We recently presented a Black Book on the Exchange sector and the major themes impacting the group. We see collateral damage from the ongoing rapid price decline in energy and commodity markets in the new era of a strong U.S. dollar with formerly imbalanced global commodity markets now normalizing. We estimate that the big energy markets at the Intercontinental Exchange (ICE) will be more dormant than the Street expects, as commercial hedging and speculative energy trading dries up. Conversely, interest is growing substantially at the more Financially oriented CME Group (CME), as trader counts and open interest in Treasuries, Eurodollars, and FX products are swelling. We think the Street is not bullish enough on shares of CME and that the company has $5 per share in earnings power in the out year and that the stock will revisit near all time highs at $140. As outlined in our presentation deck and replay below, a CME long position can also be paired with a short ICE position, with favorable fundamental exposures on each side of the trade. In addition, the recent Virtu (VIRT) IPO is being egregiously valued by the market for a company that takes intraday proprietary risk but does not have any tangible equity capital to cover a potential trading loss. Shares of VIRT are currently on our Best Ideas list as a short position with a fair value in the mid teens, implying over 30-40% downside.
Hedgeye Exchange Black Book Replay HERE
Hedgeye Exchanges Black Book Materials HERE
Weekly Activity Wrap Up: U.S. equity options are putting up the best activity levels currently, with 17.3 million contracts traded in the most recent 4-day period ending July 16th. The running quarter-to-date average for options is currently 23.3 million contracts, up a robust +48% year-over-year and better by 55% sequentially from 2Q15. Futures activity hit 16.6 million contracts this week, slightly lower than the running 3Q15 average of 18.5 million contracts quarter-to-date, which is up 3% year-over-year. U.S. cash equity trading is running higher by +16% year-over-year thus far in the new 3rd quarter.
U.S. Cash Equity Detail: U.S. cash equity trading finished the week at 6.0 billion share traded which is blending to a 6.5 billion daily average thus far for the 3rd quarter of 2015. This is +16% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed, with the New York Stock Exchange/ICE standing pat at 24% market share and NASDAQ continuing to cede share to competitors. NASDAQ thus far this quarter has taken just 18% share of all U.S. stock trading, down 200 basis point year-over-year or a -5% decline.
U.S. Options Detail: U.S. options activity continues to churn higher with 17.3 million contracts traded this week which is blending 3Q15 activity to 23.3 million contracts per day, up +48% year-over-year. The market share battle amongst venues continues to be one of losses at both the NYSE/ICE and NASDAQ. NYSE has lost over 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ has shed 300 basis points of share, good for a -14% loss from last year as ISE/Deutsche Boerse and Other venues mop up volume and share.
U.S. Futures Detail: CME Group volume came off the boil last week with activity levels hitting 11.7 million contracts at the big futures exchange. 3Q15 volumes are blending to a 14.0 million average level which is good for +4% year-over-year growth. CME open interest continues in strong fashion with the latest count this week showing 98.8 million contracts pending, good for +17% year-over-year growth. Activity levels on the futures side at ICE hit 4.8 million contracts this week, with 3Q15 blending to a 4.5 million daily average. That is good for a +8% year-over-year expansion. ICE open interest this week tallied 71.4 million contracts, continuing a -4% year-over-year contraction.
Monthly Historical View: Monthly activity levels give a broader perspective of exchange based trends. Largely, volatility levels are just starting to rise after drastic compression this cycle. Thus as the VIX, MOVE, and FX Vol starts to normalize, we expect all marketplaces to experience higher activity levels.
Sector Revenue Exposure: The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA