In its heyday, the Chicago Stock Exchange helped introduce big-name American companies such as Marriott and IBM to investors. Now the 135-year-old Midwest institution could do the same for Chinese companies, after it agreed to sell itself to a group of investors led by Chongqing Casin Enterprise Group.
The proposed transaction — an attempt to revive the fortunes of the exchange — has stirred fresh debate about foreign takeovers of U.S. corporations.
The $20 million sale, which requires clearance by the Securities and Exchange Commission, has been lambasted by Republicans and Democrats on Capitol Hill, many of whom say it would be risky to sell such a critical part of the U.S. financial market to a foreign investor. Allowing China access to a U.S. exchange could pose a risk to national security, critics say.
“An exchange license is a rare commodity,” Rep. Robert Pittenger (R-N.C.) said. “It’s about more than the exchange itself.”
The proposed deal, announced in February, has also been blasted by President Trump, who has criticized Chinese trade practices in recent weeks. “China bought the Chicago Stock Exchange — China, a Chinese company,” then-candidate Trump said during a presidential debate in South Carolina last year. “They are taking our jobs. They are taking our wealth. They are taking our base.”
The deal is a test of the Trump administration’s resolve to curb the growing influence of the world’s second-largest economy, particularly in U.S. financial markets.
China’s appetite appears to be growing. Chinese investors and companies snapped up 171 companies last year in deals worth more than $65 billion, more than triple the 45 acquisitions, worth $5 billion, done in 2010, according to data from the analytics firm Dealogic.
The exchange is not the only financial-industry player with a potential Chinese buyer. Former White House communications director Anthony Scaramucci is selling his investment firm, SkyBridge Capital, which has $11 billion in assets, to a Chinese firm. Some say that deal, like the agreement for the Chicago Stock Exchange, or CHX, could give Chinese firms new access to U.S. financial markets and a map to its most wealthy investors.
“It’s a bit of a coup to get approved to be involved in the U.S. financial sector,” said Derek Scissors, a China specialist at the American Enterprise Institute, a conservative-leaning research organization in Washington. “It’s a nice feather in your cap.”
The privately held Chongqing Casin Enterprise Group attempted to introduce himself to a U.S. audience in March with a blog post, “Hello America, We Are the Casin Group.”
“For qualified companies in developing countries that desire a global presence and a listing in a mature market, [the Chicago Stock Exchange] could give them that opportunity under a U.S. regulatory framework,” Jackson Xiao, vice president of Casin Group and chief executive of its U.S. subsidiary, said in the blog post.
“Of course, this is also an investment, and we believe that CHX — with the help of our acquisition group — has enormous potential for growth,” Xiao said. “This transaction can provide a link between the capital markets in China and the U.S., the two biggest economies in the world.”
For this article, Casin referred comment to the Chicago Stock Exchange. There, officials said the deal would provide their platform with the capital it needs to grow and potentially turn it into an international force, helping small and medium U.S. and Chinese companies offer stock to the public for the first time. Without it, the exchange’s future is unclear, industry experts say.
“The goal is, as the Chinese marketplace matures and thousands of Chinese companies want to seek liquidity, they get their accounting in line, we get them to come to us,” said Tony Saliba, who is part of the investment group pitching the deal and an exchange board member. “They are going to list in the U.S. or London. Casin gives us in America an advantage.”
The Chicago Stock Exchange was one of dozens of regional exchanges started in the 1880s to help local companies sell their stock to the public and is one of the oldest still open. Twenty-five years ago, the exchange trading floor was “vibrant, packed with a lot of people. Every firm was represented; it was a competitor,” said Saliba, who traded there in the 1990s. “It could provide the personal touch.”
But as stock trading first started to centralize in New York and then digitize, the Chicago institution found itself serving a smaller and smaller part of the market. Now, less than 1 percent of stock traded during a day goes through the venue.
“The Chicago Stock Exchange has been an inconsequential player for a really long time. They have been having a difficult time competing with the large incumbents,” said Spencer Mindlin, an analyst who focuses on capital markets at the research and consulting firm Aite Group.
