A Nothing Burger

NYSE Chicago Moves to Texas

People on both sides of the political divide will use the move of NYSE Chicago to Texas as evidence that there is something happening. Trust me, in the deep bowels of finance, no one cares.

I had a good friend who was active in business his entire 40-year career. He was a highly successful guy with a huge network. He said next to NYC, Dallas was his favorite city to do business in. He loved the business culture there.

NYSE Chicago used to be the Chicago Stock Exchange. The Chicago Stock Exchange has not been relevant for 100 years or more. The reason the NYSE bought it was their strategy of buying up regional stock exchanges. They own Boston, Philly, and other regional exchanges.

Regional exchanges were relevant in the 1800s. Philly was relevant when it came to equity options trading in the 70s-90s. They also offered some competition to the CME when it came to FOREX.

But, people who understand the industry aren’t changing any business operations due to this change.

The reason is that on the SEC side of the financial ledger, most of the trading is done off-market in dark pools, where big firms like Citadel pay for order flow from firms like Schwab. Those orders never see the floor of any exchange but their price action is reported via the exchange.

When stock trades clear, all of them are fungible. This means if I buy IBM 0.00%↑ stock at the NYSE, and I sell it anywhere else, the trade offsets. Clearing is a utility in SEC exchanges.

The same clearing operation goes for exchanges like the Chicago Board Options Exchange. However, if the CBOE decided to pick up stakes out of Chicago and move to Texas, that would be a big deal. They are an industry leader. The dominate the options trade which is done more on exchange than stocks because options are a helluva lot harder to make a market on than a simple equity.

I know there are options market makers or former options market makers who read this blog. It would be appreciated if they could enlighten us on how they did their job and why that created a strategic advantage for a business like CBOE.

The CFTC side of the financial marketplace is different. Owning your own clearing house is a big advantage. CME owns theirs and they are the largest exchange in the world because of it. According to their recent earnings call, customers were saving $60 billion dollars a day due to the cross-margining capability of their product line. When ICE decided to compete with CME, the first thing it did was buy the NY Cocoa and Cotton Exchange which owned its own clearinghouse. ICE also offers cross-margining efficiency for its customers across its product line.

If CME decided to leave Chicago, it would be an earthquake for the city. I do think the board at the exchange ought to be discussing it. Not because of the tax benefits, but because of the network and exposure benefits. Dallas is growing and on a big upswing. Chicago is dead.

It is going to be easier to attract employees to Dallas than Chicago for the next ten to twenty years.

I was chatting with an investment banker the other day. He’s a former Wall Streeter who grew up in Chicago. We were lamenting the state of city finances and corruption. He remarked; There is not one major bank left in Chicago. There is not one M+A Investment bank from Wall Street that feels like they need to staff up in Chicago but they are staffed up in other cities.

It is a dead end for a person pursuing a career in traditional banking and finance.

There is trading with trading firms, private equity, and some good, subpar lending facilities. The venture community doesn’t have a large footprint, and if it didn’t occasionally jump up and down, you wouldn’t know it exists.

My parlor game question is: How long will it take for the Chicago Machine Democrats to pass a transaction tax on the two large exchanges that are left? As long as Pritzker is governor, he is not stupid enough to do that. But he’s gone soon. Who will be next? We know the Chicago Teachers Union wants that tax, and they run the county of Cook and the city of Chicago.

Texas is making smart moves. It’s building out its chancery court to offer healthy competition to Delaware. It’s low tax. It is passing school choice. The Achilles heel in Texas is the damn property taxes which are as high as states like Illinois and New Jersey.

I always thought Charlotte, NC had a chance to steal all the financial entities from other states. But, it might be Dallas.