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Get Ready for More Exchanges

Traders Magazine Online News, January 29, 2019

Healthy Markets Association

This item was originally printed in Healthy Markets Association's Market Structure Insights, January 2019 edition.

This year, we at Healthy Markets expect several new securities exchanges to be approved by the SEC.

The leading stock exchange contenders are the LTSE and MEMX. Both pose very interesting questions for the markets and market participants.

On November 30, 2018, the Peter Thiel and Marc Andreessen-backed Long Term Stock Exchange filed its Form 1. In doing so, the LTSE officially kicked off its bid to become yet another stock exchange.It's been an interesting road to get here.

Initially started by Eric Reid (who reportedly still owns 30% of the LTSE parent company), the LTSE has been marketed as a response to the rising ďshort-termismĒ of the modern public markets. In December 2017, the company inked a deal with IEX to offer its listing standards as part of IEX, but the two parted ways last summer. One of the key elements of the LTSE offering was that companies listed on it would reward long-term holders with increased voting rights over time. And while that may sound nice in theory, a little tire kicking by SEC Democratic Commissioner Jackson (a former corporate governance law professor) revealed that the impact would be to consolidate control of the companies into the founders and a small handful of investors hands.

Once the LTSE ran into opposition at the SEC for this type of disenfranchisement of investors, the LTSE decided to strip out all of its long term listing standards and simply apply to become an exchange. According to LTSE executives, the company remains committed to ultimately adopting unique long term-focused listing standards, but it will seek to implement those slowly, and carefully, after the exchange application is approved. An exchange registration has significant monetary value, as CHX's sale just proved. That deal was reportedly for $50-$100 million. If the founders of LTSE walk away right now, they have nothing. But if they get registration, they at least have a valuable asset--with or without any listings.

Of course, assuming LTSEís owners decide to stick with it after their registration is approved, they will then have to get down to the difficult task of implementing their long term policy focus. Thatís going to be difficult. Silicon Valley executives donít want to relinquish control (hence the rise of dual class share structures).

They definitely donít want to listen to (or get fired by) their companyís new shareholders. So how do you create a listing standard that long term investors want and corporate executives (who actually pick where to list) both like? We arenít sure how to thread that needle. And itís clear from the exchangeís last attempt at listing standards that they arenít certain on a path forward either.

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