Is Long-Term Stock Exchange a Silicon Valley Pipe Dream?

Silicon Valley, the headquarters of some the world's most innovative technology companies, is a truly fascinating place. There are people with amazing ideas and skills, and others with billions of dollars eager to spend them funding those ventures. 

There is nowhere else in the world where impossible challenges seem as achievable as they do in Silicon Valley. The entire region has been built on the idea that you can take on a long-standing truth and completely disrupt it, or come up with an entirely new one.

But like a double-edged sword, the secret to Silicon Valley's success—its desire to continually question the establishment, and believe it can implement change—is also its biggest fault.

Take, for example, the recently published stories regarding the Long-Term Stock Exchange (LTSE). The exchange is the brainchild of Eric Ries, who developed the Lean Startup, a methodology that stresses the importance of continuous innovation. Ries turned the idea into a book in 2011, which reached number two on the New York Times' bestseller list.

I encourage you to read the stories written about LTSE by Bloomberg and Quartz, but to summarize LTSE to the simplest of terms: Ries is looking to build an exchange that values investors and firms who focus on the long term.

According to the Bloomberg, LTSE would differ from typical exchanges in three major ways: how executives are compensated, how the firm shares information, and how investors vote.

Disruptive Decisions

Ries is clearly looking to shake things up with LTSE. The three reforms touch on some of things folks in the financial industry care about most: money, transparency and power. It would be hard enough to actually implement change in just one of those categories. To impact all three seems insane.

LTSE's principles also stand in stark contrast to high-frequency trading (HFT). And although they might not like to admit it, nearly every firm practices some form of HFT. I'm not sure how interested financial firms will be in LTSE when their algorithms will be useless there.

The obvious comparison for LTSE is IEX, the alternative trading system (ATS) currently seeking regulatory approval from the US Securities and Exchange Commission (SEC). The SEC commissioners have until June 18 to approve IEX, which originally submitted its application to become an exchange in mid-September of last year.

Both stories referenced IEX and the challenges it has faced while fighting for approval. Now think of all the pushback IEX has gotten due to its speedbump, and then consider the changes LTSE is looking to make. Whether you agree or disagree with IEX's framework, the exchange's reforms look conservative compared to LTSE's.

If it's been this hard for IEX to gain regulatory approval, how smooth a journey could LTSE realistically expect to have?

Ready for Change?

For the record, I'm not against change or disruption. That's the basis of nearly every technology project. If we didn't choose to question the establishment, we'd all still be riding horses and I'd be writing this column on a printing press. But I'm not, thanks in large part to folks like the people in Silicon Valley who are always looking to innovate.

That said, financial markets are a completely different beast from other areas where Silicon Valley is able to implement changes quickly. Firms are slower to adopt new ideas, and regulations make it even harder to implement change.

One of the main principles of the Lean Startup is that a firm always keeps customer feedback front-of-mind. The point of LTSE is to allow companies to avoid chasing the revenue benchmarks of their quarterly reports. It's something that's stopping startups from going public, Reis told Bloomberg, as firms fear their innovation will be hamstrung by focus on their revenue reports.

That might be true—Ries is far smarter than me—but are firms willing to limit their compensation packages, voting rights and privacy to do so? In an industry that's not always agile, it's a question that needs to be asked.

If anyone is able to do it, it will be Ries, who is just as open about his failures as he is his successes. And with The Wall Street Journal reporting IEX will be granted approval on Friday, maybe the times are changing in the financial industry.

Any coach will tell you their team will learn more from a loss than a win. So even if LTSE does fail, maybe it will be the spark that leads to a change in how exchanges handle startups looking to list. And that's why I'm grateful for people like Ries shooting for the stars. 

This week on the Waters Wavelength podcast ─ Episode 21: Toronto Information and Tech Summit, Fintech Regulation

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