Creating an entirely new US Stock Exchange

I came across a story this morning and couldn’t help but to dig deeper and find out more about why someone would want to create an entirely new stock exchange. Here’s what I found out:

A startup, spearheaded by Eric Ries, a San Francisco entrepreneur and author of The Lean Startup and backed by highly reputable Silicon Valley names is attempting to bring the Long Term Stock Exchange (LTSE) to life. Not only does the LTSE include the normal SEC regulations for exchanges, but also additional rules for companies and investors, rewarding long- term shareholding and long-term results.
US Tech startups have for a while now been in conflict with east-coast bankers and wanted to change the process of minimizing pressures on public companies from HFT. The LTSE is a more outsider approach and would have a number of differences from the traditional exchanges such as:

  • Tenured shareholder voting power
  • Ties between executive pay and long-term business performance
  • Additional disclosure requirements for long-term shareholders and companies

Advantages

The advantages of the LTSE would cater to many private companies who have feared going public in the past. In addition, companies on this exchange will have to choose from compensation plans that tie together executive pay and short term performance, pushing companies to make healthy long-term moves. Ries claims that a company within LTSE looks much better because you’re demonstrating the fact that you’re willing to be held at a higher standard.

Obstacles

The biggest challenge here seems to be discussing with the SEC how the exchange will operate and draft applications could take many years. Even once approved, another big challenge with the LTSE is getting companies to list on the exchanges due to possible lack of investor activity to provide fair prices. One solution that LTSE has provided would allow companies to dual list. Given their goal to change the status quo, SEC approval could prove to be painstakingly difficult.

So what are your thoughts? Is the LTSE just another attempt to disrupt the traditional Wall Street exchanges or are they an exchange that is on the rise in the future?

Bloomberg

QZ

 

What happens if a company wants to switch from LTSE to a traditional exchange? Two IPOs?

"There's no reason to be the richest man in the cemetery. You can't do business from there." - Colonel Sanders
 

I don't like the idea.

The price of an asset is SUPPOSED to change every second of every day, since the value of said asset changes every second of every day. We may not get new information on company financials every day, but company financials are obviously not the only way we derive the value and therefore price, of an asset. One example for any company is the price of risk - it is changing every second of every day, and the price, as listed on the stock exchange, should also change every second of every day, in order to reflect this.

Honestly, I'd be more interested in the transition to a global, 24/7 stock exchange.

 
QGKZ:

I don't like the idea.

The price of an asset is SUPPOSED to change every second of every day, since the value of said asset changes every second of every day. We may not get new information on company financials every day, but company financials are obviously not the only way we derive the value and therefore price, of an asset. One example for any company is the price of risk - it is changing every second of every day, and the price, as listed on the stock exchange, should also change every second of every day, in order to reflect this.

Honestly, I'd be more interested in the transition to a global, 24/7 stock exchange.

Price will continue to change every second. It's just that now there will be a 360-millionth of a second lag. HFT executes at faster than even close to a half-a-billionth of second.

 
abisto:
QGKZ:

I don't like the idea.The price of an asset is SUPPOSED to change every second of every day, since the value of said asset changes every second of every day. We may not get new information on company financials every day, but company financials are obviously not the only way we derive the value and therefore price, of an asset. One example for any company is the price of risk - it is changing every second of every day, and the price, as listed on the stock exchange, should also change every second of every day, in order to reflect this.Honestly, I'd be more interested in the transition to a global, 24/7 stock exchange.

Price will continue to change every second. It's just that now there will be a 360-millionth of a second lag. HFT executes at faster than even close to a half-a-billionth of second.

I see.

Even if that's the case, I still do not like the idea. HFT plays a huge and critical role in keeping markets efficient.

 

I just read through the documentation on the site and I can't say that I'm a fan. Investors derive value from many different valuations - value, growth, momentum, macro, etc. - and it seems that this exchange is designed to protect startups from "harsh" Wall Street valuations with a focus on a silicon-valley focused growth-type value.

