RPT-BREAKINGVIEWS-Texas market bulls run into ferocious bear case

By Jeffrey Goldfarb

NEW YORK, April 9 (Reuters Breakingviews) - Everything keeps getting bigger in Texas. In a sign of anticipated corporate growth, the New York Stock Exchange and Nasdaq are galloping to Dallas to prevent a new local stock market from wrangling their customers. The city has ambitions of becoming a far more powerful commercial hub, but for now there’s less substance than swagger.

The Lone Star State is making a strong bid to muscle aside rivals east and west. Business-friendly regulation, stronger-than-average economic expansion, and recent backlash against socially conscious investing are helping it chip away at California’s technology dominance, Delaware’s legal supremacy and New York’s financial fortitude.

It would be a feat to unseat any one of these respective strongholds, let alone all three. Doing so would transfer substantial employment, wealth and consumption to a state that ranks worst in the country for quality of life, based on an annual CNBC study of places to do business. Texas scores poorly on healthcare, education and protections against discrimination, and its restrictive abortion ban also threatens to deter younger workers.

Money is talking loudly, though. On a per-capita basis, the state’s GDP is 25% smaller than California’s and in line with the U.S. average, but at $2.7 trillion, it produced enough goods and services last year to qualify as the world’s eighth-biggest economy, squeezed between France and Italy.

Governor Greg Abbott also can justifiably crow about growth. Texas added more than 180,000 jobs, the most of any state, in the year through February. More than 200 companies, including Tesla TSLA.O and Chevron CVX.N, moved their headquarters there between 2018 and 2023, nearly half the publicly traded ones that relocated over the span, real estate giant CBRE found. Many arrived from California, eighth on CNBC’s quality of life measure, escaping bureaucratic red tape and taxes on personal and corporate income.

The governor is also challenging Delaware, legal home to some 2 million businesses, and two-thirds of S&P 500 Index .SPX members. Texas last year rolled out a new specialized corporate judicial system, modeled after Delaware’s Court of Chancery, to woo companies from a place renowned as a reliable venue for boards and shareholders.

Rounding off the campaign is a push into capital markets. TXSE, a company started by trading technology entrepreneur James Lee and backed by BlackRock BLK.N, Citadel Securities and Charles Schwab SCHW.N, formally submitted its Texas Stock Exchange plans to U.S. regulators in January. The Big Apple bourses were sufficiently worried to yeehaw themselves, as the Intercontinental Exchange-owned ICE.N NYSE opens its own southern outpost in Dallas and the Nasdaq NDAQ.O establishes regional headquarters there.

This is impressive momentum, but the power of incumbency is immense. Other would-be contenders for New York’s throne also have tried to ride political and market fads. The Long-Term Stock Exchange, for example, started in 2020 amid exuberance over the kind of sustainable investing goals that sparked blowback from Texas and elsewhere. It counts just two listed companies so far.

Similarly, IEX aimed to challenge algorithmic trading, its message of rigged markets propelled by the bestselling book “Flash Boys.” Co-founder Brad Katsuyama aimed to snag 8% of market volume by 2017, but has less than 3%, according to CBOE data. It also abandoned efforts to compete for corporate listings five years ago. “It has become clear that the legacy exchanges have a stronghold on this market,” Katsuyama said at the time.

The New York markets are also overhyping the opportunities. For one thing, investing in Texas-based companies offers no obvious advantage, judging by an exchange-traded fund tracking them since July 2023.

In their fanfare, the NYSE and Nasdaq separately touted a combined $6 trillion of Texas-based market capitalization. A dozen companies, however, account for more than half the sum. NYSE’s Lone Star exchange opened last week with a secondary listing from President Donald Trump’s social media company. Despite the recognizable brand and a $4 billion equity value, Trump Media and Technology DJT.O generated less than $4 million of revenue last year.

Even so, if billionaires such as Tesla boss Elon Musk or Houston-born Michael Dell were to sign up their companies as TXSE anchor tenants, they would give the fledgling exchange a running start. Local lawmakers are already helping with legislation to ban trading taxes and to curb the power of assertive investors.

The Texas exchange’s ambitions extend to the entire U.S. southeast and its 14,000 private equity-backed firms, where it will push its “anti-woke” credentials and potentially shun the trifling companies welcomed elsewhere to burnish its credibility. TXSE also could compete by charging brokers lower fees, especially at the market close each day when New York venues levy a premium and collect the bulk of their trading revenue.

Winning market share will depend heavily on attracting sufficient volume for investors to buy and sell stocks quickly and easily, which is no easy task. Only about 40% of last year’s trading even occurred at the major exchanges, down from nearly two-thirds a decade ago.

Market leaders elsewhere are also fighting back. Delaware last month rewrote the rules behind a court ruling to void Musk’s $56 billion Tesla pay package, after which he drove his electric-car maker off to Texas. The controversial new law is designed to help the First State retain its position as the country’s corporate capital by giving controlling stockholders greater protections from smaller investors, among other sops to boards. Combined with Delaware’s two centuries of legal decisions from judges specialized in business law, the temptation to flee might wane, especially for an untested upstart.

The highway into Texas also sometimes leads right back out. Chairman Larry Ellison moved software goliath Oracle ORCL.N from northern California to Austin in 2020, triggering fresh handwringing about Silicon Valley’s position as the world’s technology nerve center. He packed up the company last year for Nashville, however, beckoned by the healthcare industry and more than $200 million of tax breaks and other economic incentives.

Cities from Seattle to Miami have tried to position themselves as tech-hub rivals to the San Francisco Bay Area, but it is almost impossible to artificially replicate its venture capital, entrepreneurial and engineering communities. The same is true when it comes to Delaware corporate jurisprudence and New York finance. In those areas, Texas will get only so big.

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CONTEXT NEWS

The New York Stock Exchange said on March 31 that its Texas outpost was open for business, becoming the first securities bourse to operate in the state, with Trump Media & Technology as the first company to list there.

Nasdaq said on March 18 that it would open a new regional headquarters in Dallas and vowed to make additional investments in Texas to improve stock trading.

On January 31, TXSE said that its Texas Stock Exchange had filed registration forms with the U.S. Securities and Exchange Commission proposing to run a stock trading venue, list corporate issuers and exchange-traded products, oversee auctions and sell data products.