BlackRock and Citadel’s Bold Push to Disrupt Nasdaq

BlackRock and Citadel Challenge Nasdaq: A Shift in the Exchange Landscape

BlackRock and Citadel Securities, two titans of the financial industry, are backing the launch of a new national stock exchange based in Texas. This initiative aims to rival established giants like Nasdaq and the New York Stock Exchange (NYSE), potentially reshaping the equities market. The move comes amid escalating debates over regulatory requirements, rising costs of public listings, and a perceived departure from traditional meritocratic principles in public markets.

Rising Costs, Declining Listings, and Robust Private Markets

Over the past few decades, the cost of publicly listing a company has increased substantially. Initial listing fees on Nasdaq range from $150,000 to $295,000,¹ depending on factors like market capitalization and the number of shares. Annual listing fees add another $48,000 to $167,000² to a company's expenses. However, these figures represent just a fraction of the total costs.

Companies must also contend with significant compliance expenses associated with regulatory requirements such as the Sarbanes-Oxley Act (SOX), Securities and Exchange Commission (SEC) reporting, and corporate governance mandates. Estimates suggest that the average annual cost of being a public company ranges from $1.5 million to $2.5 million for smaller firms and can exceed $10 million for larger enterprises.³

Concurrently, private markets have become more robust and accessible, offering companies ample opportunities to raise capital without going public. The global private equity market has grown significantly, with assets under management (AUM) increasing from $2.5 trillion in 2010 to over $6.5 trillion in 2022, according to Preqin.⁴  Venture capital funding has also surged, providing substantial resources for startups and growth-stage companies.

As a result, the necessity for companies to access public capital markets has diminished. This shift contributes to the secular decline in the number of publicly listed companies in the United States, which has dropped from over 8,000 in 1996 to approximately 4,000 in 2022—a nearly 50% reduction.⁵

Shift Away from Additional Regulatory Mandates

Recent regulatory trends have introduced new requirements for listed companies, including diversity, equity, and inclusion (DEI) mandates that some argue are unrelated to traditional meritocratic principles. A notable example is Nasdaq's Board Diversity Rule, approved by the SEC in August 2021. This rule requires listed companies to:

• Have at least two diverse directors, including one who self-identifies as female and another who self-identifies as an underrepresented minority or LGBTQ+.

• Provide annual disclosures on board diversity statistics.

Non-compliance requires companies to publicly explain their reasons, potentially exposing them to reputational risks and shareholder scrutiny. Implementing these requirements can involve additional costs related to recruiting diverse candidates, modifying governance structures, and enhancing disclosure processes. While precise figures vary, some companies may incur millions of dollars in additional expenses to meet these mandates.⁶

By establishing an alternative exchange, BlackRock and Citadel may provide companies with a venue that emphasizes financial performance and merit-based practices without the added layer of non-financial reporting requirements that may lead to a performance drag.

Implications: Increased Competition and Market Efficiency

The entrance of BlackRock and Citadel into the exchange space introduces significant competition to the existing duopoly of Nasdaq and NYSE. Increased competition could lead to:

• Lower Listing Costs: The new exchange could offer more competitive fee structures, reducing financial barriers for companies considering an initial public offering (IPO). For instance, if the new exchange sets listing fees below Nasdaq's minimum of $150,000, it could make going public more accessible for smaller or mid-sized companies.

• Reduced Compliance Expenses: By minimizing additional regulatory mandates like DEI requirements, companies could save on compliance costs that can reach into the hundreds of thousands or even millions of dollars annually.⁷

• Enhanced Market Structure: Competition may drive innovation in trading technology, execution speed, and market accessibility, benefiting both issuers and investors. Advanced trading platforms could reduce transaction costs and improve liquidity.

• Renewed Focus on Shareholder Value: Companies may prefer an exchange that prioritizes shareholder interests without additional mandates that do not directly contribute to financial performance.

• Incentivizing Public Listings: By addressing the cost and regulatory burdens of going public, the new exchange could make public listings more attractive compared to private funding options. This may help reverse the trend of companies staying private longer due to robust private markets.

Why Investors Should Pay Attention

• Market Influence of Backers: BlackRock manages over $9 trillion in assets under management (AUM), and Citadel Securities is a leading market maker responsible for a significant portion of U.S. equity trading volume. Their involvement lends substantial credibility and resources to the new exchange, increasing its likelihood of success.

• Potential for Increased IPO Activity: Lower barriers to listing and reduced compliance costs could reverse the trend of declining public companies, offering investors a broader array of investment opportunities. A more vibrant IPO market enhances capital formation and can stimulate economic growth.

• Challenging Established Exchanges: Nasdaq and NYSE may need to reevaluate their fee structures and regulatory requirements to remain competitive. This could lead to a more efficient market overall, with benefits such as reduced costs for issuers and improved services for investors.

Competitive Advantages

BlackRock and Citadel bring substantial capital, technological expertise, and market access to the table. Their advantages include:

• Advanced Trading Technology: Leveraging cutting-edge systems to enhance execution speeds and reduce transaction costs. This technology could rival or surpass existing platforms, offering a compelling value proposition for traders and investors.

• Extensive Networks: Utilizing vast industry connections to attract a diverse range of companies and liquidity providers. Their relationships could facilitate quicker adoption and integration into the broader market ecosystem.

• Financial Strength: Investing in infrastructure and absorbing initial operational costs to establish market presence. Their deep pockets allow for sustained investment during the critical launch and growth phases.

Potential Challenges for Nasdaq

Nasdaq, with its entrenched systems and regulatory commitments, may face difficulties in adapting quickly to this new competitive landscape. Its existing fee structures and compliance requirements, including DEI mandates like the Board Diversity Rule, could make it less agile in responding to market demands for lower costs and fewer non-financial mandates.

Moreover, Nasdaq's adherence to these additional requirements may alienate companies that prefer to focus solely on financial performance and shareholder returns. The new exchange could capitalize on this by offering a more streamlined and cost-effective listing process, potentially attracting companies that might otherwise remain private due to the robustness of private capital markets.

A Possible Turning Point in Public Markets

The collaboration between BlackRock and Citadel to launch a new stock exchange could mark a significant shift in the U.S. equities market. By potentially reducing listing costs, easing regulatory burdens, and refocusing on shareholder value, the new exchange might encourage more companies to go public rather than relying solely on private funding. This would provide investors with increased access to growth opportunities and could enhance overall market liquidity.

Investors should monitor this development closely. The success of this new exchange could herald a more competitive era in the equities market, challenging existing paradigms and possibly reversing the long-standing decline in publicly traded companies. It represents a strategic move that could realign market structures with traditional meritocratic ideals, emphasizing performance and efficiency over additional regulatory mandates.

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[1] Nasdaq. (n.d.). Initial Listing Fees.

[2] Nasdaq. (n.d.). Annual Fees.

[3] PwC. (2017). Considering an IPO? The costs of going and being public may surprise you.

[4] Preqin. (2022). 2022 Preqin Global Private Equity & Venture Capital Report.

[5] World Bank. (n.d.). Listed domestic companies, total - United States.

[6] U.S. Securities and Exchange Commission. (2021). Order Approving Proposed Rule Changes to Adopt Listing Rules Related to Board Diversity.

[7] Deloitte. (2019). The cost of compliance: Have you counted the dollars and cents?

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