New Texas exchange pledges tougher standards than New York rivals

The head of the fledgling Texas Stock Exchange has pledged tougher listing standards than his New York rivals as part of his state’s bold attempt to establish Dallas as a financial challenger to east coast dominance.

Jim Lee, chief executive of the TXSE, told the Financial Times the new exchange’s standards, including earnings tests, minimum prices and other unspecified measures, would be stringent enough to in effect exclude more than a third of the companies listed on Nasdaq and the New York Stock Exchange.

The comments push back against early expectations that the nascent bourse would adopt looser rules in its attempt to break New York’s pre-eminence. Its emphasis on “predictability” in its initial June launch was seen as a riposte to a controversial 2021 board diversity disclosure rule Nasdaq introduced that is being challenged in court.

“Ours are going to be the tightest [quantitative standards] inside of the strike zone,” he said in an interview. “Our qualitative standards will be tighter, not on every element, but in total, such that about 1,500 Nasdaq companies [would] fall out and about 200 NYSE companies [would] fall out — that would not qualify for continued listing on our exchange.”

NYSE and Nasdaq declined to comment.

The anticipated launch of the TXSE comes as part of a broader push by Texas to position itself as a corporate mecca with its pitch of a hands-off approach to regulation that has drawn hundreds of headquarter relocations and redomiciles to the state in recent years. The new bourse feeds into an effort to establish Dallas — the nation’s second-biggest financial hub by number of industry employees — as a rival to New York.

The TXSE will formally file for registration with the Securities and Exchange Commission on December 1. Assuming approval, it expects to make its first trades in December next year and list companies early in 2026.

Backed by Citadel Securities and BlackRock among others, TXSE caused a stir when it was unveiled in June with plans to break the duopoly over listing stocks and exchange traded funds enjoyed by Nasdaq and the NYSE, which is part of Georgia-headquartered Intercontinental Exchange. 

Lee told the FT the exchange would look to minimise costs by remaining “agnostic” on certain “wholly optional” environmental, social and governance standards imposed by the major incumbents but declined to point to specific rules. He also said the TXSE’s minimum requirements would keep out speculative penny stocks.

But its ambitions have been met with scepticism from rivals and other industry participants who have pointed to the failure of previous attempts to wrest listings from the New York duo.

“Nobody’s been able to start a new listings exchange in 50 years — and they’ve tried,” said James Angel, finance professor at Georgetown University. “The people behind this do know how to start a stock exchange so with good technology and marketing, they will make sure they have a good trading product. But listings are an uphill battle.”

While the US has 16 national stock exchanges, most are focused on trading, not listing, stocks. Hosting companies, as the TXSE aims to do, produces attractive annual revenues for that exchange regardless of where the shares are actually traded.

Rick Perry, the former Texas governor who will serve on the TXSE board, told the FT its launch was “the next step in [the pro-business] evolution” of the state.

At the governor’s mansion in the state capital of Austin this week, Greg Abbott, Perry’s successor, hosted an event endorsing the bourse in front of banners reading “the bull market is coming home”.

Abbott said: “Texas already has become the home of capital in the United States of America. Today, we are staking a claim as a home of capital markets with the addition of the Texas Stock Exchange.”

The exchange estimates it could appeal to roughly 1,000 publicly traded companies — about a fifth of the national total — and a pipeline of 14,000 private equity-backed private companies that are based in the so-called south-east quadrant of the US, an area stretching from Texas to North Carolina.

Lee said the TXSE would be “as apolitical an exchange as could ever be put together” and described ESG as a “short-term aberration that other exchanges are pushing their issuers away under”.

Lee said the TXSE would structure its rules to keep out penny stocks, which have become a hot topic among brokers and exchanges after a boom in their number has threatened to skew the trading fees paid by exchanges.

Trading charges in the US are partially based on the volume, or number, of shares traded. Sub-dollar trading volume has accounted for about 14 per cent of all US trading volume this year, double its level two years ago.

Lee said: “Market makers and major liquidity providers are obliged to make markets in those companies, and it’s not healthy. It’s not healthy for investors. It’s not healthy for liquidity providers. Candidly, these companies shouldn’t be listed.”