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Takeaway: U.S. cash equity volume is vaulting higher by +16% Y/Y with U.S. equity option volume not far behind at +10 Y/Y.

We recently presented our investment thesis on the Exchanges. To summarize,

  • Long CME:  Financially oriented CME Group (CME) is enjoying a long awaited boom in activity, as trader counts and open interest in Treasuries, Eurodollars, and FX products are swelling. The decade long concentration on trading energy and commodities is over and with steeply shaped forward curves and more profitable opportunities, financial products are seeing rapid adoption. 
  • Short ICE: We see collateral damage from the ongoing rapid price decline in energy and commodity markets. As a result, these important products at ICE will be less active than the Street expects, as commercial hedging and speculative energy trading dries up.

We think CME has $5 per share in earnings power in the out year and the stock will revisit near $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.

Separately, recent IPO Virtu (VIRT) is being valued incorrectly by the market. Our main qualm is that the company takes intraday prop risk, but has no tangible equity capital to cover any potential trading losses. Shares of VIRT are currently on our Best Ideas list as a short with a fair value in the mid-teens (30-40% downside).

Hedgeye Exchange Black Book Replay HERE

Hedgeye Exchanges Black Book Materials HERE

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - XMon20

Weekly Activity Wrap Up:  U.S. equity options are putting up the best quarter-over-quarter growth so far. The running quarter-to-date average for options is currently 17.3 million contracts, up +10% year-over-year and better by 15% sequentially from 2Q15. Futures activity hit 14.2 million contracts this week, lower than the running 3Q15 average of 17.2 million contracts quarter-to-date, which is down -5% year-over-year. U.S. cash equity trading is showing the largest year-over-year growth, running higher by +16% Y/Y thus far in the new 3rd quarter.

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon1

U.S. Cash Equity Detail: U.S. cash equity trading finished the week at 6.6 billion shares traded which is also blending to a 6.6 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 points year-over-year or a -6% decline.

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon2

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon3 2

U.S. Options Detail: U.S. options activity continues to churn higher with 18.0 million contracts traded this week which is blending 3Q15 activity to 17.3 million contracts per day, up +10% 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 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ has also shed 400 basis points of share, good for a -16% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon4

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon5

U.S. Futures Detail: CME Group volume has been relatively low the last couple weeks. In the most recent 5-day period ending July 23rd, activity levels were 10.5 million contracts at the big futures exchange. 3Q15 volumes are blending to a 12.9 million average level which is a -4% year-over-year decline. CME open interest continues in strong fashion with the latest count this week showing 100.1 million contracts pending, good for +17% year-over-year growth. Activity levels on the futures side at ICE hit 3.7 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That amounts to a -6% year-over-year decline. ICE open interest this week tallied 72.6 million contracts, continuing a -4% year-over-year contraction.

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon6 2

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon7 2

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon8

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon9

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.

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon10

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon11

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon12

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon13

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon14

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon15

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:

HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - XMon19 3

Please let us know of any questions,

Jonathan Casteleyn, CFA, CMT 

  

  

 Joshua Steiner, CFA