, they are going to eventually change jobs. How can you keep them engaged through their career journey? Perhaps you offer an ‘exclusive club’ (a la Amex), or you give them some kind of ongoing access to software and tools (a la Bloomberg). Throw a conference or networking event once a year. Whatever you choose, having been part of the new Exchange ecosystem should carry lifelong privileges
One area that a new exchange could also focus on is turning broker dealers into advocates to list corporate clients on their exchange. Exchanges already give broker dealers discounted trading rates for things like volume levels (i.e. the more volume you send, the less you pay). Why not give brokerages reduced trading rates for the number of public companies they cover on your exchange?
For client access, one big area that Exchanges could focus on is providing marketing and awareness support. Perhaps that means Exchanges subsidize research coverage with brokerages (through reduced trading fees), or provide a stable of independent providers that can provide coverage and analysis. This starts to bleed into ‘corporate sponsored research’, but especially for small cap companies, there might be a legitimate need
I would partner with all the top corporate IR solutions and tools: CRMs, marketing systems, etc. Get preferred discount rates for IR teams that list on your exchange, giving them material savings (i.e. 30% off every vendor). Vendors would love it (who doesn’t want new business), and corporates would appreciate it (a curated list of high value vendors, with discounted prices)
I would also find ways to connect listed corporates more effectively with the broker dealer community. Exchanges sit on a data set that could be used to intelligently connect corporates and investment banks proactively (assuming both parties opted in). Corporates are much more focused on client outreach (as I’ve recently written about) – how do you facilitate that with the banks? Banks are looking to build new corporate relationships, and sell services, and provide access to their institutional clients – how do you facilitate those relationships as well? I won’t write an essay on the topic, but there’s a lot to do
Finally, it seems like there are lots of opportunities to be creative about how you charge corporates. Listing fees are a cash cow for Exchanges, and have the indirect benefit of likely generating additional trading revenues, but the pricing model hasn’t changed in a long time, but I believe there is room for innovation. Perhaps the listing fee is reduced based on trading volume in the corporates name? Maybe listing corporates get ‘credit’ from their fee to be used against software and tools provided by the Exchange? Or brokerages could subsidize the listing fee by getting ‘preferred corporate access’ from the corporate? Regardless of the actual tactics, there is a big opportunity to rethink the pricing model, and innovate on how the commercial relationship between corporates and exchanges work.
It wasn’t all too long ago that the commercial relationship between exchanges and brokerages was fundamentally changed with the innovation around the maker/taker pricing model. That pricing structure was dreamt up and implemented by a single individual (Joshua Levine) working on one of the first electronic trading platforms in 1997 (as an aside, if you haven’t read Dark Pools, I highly recommend you add it to your summer reading list).
The natural question is: what will the next area of innovation be for exchanges around how they interact with corporates? Will it be something as foundational as pricing? I’m a firm believer that its much easier for a new firm to implement these changes than it is for an existing firm to change their existing strategy and pricing. It’s not impossible, but there’s simply more momentum to fight.
With Texas opening a new stock exchange, one can only hope that we’ll see some innovation from the exchanges. Time will tell
Blair
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