America has a new stock exchange.
In May 2019, the Long-Term Stock Exchange (LTSE) got the Securities and Exchange Commission’s stamp of approval, and if all goes according to its founder’s plan, it could be up and running by the end of the year. (The exchange’s specific listing standards are still subject to SEC commentary and revision.)
The nation’s 14th stock exchange is the brainchild of entrepreneur and start-up advisor Eric Ries, whose 2011 best-selling book, The Lean Startup , discusses the benefits of creating an exchange like the LTSE.
The idea behind the San Francisco-based stock exchange, he says, is to shift the focus away from short-term incentives and short-sighted reactions to quarterly reports and move companies and investors toward a more long-term vision.
“In short, we are building a market where companies are rewarded for choosing to innovate, to invest in their employees, and to see future growth,” Ries said in a statement released by LTSE on the day the exchange was approved by the SEC. “And where companies can run their businesses with the stewardship that similarly aligned shareholders, stakeholders and society demand.
“Our vision is that companies in every industry will be able to go public while continuing to prioritize and pursue strategies for long-term success. That’s a step forward for all of us.”
Silicon Valley movers and shakers like LinkedIn co-founder Reid Hoffman and venture capitalist Marc Andreessen backed the concept, and Ries reportedly raised $19 million from venture capitalists to get the project off the ground.
In 2017, Hoffman told the Wall Street Journal he wished the LTSE had been around when LinkedIn® went public in 2011. “I would have advocated very strongly to the LinkedIn board that we go out with an LTSE listing,” he said.
U.S. tech companies, many of which are based on the West Coast, have a history of grumbling about the difficulties they face in going public, and the unreasonable push for immediate success. Instead, many of these so-called “unicorns ” are avoiding Wall Street , remaining private, and finding other ways to raise funds.
Ries says companies that list on the LTSE will get benefits that are unavailable elsewhere, including something called tenure voting, a system in which the voting power of shares increases the longer investors own them.
The LTSE founder is also a proponent of “base transparency,” a fairly new goal for many businesses, which requires more openness about the investments a company is making and who its long-term shareholders are..
And Ries wants to see executive compensation packages change so the big bosses are less incentivized with bonuses for beating certain short-term targets. Instead, he told Vox.com , certain executive goals could take as long as 10 years to accomplish. Though the rules are still being determined, those are the types of requirements companies would have to embrace to be part of the LTSE.
Zoran Perkov, the exchange’s chief executive, says the similarities between the LTSE and other existing or proposed stock exchanges “ends with the word ‘exchange.’”
The LTSE will be a marketplace for buying and selling shares of listed companies—it will include many of the same participants, and it will be subject to the same regulations that govern U.S. stock exchanges generally, Perkov wrote in a March blog post .
“But unlike those exchanges, ultimately our intention is that when companies list shares on LTSE for sale to the public, they will adopt a set of governing practices that are designed to help them build lasting businesses and empower long term-focused shareholders.”
Another difference: Unlike other U.S. stock exchanges, which generate most of their revenue from trading and data, the LTSE expects to earn most of its revenue from software and services designed to help issuers “thrive over the long term,” Perkov wrote in his post.
In other words, the goal is for companies on the LTSE to get the perks of being publicly traded without some of the headaches startups often experience—including a “preoccupation with the short term” that plagues many public markets and has delayed or stopped some founders from going public.
“Companies that operate with a long-term mindset tend to outperform their peers over time,” the LTSE website states. “But going public can pressure even the most visionary founder into a short-term mindset.”
Not everyone loves the idea of switching things up. Critics say the new exchange’s rules would overprotect company founders and executives—reducing accountability and prolonging their control to the detriment of shareholders.
There’s also some debate as to whether the existing markets are, indeed, too focused on short-term profit over long-term value.
But there are those who believe there’s room for improvement to the modern exchange system.
How it Works: A History Lesson
Many investors probably aren’t even aware that there are currently more than a dozen national stock exchanges.
Most people are familiar with the New York Stock Exchange and NASDAQ but beyond that, how far can you go toward completing the list ?
If your next guess was the Dow Jones Industrial Average, take a step back. The Dow is a stock index that tracks publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ . There are many other indexes, which are used to read the market or a sector of the market.
A stock exchange is where investors buy and sell stocks, bonds, and other securities that are listed on those various indexes. A stock exchange can be a physical location, like the New York Stock Exchange, where transactions take place on a trading floor, or it can be electronic-only, with everyone using computers to manage trades, like the NASDAQ.
