Weekly Activity Wrap Up: U.S. cash equity volume is putting up the largest year-over-year growth, running higher by +18% Y/Y thus far in the new 3rd quarter. U.S. equity options activity is not far behind at +10% Y/Y, with U.S. futures trading currently averaging 16.9 million contracts quarter-to-date, which is down -7% year-over-year.
U.S. Cash Equity Detail: U.S. cash equity trading finished the week at 7.2 billion shares traded which is blending to a 6.7 billion daily average thus far for the 3rd quarter of 2015. This is +18% 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. NASDAQ's weekly market share rose to 19% this week. However, its share of third quarter volume remains at 18%, 200 bps lower than its 20% share in 3Q14, a -6% decline.
U.S. Options Detail: U.S. options activity continues to churn higher with 17.3 million contracts traded this week which is also 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 -15% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.
U.S. Futures Detail: CME Group volume has been relatively low the last couple of weeks. In the most recent 5-day period ending July 30th, activity levels were 11.9 million contracts at the big futures exchange blending 3Q15 volume to a 12.7 million average level, a -6% year-over-year decline. CME open interest, the most important beacon of forward activity, however continues in strong fashion with 100.6 million contracts pending, good for +19% year-over-year growth. Activity levels on the futures side at ICE hit 3.8 million contracts this week, with 3Q15 blending to a 4.2 million daily average. That amounts to a -8% year-over-year decline. ICE open interest this week tallied 72.4 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:
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
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA