Ben Ashwell profiles new exchanges and trading venues to understand why they exist, why we need more trading venues – and what it means for issuers
September 2020 saw the launch of three new stock exchanges – the Long-Term Stock Exchange (LTSE), the Members Exchange (MEMX) and the Miami International Securities Exchange – bringing the total number of US exchanges to 19. In addition, the SEC continues to approve alternative trading systems (ATSs) – also known as dark pools – with 54 currently in operation in the US, according to an SEC list from February 2020.
Last year, IR Magazine reported on statistics from ModernIR that up to 36 percent of trading activity occurs on dark pools, with the rest split across the ‘lit’ exchanges. As more trading venues and exchanges launch, it makes it harder to understand where a stock is traded, by whom and what it means for the price and the likely buyer/seller.
What’s more, there will be fewer experts who can have a detailed understanding of the entirety of the US market to help IR and corporate finance teams understand trading activity across venues.
Joe Saluzzi, partner and co-founder at Themis Trading, says that while many market participants will relish the growing list of trading venues available to them, it’s a less positive picture for issuers. ‘I don’t think this helps the issuer at all,’ he says. ‘Issuers can’t be excited about having so many exchanges trading their stock. The more fragmentation of liquidity, the less color you’ll get.’
The new exchanges and trading venues have clear value propositions, however, and – they believe – a differentiated offering from the traditional exchanges.
For example, MEMX was approved by the SEC as a regulated stock exchange on May 4, and began trading on September 21. It was founded by a consortium of investors, banks, retail brokers, market-makers and institutional firms and, according to Sophie Sohn, head of marketing and communications at MEMX, it will give these market participants ‘a larger voice in the market structure debate'.
On the topic of market fragmentation, Sohn says: ‘While it’s smart to be sensitive to fragmentation, we should also be supportive of competition and new entrants trying to produce better outcomes for the market as a whole. It’s interesting that this question around fragmentation seems to be primarily directed at new entrants, even though many of the incumbents continue to operate, rather than consolidate, their multiple exchange platforms.’
Nasdaq, the NYSE and the Investors Exchange all declined to comment about market fragmentation and the launch of new exchanges. In this article, we profile one of the new exchanges – LTSE – and one of the new trading venues – EQX – and ask why they need to exist.
A new standard for listings The LTSE was formally approved by the SEC in May 2020 and its launch followed on September 9. Michelle Greene, interviewed below, is president of the new exchange.
What is LTSE’s mission?: ‘What we’re trying to do is create a new set of standards and disclosures that align companies with a longer-term vision and investors that want to be in it for the long term and that measure success over decades, not quarters.
'The idea is that if you create a place in which companies are holding themselves to long-term standards and provide additional disclosures around their long-term policies, they will attract genuinely long-term investors – such as sovereign wealth funds and pension funds.
‘In addition to being an exchange, we have a software business and we help firms understand what investors are doing in terms of behavior. We’re helping companies to understand how investors behave over the long erm with the investments they make.
‘A number of policies and disclosures are required to list, based around companies demonstrating a long-term approach to stakeholders, strategy, compensation, board policy and investor policy.’
Requirements to maintain a listing: ‘In terms of how we think about the value proposition, when you sign up with LTSE you agree to abide by our listings standards, which focus your narrative for success on the long term and on long-term value creation. We want to get back to the fundamentals of companies that have good ideas and investors that want to invest in that. A company’s adoption of our listing standards must be public on its website and visible for all to see. Those policies are then renewed on an annual basis.’
Measuring success: ‘The way we think about our goals is very long term. Really, what we’re trying to do is change behavior and create a different way of being public, and a recognition that the alignment between a long-term investor and a company is what should guide that relationship. Success to us is changing the way the markets work and creating long-term value in the markets.’
Dual-listing on LTSE and another major exchange: ‘At least for the time being we are pursuing dual-listings. Primary listings might be something for the future, but right now we’re trying to create this new public market listings experience. We’re targeting companies that are already public and companies that are thinking of going public in a different way.
‘When we talk to companies that are already public, they are experiencing some short-term pressures and would like to have a different focus on how they talk about success and how the market views that.
'When we talk to companies that are contemplating going public, we explain that the IPO is the wedding and we’re more interested in the marriage. We want to unlock the pipeline for firms that haven’t wanted to take part in the public markets because they’re overly focused on quarterly results.’
The type of companies interested in LTSE: ‘One of the commonalities you find in companies that are interested in talking to us is that they have senior executives who have taken a company public and have seen what those short-term pressures can do.
'Obviously, it’s something of a self-selecting group that is expressing interest at this point – they tend to be companies with a strong sense of vision. For them, the LTSE is an opportunity to showcase that they can operate in a different way, a way their investors and employees find meaningful and valuable.'
Why do we need new exchanges in the US?: ‘If you look at the exchange sector over the past several decades, there have been all sorts of innovations to make trading faster. We’re really trying to do something different from any other exchange by innovating on the listings side. We’re focused on how we can create a different environment for issuers and investors to come together in alignment on long-term value creation.’
A new form of equity EQX was approved as an investment bank by FINRA and as an ATS by the SEC earlier this year. Founder and CEO Matthias Pitkowitz talks to IR Magazine about the mission behind EQX.
Trading on EQX: ‘We actually have three different business divisions – one of them is our investment bank, the second is our trading platform and the third is an advanced analytics platform, which is due to launch in Q4. With the investment bank, we go out and help companies raise long-term financing through long-term enhanced equity (LTEE), a new equity security.
'Think of it as a tool that a CFO, CEO or IRO can reach for in order to satisfy capital needs. Our trading platform will trade only LTEE. It will not participate in equity or bond trading.'
The reason for EQX: ‘We have all seen the equity market structure diverge. When I founded this company, the big observation was that no corporate issuer appears to love the stock market.
'Globally, investors look to the US capital markets with envy because they are the most dynamic and vibrant beacon of capitalism. Hedge funds, high-frequency traders and stock exchanges are all happy, but the issuers and long-term investors aren’t always as happy. Our goal is not to displace the existing system, but to create a simple way to say: I don’t want to raise my equity in this environment.
‘A lot of technology has entered the market and we’ve seen spreads increasing, volume increasing and shifts to those with a short-term view. In the end, there’s always going to be a bias toward those in the stock market who trade a lot. Warren Buffett buys once and doesn’t touch it for five years.
'His impact on price is only when he buys and when he sells, whereas a hedge fund buys in and out thousands of times and has more impact during those five years.’
How LTEE incentivizes long-term investors: ‘The product rewards long-term ownership. You get additional dividends and voting rights each quarter for two years, if you continuously own the stock. If you’re a short-term hedge fund, you’re not going to benefit from LTEE, but if you’re a long-term fund that typically invests after looking at companies for a long time, you’re going to be better off financially with LTEE.’
Why do we need more trading venues in the US?: ‘A lot of issues in the market right now can be traced back to the current business model. With so many trading venues in the US, they all have to compete on having the highest number of trades executed at the highest speed. That business model results in fragmentation and a short-term stock market.
'There are half the number of companies in the US markets today that there were 20 years ago, but there’s more trading and the venues make more money. Meanwhile, investors are loosening their liquidity rules to invest in companies in the private markets. We’re trying to set up a side market that works for long-term investors.’