If you want to take your company public (and enjoy the one-time payoff that comes with it), you have to be willing to dealing with the problems of public valuation and being indebted to your shareholders, who literally constitute the ownership of your company. If you don't like it, don't take the cash - it doesn't have to be a reflection on how you run your company.

 

What if an exchange (even the established ones) proposes a new fee or tax where a tiny amount for every share traded of a listed company (say 5bps) goes directly to said company and credited as income?

Colourful TV, colourless Life.
 
Bonus:

What if an exchange (even the established ones) proposes a new fee or tax where a tiny amount for every share traded of a listed company (say 5bps) goes directly to said company and credited as income?

5bps seems like a huge amount given that exchange fees are a fraction of a bp generally. While you would therefore reduce the financial incentive for HFTs to trade the stock you would also reduce liquidity which is generally the reason that companies go public. They want the liquidity in the secondary market such that it makes future equity raising cheaper (such that future investors won't factor illiquid discount into the price they are willing to pay for a stock)

 

Most recent attempts to start exchanges have just been about disruption. Technology has made setting up such ventures cheaper and the end game ideally is to either become successful enough and grow fast enough to buy out the traditional exchanges (e.g. the BATS and ICE model) or be bought out by them (the Turquoise and Chi-X model). Consolidation has been the name of the game for the last decade but this leads to less competition which then leads to calls for new start ups and then the cycle continues.

Depending on the backers of the new exchange there may be other structural benefits (e.g. Turquoise was started by the banks to put pressure on exchanges to reduce their fees which is what happened. They didn't really care if the Turquoise venture succeeded not as the cost was shared between the banks anyway and would have been recovered indirectly on each of their trading desks by the reduced exchange fees. As it happened it got bought by the LSE which was the ideal scenario.

Apart from cost, other differentiators are market model and sometimes alternative models can be very successful (e.g. DirectEge) but that is a rare scenario and the end game was to merge with BATS.

Most other start ups even those backed by the large exchanges have failed, not from lack of funding but by poor senior management who didn't understand that they were being gamed and we're too naive and had business cases that were based on imaginary numbers with no strategic vision.

I've seen it time and time again.

 
Best Response

Sounds great in theory.

While giving additional voting power based on a shareholder's tenor is probably the best thing in the details you gave. It could reduce the influence of fast money.

However, once should think about what are other factors on why companies feel the need to meet short term goals vs plan for the longer term. Is it just fast money investors... In fact the fastest money probably doesn't have any option on strategic planning, they are arbing the expected market movements.

I think it is investors at large who look at quarterly results, look at sales for the last 3 months and push firms to have product launches quicker (and maybe too early) instead of taking stock of the market condition and R&D to launch when products are ready and to invest in long term financial strength. Maybe LTSE will execute this plan, and maybe it will change things. But I think more likely than not, it will still be price action will be very volatile on each quarterly earnings. CEOs will still feel the need to cater to quarterly results and expectations. Few (quality and discipline) CEOs will manage to keep their eye on the the long game, and downplay quarterly results AND keep their jobs.

 

So some SF guy wants to create a company that protects the naive long term guys from their valuation changing based on real time info?

Can someone remind me when liquidity became such a dirty word? Seriously, how is preventing people from incorporating real time information ~progress~? We don't bitch and moan about how horrible it is that we have Yelp now and how great it was to read the weekly newspaper for the local food critic's opinion.

Who's being protected, and from what?

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
 
The Stranger:

So some SF guy wants to create a company that protects the *naive* long term guys from their valuation changing based on real time info?

Can someone remind me when liquidity became such a dirty word? Seriously, how is preventing people from incorporating real time information ~progress~? We don't bitch and moan about how horrible it is that we have Yelp now and how great it was to read the weekly newspaper for the local food critic's opinion.

Who's being protected, and from what?

Agreed.

 

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