Silicon Valley Exchange Says Wall Street Needs to Slow Down
The Long-Term Stock Exchange wants to list companies that aim for sustainable growth.
(Bloomberg Markets) -- Eric Ries has plenty of Wall Street doubters. That only motivates him more. The Silicon Valley author, who’s sold more than a million copies of his book The Lean Startup, is putting his own lessons into practice by entering one of the world’s most competitive and cutthroat markets: U.S. stocks. His Long-Term Stock Exchange got the green light from regulators in May, but many market executives still don’t know what to make of it and can’t figure out how it will fit into an already complex ecosystem.
“A lot of finance people said, ‘Listen, kid, you don’t understand,’ ” says Ries, 41, about the reaction to his exchange. “I don’t take being called crazy as an insult. I’m used to it.”
Startups that list with LTSE will prioritize longer-term governance over quarterly profits, he says. The exchange would require companies to adopt and publish binding policies on long-term strategy and compensation that take into account a broader group of stakeholders. In a market known for its speed and high-frequency trading, LTSE wants to help entrepreneurs build lasting businesses not overly driven by short-term results.
That urge to move away from so-called quarterly capitalism isn’t novel: BlackRock Inc. Chief Executive Officer Larry Fink has championed longer-term growth over short-term returns. And President Trump asked the U.S. Securities and Exchange Commission to look into a semiannual system of reporting.
Still, it’s not clear to equity market participants how one market can advance even the best-intentioned goals when it’s interconnected with other venues. Executives in the stock trading business say they support LTSE’s ideas but don’t see a way to put them into practice. “It’s an interesting, very valid, and very noble aim,” says Jack Miller, head of trading at Robert W. Baird & Co. in Milwaukee. “How that gets accomplished, I don’t know.”
LTSE faces an uphill battle against two well-established players: the New York Stock Exchange and Nasdaq Inc. Those exchanges have a “strong hold” on the market, says IEX Group Inc. exchange CEO Brad Katsuyama, whose company exited corporate listings in September.
“This is a very competitive landscape which has been dominated by legacy companies,” says Steve Goldstein, LTSE’s chief marketing officer. “We take seriously the fact that we have ‘long term’ in our name, and we are working hard to get it right.”
The company has raised almost $70 million, with backing from venture capital firms including Founders Fund, Collaborative Fund, and Andreessen Horowitz. (Bloomberg LP, which owns Bloomberg Markets, is an investor in Andreessen Horowitz.) Its 29 staff members include exchange CEO Zoran Perkov, who’s managed operations at Nasdaq and had a similar role at IEX, and Michelle Greene, who worked at the NYSE and U.S. Treasury Department.
Its office in New York’s Chelsea neighborhood is tucked between a Brazilian jiujitsu club and a fur store. In typical startup fashion, dogs are welcome. It regularly hosts Roy, a dachshund mix owned by chief of staff Carolyn Dee.
Ries, who’s based at LTSE’s San Francisco office, published his bestselling guide to entrepreneurship in 2011. The book has been translated into more than 30 languages and drawn praise from the likes of venture capitalist Marc Andreessen and Facebook Chief Operating Officer Sheryl Sandberg.
Since receiving approval from the SEC in May, the exchange has locked in more funding and published details on its listing standards. LTSE is building its systems and aims to start trading by the end of the first quarter. It’s also looking to clinch its first listing.
The idea for LTSE is tucked into two pages near the end of Ries’s almost 300-page book. A proofreader from the financial industry advised the author to cut the passage entirely, believing it would undermine the rest of his ideas. The reader said, “It’s so stupid, you have to take it out,” Ries recounts. Instead, he let the idea brew and consulted industry experts, investors, and traders. Many, skeptical about his lack of financial knowledge, ruled out the proposal as unworkable. Ries plowed on anyway, founding LTSE four years ago.
Timing is key. Even though it wants clients with long-term business models, the exchange itself is in a time crunch to get up and running. LTSE says it’s capitalizing on a moment in stock markets when participants are more receptive to new exchanges. That’s because of acrimony in the broader market relating to lawsuits, proposed changes in market structure, and the cost of market data. “That creates a nice contrast for us,” Ries says. “It’s great, because we’re not trapped in these legacy business models, so we’re not having these legacy fights.”
Nguyen is a finance reporter at Bloomberg News in New York.
To contact the editor responsible for this story: Dan Reichl at dreichl@bloomberg.net, Siobhan Wagner
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