NYSE, Nasdaq place big bets on ‘Y’all Street’, but TXSE has an ace up its sleeve

When the Texas Stock Exchange filed for approval from the U.S. Securities and Exchange Commission earlier this year, observers finally got to see what the fledgling exchange brings to the table ― thanks to its Form 1 revealing listing standards, operating structure and other technical details.

Or so they thought.

For CEO and founder Jim Lee’s fledgling exchange — TXSE for those in the know — to stake its claim to Y’all Street, it’ll need any edge it can get.

Power players like JPMorgan Chase, Goldman Sachs and Bank of America are making big bets on Texas, and the capital markets duopoly of the New York Stock Exchange and Nasdaq have followed suit.

The Big Board already has listed a handful of Texas-based companies — including AT&T, which recently announced a dual listing — on NYSE-Texas. The exchange made an additional splash Monday, simultaneously announcing its new Dallas headquarters and naming a former Texas state official official to run it.

Meanwhile, it’s hard to escape the feeling that TXSE is falling behind even before it starts the race. It has yet to get official regulatory approval, and it hasn’t even publicly announced where its trading operation will be.

But Lee is confident in the hand his exchange has been dealt, and he hints it may even have an ace up its sleeve.

“Candidly, the tactical approach is to make your initial filing in line with the confines of what’s been approved over and over again. And so what’s novel comes later,” Lee told The Dallas Morning News in an interview.

“But it is already in the pipeline.”

Hoping to reverse a ‘raw collapse’

The exchange filed for SEC approval on Jan. 31, and had its Form 1 published in April. Barring the unforeseen, it expects approval in the third quarter of 2025 ahead of its debut as a trading venue early next year.

While TXSE has become one of the buzziest business stories in the country, a common reaction has been, “Why does Texas need its own stock exchange?”

But the better question may be, “Why does the market need the Texas Stock Exchange?” — especially since relentless, decades-long exchange consolidation has consigned most regional trading markets to the dustbin of financial history.

However, Lee is quick to emphasize that TXSE is a national exchange designed to address national problems.

The number of U.S. public companies has fallen by about 40% since 1997, a “raw collapse” according to Lee. It’s a problem much of the rest of the world doesn’t have, he says, pointing to problems within U.S. capital markets.

The market capitalization of the U.S. stock market has skyrocketed, but that’s because of mammoth valuations at the top end, like the “Magnificent Seven” technology stocks that have dominated post-pandemic trade.

Meanwhile, at the bottom, more than a thousand so-called “micro-cap” issuers trade for mere dollars or even less — many of which Lee believes shouldn’t be public.

“It adds a lot to volatility, distorts the capital allocation process and, frankly, it harms investors,” he said.

The idea of too many public companies, but also not enough may sound contradictory — but TXSE’s global head of trading Cameron Smith has a different perspective.

“In reality, then you’re saying, well, there’s 1,000 companies that are public for entirely different reasons, arguably, and if you pull those out, that just underscores the whole challenge of being a public company,” he said.

Rising costs usually get the blame for this, whether they entail listing fees, compliance costs or executive compensation. Being a public company has always cost money, experts argue, but what changed is the value calculation.

Where it used to cost money to make money, as the old adage says, companies no longer need to spend money on being public in order to access liquid capital, thanks to the explosion of high-risk, high return alternatives like private equity and private credit.

In Lee’s view, legacy exchanges haven’t done enough to compete within this new financial world and court the missing middle. That includes companies opting to stay private for longer, even as they freeze everyday investors out of accessing some of the country’s most exciting growth.

“They’re focused globally, on being a global exchange operator, or evolving into a fin-tech company and selling financial fraud software into other similar channels,” Lee explained.

“That has created an environment where the rules aren’t fully aligned with issuers, and it’s ultimately driven up cost. And we aim to go back wholesale to first principles.”

The ‘swing for the fences approach’

Exactly how TXSE intends to do that, as Lee indicated, is subject to interpretation. For now, though, the listing standards in its formal paperwork are relatively in line with what NYSE and Nasdaq require — with some caveats.

Lee has long said TXSE will have the highest continuous listing standards in the world. Per Form 1, it will operate with a single-tier structure; NYSE has two tiers, while Nasdaq has three, each offering lower financial standards attainable for smaller-market cap companies. The financial standards to list on TXSE, though, resemble standards for the higher tiers on the two biggest markets.

“We did that because we thought it was the right thing to do,” Lee said, adding that of the 4,600 public companies in the U.S., 1,700 of them would not qualify for TXSE. “We very much take the high road away from a lot of the micro caps.”

But targeting mid- to high-cap companies comes with risks, according to David Wolpa, a capital markets attorney with Troutman Pepper Locke, an international law firm headquartered in Atlanta. TXSE won’t be able to rely on small companies “seeking refuge” to get initial listings.

“It’s kind of a swing for the fences approach, right?” Wolpa said. “Either hit that home run, or have a lot more difficulty and get some strikes. And we don’t know.”

According to fellow Troutman attorney Jon Daly, an exchange needs to offer three basic things companies are looking for in order to hit that home run: prestige, liquidity, and reasonable listing fees and governance standards.

