FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
There’s a new exchange in town.
Or, at least there will be when/if the US Securities Exchange Commission approves the Texas Stock Exchange.
The exchange business is heavily regulated, with sticky customer bases and high barriers to entry, so it’s not every day that a startup exchange is announced. Which is why this week’s TXSE announcement was more newsworthy than, say, the launch of a new hedge fund or technology solutions provider.
Any new bourse faces an uphill climb to gain traction in a very competitive space dominated by incumbents New York Stock Exchange, Nasdaq and Cboe. There is hope, though, as relative newcomers Members Exchange, Investors Exchange, and MIAX Pearl are at least on the map with a percentage point or two of market share.
TXSE has raised about $120 million and has the backing of industry titans BlackRock and Citadel Securities. The startup reportedly aims to attract listings of exchange-traded products and challenge increasing compliance costs at NYSE and Nasdaq.
To be sure, every new stock exchange has its own value proposition, and will chart its own course, whether that be growing into a formidable player, being acquired, languishing with minimal market share, or shutting down.
One interesting aspect about TXSE is the Texas address, as the Lone Star State is not normally associated with institutional stock trading. But From reviewing the list of former stock exchanges in the Americas, a similar name jumped out: the Arizona Stock Exchange.
AZX was founded as Wunsch Auction Systems in 1990 before moving from New York to the Grand Canyon State and rebranding as Arizona Stock Exchange (AZX) in 1991. The enterprise was a bit ahead of its time in that it was founded as an electronically enabled stock exchange when floor trading was still dominant, and it originally aimed at extended hours trading, a concept that was largely a curiosity back then but has gained traction in recent years.
Alas, AZX never could attract enough trading volume to sustain the business for the long term, and the exchange ceased operations in 2001.
Traders Magazine wrote about AZX when it rolled out a last-ditch initiative in its latter days.
From the 2000 article “AZX Looks for an Order Transfusion”:
“These are critical days for the struggling Arizona Stock Exchange.
The electronic call auction system has partnered with Goldman Sachs, Salomon Smith Barney, Lehman Brothers, J.P. Morgan and others.
They plan to offer the buy side an alternative to Nasdaq’s chaotic opening….
…The AZX, which has been around in some form since 1991, is in dire need of order flow.
That’s a problem experienced by other innovative trading systems. AZX averages about 10,000 shares a day…That’s a far cry from the millions of shares traded daily by alternative trading systems like POSIT and Instinet.
Without the support of the New York bankers, sources said Arizona was likely headed for the sunset.”
That sunset did come just one year later, despite the support of the bulge bracket banks. Steve Wunsch, the AZX founder and apparently an accomplished climber, passed away in 2019.
AZX showed that having influential, name-brand backers doesn’t guarantee success, nor does having ideas that are ahead of one’s time. As TXSE will find out, it will come down to execution, hard work, timing, and luck.