And now the exchange is facing a different kind of crisis: U.S. companies are going public at the slowest rate in decades, and more of the day-to-day trading is being done in “dark pools,” or private trading platforms, which offer sellers more flexibility but have taken market share from traditional venues like the one in Chicago.
The exchange has spent years attempting to regain market share. It recently developed strategies to help investors compete with high-frequency traders, who can buy or sell a stock in less than the blink of an eye, and developed a strategy for assisting companies completing complex financial transactions.
But to rebound, the exchange needs money. Its current owners, a consortium of financial firms that include Goldman Sachs, have not invested in the company for years and have asked for an exorbitant price to sell their stake, driving away potential U.S. buyers, according to people familiar with the exchange’s finances who spoke on the condition of anonymity. “They have left it to wither on the vine,” one of them said.
To revive itself, the exchange wants to restart its IPO program, which has been dormant for about 10 years. For that, it will need millions of dollars to invest in technology, to hire more people and to prove to the SEC that it is has enough capital to safely help a company offer stock to the public, according to people familiar with the plan.
“If this purchase goes through, we will have a brand-new marketplace. This would be a bonanza for the United States and good for Chicago,” Saliba said. The companies it would attempt to attract are “small potatoes” to the New York Stock Exchange or Nasdaq but could make a solid business for the Chicago Stock Exchange, he said. “We would give them a place to have an IPO efficiently and cheaply.”
And while a relic to U.S. investors, the Chicago Stock Exchange potentially offers a lot to a Chinese buyer, industry analysts say. It would be an expensive and time-consuming process for a Chinese firm to get regulatory approval to build a U.S. exchange from scratch. By buying the Chicago exchange, Casin would bypass that process and could quickly begin offering a venue for small to medium Chinese companies to stage IPOs.
“They are making a large investment,” Saliba said of the Chinese investors. “They believe they can get Chinese business over here. Whether we’re successful or not remains to be seen.”
But the deal has stirred strong objections, particularly from critics who question whether the Chinese firms that would trade on the Chicago exchange would be safe investments for U.S. investors. The purchase would also give China unprecedented access to the infrastructure of the U.S. financial system, they say.
Exchange officials note that the deal has already been cleared by the Committee on Foreign Investment in the United States, known as CFIUS, which reviews whether such deals pose national security concerns.
But that has not satisfied the critics, who point to China’s history of stealing intellectual property and state-sponsored cyberattacks. “I believe it is highly likely that they will employ similar, deceitful practices to gain an unfair advantage in our financial markets through this acquisition,” Sen. Joe Manchin III (D-W.Va.) said in a July letter to the SEC.
CFIUS needs to be improved to account for China’s aggressive push into U.S. markets, said Pittenger, the congressman from North Carolina.
“You have to have trustworthiness in our economic security,” he said. “We welcome Chinese investments, but our concern is anything that could have national security implications.”
The deal’s future now lies with the SEC. The agency’s staff has recommended approval of the deal, but its commissioners are asking for more information. The agency has extended the time the public can weigh in on the deal until Sept. 17.
The ruling could help define the leadership of Jay Clayton, whom Trump nominated to lead the agency. As a Wall Street lawyer, he specialized in helping companies tap the financial markets to raise money. Clayton, who declined to comment for this article, served as an adviser to China-based Alibaba Group in 2014 when it raised $25 billion in an IPO, the largest such deal in history.
Since taking the helm at the SEC, he has called for scaling back regulations to allow more companies to go public. “We have to reduce the burdens of becoming a public company so that it’s more attractive,” Clayton said during his confirmation hearing in March. He has also praised a 2012 law, Jumpstart Our Business Startups Act, that the Chicago Stock Exchange says it wants to tap to help more small companies go public.
“Jay Clayton is a listings guy. He is an IPO guy. That is a big part of his narrative,” Mindlin of Aite Group said. “So what could be his objection?”
By Renae Merle
The Washington Post