Separate from that, given how heavily regulated exchanges are, are the things an exchange can actually compete on. For now, TXSE’s corporate governance standards are essentially the same as NYSE and Nasdaq, with much of them passed down from the SEC itself.

Still, clear interpretation of those rules and stability could provide TXSE an edge, Wolpa says, and TXSE’s Lee emphasized that there’s one set of standards for everyone.

Then, a lot of competition for listings currently just comes down to the sales pitch.

“At the end of the day, when companies get ready to go public, we’ll tell them to reach out to Nasdaq and NYSE and talk to both of them, and just see which one does a better job of courting them and convincing them,” Daly said.

So can Lee and company make a good pitch? They’ve pitched some of the most powerful financial entities in the world on tens of millions in investment, but it’s still wait and see on the bigger question of who will actually decide to list.

Listing fees are TXSE’s last big unanswered question, and it’s ripe for competition. Nasdaq and NYSE each raised their listing fees effective this year. Now, equities securities on Nasdaq Global and Global Select Markets pay between $56,000 and $193,000 annually, up from between $47,000 and $163,000 in 2021, while NYSE’s per share annual rate is up nearly 15% over the past four years.

“Part of the strategy for setting up a new exchange almost requires you to have a plain vanilla offering, and a lot of the innovation comes next,” Lee said. “And so we expect to modify our rules over time, and particularly the pricing, such that we are much more aligned with issuers.”

Building TXSE

Tactical is nothing new for Lee, who launched the exchange last year after several years of quiet development and capital raise. It quickly became the most well capitalized exchange to file with the SEC, with $161 million in total backing from Citadel Securities, BlackRock, Charles Schwab and more.

TXSE’s website touts a pipeline of more than 14,000 sponsor-backed private companies, and the exchange’s leadership provides ins with some of the nation’s key industries. Billionaire Energy Transfer Partners CEO Kelcy Warren is the majority owner of TXSE Group Inc., and Paul Foster, founder of Fortune 200 company Western Refining, sits on the board and owns a significant stake through Franklin Mountain Investments. Tyson Tuttle, CEO and founder of Austin artificial intelligence startup Circuit, is also on the board.

“If you were going to put a stool under an exchange and say, What legs do you want? … Those are the legs you want,” Lee said. “We’re very proud of the institutional support we have, but we also have dozens of public company control people that are investors here and that share our vision and alignment.”

TXSE has also plucked some of the premier capital markets experts from financial powerhouses to execute on that vision.

Robert Marrocco was vice president and global head of ETF listings for Cboe Global Markets before signing on to lead TXSE’s exchange traded products. Rick Yoder, now TXSE’s chief technology officer, previously served as director of software development for the data services branch of NYSE’s parent company, Intercontinental Exchange.

That expertise and experience matters when trying to build an innovative, competitive exchange from the ground up.

Smith himself comes with decades of experience at innovators in finance and technology. He tells The News that while TXSE’s technology platform will meet or exceed industry latency expectations, under the hood, the platform looks very different from competitors.

This is because TXSE intends to write in the latest programming languages, on the latest hardware, free of the bloat and bugs that come with updating or rewriting decades old code.

“We have an advantage being able to create [a platform] from scratch with people who really understand the problems and maybe the pros and cons of some of the approaches that were taken in the past,” he said.

The flexibility built into the platform will come in especially handy as TXSE pivots and changes to meet issuers where they’re at.

Stock exchanges also generate and collect mountains of data from their listed companies that are currently monetized, but in ways that largely shut them out of profiting from it. Lee alluded to adding them back into the equation.

“We think that we should be much more aligned with issuers about a recognition of whose data that is, how we could share the value of what you’re creating inside of the exchange, not take it from you and hide it from you,” he said.

Ace in the hole

TXSE’s true differentiator, though, could turn out to be the state it takes its name from.

Lately, everyone is trying to get in on the “Texas Miracle” of pro-business sentiment and light regulatory touch. But as state legend George Strait sings, “You’ve got to have an ace in the hole.”

Arguably, TXSE may have one as the first fully homegrown shop on Y’all Street.

“We’re just the first and most visible, but this is the beginning of a wholesale move. That’s why when our friends announced a similar intention to relocate parts of their business here, it was all expected,” Lee said.

“It’s the beginning of other new exchanges setting up here, and other established exchanges relocating here because it’s a recognition of what’s being built up here.”

The finance sector in North Texas has boomed. Texas has more NYSE listings than any other state, and contributes more than $1 trillion in market cap to Nasdaq. Strong, steady growth has seen Texas overtake powers like Italy, Canada and Russia as the world’s eighth-largest economy.

Texas is already the No. 1 state for headquarters relocations. Next up, the state may start challenging Delaware for incorporations — thanks to a suite of business-friendly bills signed in the most recent legislative session, and the formation of state business courts.

Dillards, a major retailer, recently reincorporated in Texas; TXSE itself is currently a Delaware corporation, but plans to re-incorporate here once the SEC approval process is finished.

A listing on the regional market could be the third power in the triumvirate. And as companies buy into the vision, Lee thinks it could transform the region just like DFW International Airport did 50 years ago.

“What we’re talking about today,” he said, “when you go back and you look at this five and 10 years from now, it’ll be transformational, the impact that it has in this part of the country.”