Each U.S. exchange has specific listing requirements for the companies that want to offer securities for trading. Companies typically offer an IPO (offering shares on an exchange) to raise their profile and connect to a larger audience—and to raise more money.
Knowing that much might be enough to get you a free pitcher on trivia night, but let’s take the history lesson a bit further. After all, the New York Stock Exchange dates back to 1792, when two dozen brokers met under a tree in lower Manhattan and signed an agreement to trade securities on commission.
Wall Street remains the hub of the financial industry, though now trading can be done electronically.
Another big change: The exchanges have gone from nonprofit institutions to for-profit businesses. And they’ve consolidated. Stock trading in the U.S. is dominated by markets run by the New York Stock Exchange, NASDAQ, and Cboe. They account for a combined share of more than 60% of volume.
That, critics agree, hasn’t been so great for investors, who have had to worry about rising costs and a lowering of protections over the years. At the same time, short-term performance pressures are believed to be behind the slowdown of IPOs and new listings.
In a 2018 speech noting the pros and cons of progress, SEC Commissioner Robert J. Jackson Jr. lamented that the stock exchanges, a symbol of American capitalism, have developed “puzzling practices that look nothing like the competitive marketplaces investors deserve.”
That doesn’t necessarily mean everyone who’s looking for change is on board with Ries’ vision for the LTSE. But they are ready for some kind of reform.
In January, a high-profile group of banks, brokerages and market makers announced a plan to join forces and start their own trading venue to reduce fees, simplify trading, and, according to Steve Quirk, executive vice president of trading and education at TD Ameritrade, “put the needs of investors first .”
Founding members of the Members Exchange (MEMX) include Bank of America, Morgan Stanley, TD Ameritrade, Charles Schwab, UBS, Citadel Securities, E-Trade Financial, Fidelity Investments, and Virtu Financial.
Revolution and Evolution, Profit and Purpose
In Lean Startup, Ries writes about building a “minimum viable product” (MVP) that a company can test on actual customers with the idea that if it doesn’t fly, developers can easily “pivot” to another project.
And in interviews, the startup guru turned exchange founder sounds open to remaining flexible regarding some of the strategies and concepts behind LTSE.
In May, he told The Street it’s likely the tenure voting proposal may need to be revised, but he’s confident the LTSE’s driving principles will remain intact. And he told Axios that passive long-term investors, such as index funds, could opt in or out of the tenure process.
“We’ve been working with the regulator on this for about three years, and this is a very important milestone,” Ries told CNBC when the LTSE was approved by the SEC in May. “We’re very pleased with how it’s gone.
But there’s a series of technical filings that have to happen next. We have to get our technical architecture approved. We have to get our fees approved. We have to get these next listings approved.”
Even then, Ries said, the LTSE will take an incremental approach and “layer standards on piece by piece.”
He also has said he expects many companies to co-list with both the LTSE and more-established exchanges. The LTSE doesn’t necessarily see other exchanges as competitors , Ries has said. But his exchange is offering another option.
Rise also said, “It’s a perception of liquidity issue. Because of the national market system, you get the same liquidity, but a lot of people don’t realize that. They still think of an exchange as a big building with marble and concrete, when they’re really computers in New Jersey.”
If some of what the LTSE’s Ries and Zorvan have said about what’s happening in the markets sounds familiar, it may be because BlackRock Chair and CEO Laurence Fink included a similar message in his Letter to CEOs in both 2018 and 2019.
“Without a sense of purpose, no company, either public or private, can achieve its full potential,” Fink wrote in 2018 . “It will ultimately lose the license to operate from key stakeholders.
It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth.
It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”
And in his 2019 letter , Fink wrote, “Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time—not only shareholders, but also employees, customers, and communities.
Similarly, when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders.
Purpose guides culture provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”
What Does All This Mean to the Investor?
Ries optimistically says he believes the next generation of companies want to think in terms of the future.
“They want to have better engagement with their long-term investors—who we call the citizens of the republic, not just the tourists who are trading in and out,” he said on CNBC.
It could be a while before anyone knows if Ries is right and if the LTSE’s controversial concepts do, indeed, appeal to the kinds of companies he expects to list on the LTSE.
“The way that the exchange approval process works, it’s not a fast process,” he said when the LTSE was approved by the SEC.
Over time, though, his Long-Term Stock Exchange, a sort-of startup for startups, could lead to some big changes in the way the U.S. system works in the future.
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