HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth

Takeaway: Cash equity volume continues to widen its y/y expansion, now up +19% in the new 3rd quarter.

Virtu (VIRT) stock hit the skids this week with the FX category declining by -43% sequentially with just flat year-over-year growth. This will not be good enough for a stock trading in-line with the exchange group with higher risk in its trading operations. We continue to see downside, with fair value up to 40% lower in the worst case scenario (we got a -10% correction in shares this week). Our latest research report is HERE.


Weekly Activity Wrap Up

U.S. cash equity volume continues to widen its lead with the largest year-over-year growth among the major product categories, now running higher by +19% thus far in the new 3rd quarter. U.S. equity options activity is also putting up high activity levels at +9% Y/Y growth. U.S. futures trading is currently in the midst of a summer lull at 17.0 million contracts daily, which is down -6% year-over-year. The important open interest tally continues to favor our Best Idea long view on CME Group (CME), with the big Chicago exchange's trading backlog up now +22% y/y (it was up +19% last week).


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon1


U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 7.0 billion shares traded which is blending to a 6.8 billion daily average thus far for the 3rd quarter of 2015. This is +19% 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 but with NASDAQ's still sporting market share 200 bps lower than last year, a -6% decline.


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon2


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon3


U.S. Options Detail

U.S. options activity remains significantly higher, both quarter-over-quarter and year-over-year. 16.7 million contracts traded this week which is blending 3Q15 activity to 17.2 million contracts per day, up +14% quarter-over-quarter and +9% 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 shed 300 basis points of share, good for a -14% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon4


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon5


U.S. Futures Detail

CME Group volume has been relatively low the last couple of weeks. In the most recent 5-day period ending August 8th, activity levels were 12.7 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, continues in strong fashion with 102.6 million contracts pending, good for +22% year-over-year growth, further improvement from the prior week's +19%.


Activity levels on the futures side at ICE hit 4.7 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That is also a -6% year-over-year decline. ICE open interest this week tallied 71.7 million contracts, a -5% year-over-year contraction, worse than the prior week's -4% level.


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon6


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon8


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon7


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon9


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon10


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon11


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon12


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon13


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon14


HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon15


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 | Trending Cash Equity Volume Expanding Y/Y Growth - XMon19 3




 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 | Trending Cash Equity Volume Expanding Y/Y Growth - XMon20


 Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





Video | History: Why People Are Angry

On The Macro Show today, Hedge CEO Keith McCullough discusses how unsatisfied people are and how this gives birth to the hard right and the hard left. He also talks about what has him excited in the upcoming U.S. presidential election.


Subscribe to The Macro Show today for access to this and all other episodes. 


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Special Edition of The Macro Show Unlocked

Special free edition


On this morning's edition of The Macro Show Hedgeye CEO Keith McCullough discussed the slowing jobs market and the U.S. economy remaining in a #LateCycle slowdown.


In addition to our economic commentary and analysis Keith and Director of Research Daryl Jones wade in on last night's Republican presidential debates winners and losers. 



Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Encore Capital (ECPG) | Speedbumps on the Short Highway

Takeaway: Increased probability of large issuers returning to debt sales and of Encore's CFPB settlement materializing are short-term headwinds.

Encore Capital remains one of our favorite ideas on the short side as debt collection companies have historically been the worst performing subsector in all of Financials in the late cycle period. Beyond this, the company has been using what we would characterize as a loophole in GAAP (it's legal, but we think it's sketchy) to inflate its earnings over the last two years by buying companies and allocating a large share of the purchase price to goodwill. Under interest method accounting, this has had the effect of boosting revenues and earnings. It's our view that the late cycle dynamics are a strong riptide against which longs are swimming and the artificial pull forward of earnings through these acquisitions over the last few years will turn into a RoC headwind in the NTM.


For these reasons, we still think Encore is a great idea on the short side over the intermediate to long term. However, in the short term, it's possible that some good news could cause the stock to go up.  Two potential catalysts are the return of select large issuers (JPM / C) who've been on the sidelines due to regulatory issues of their own and Encore getting out from under its own regulatory investigation by the CFPB.


It looks like one or both of those positives is getting more likely based on a flurry of recent CFPB settlement activity.


Encore reports earnings on Monday and we think they'll likely talk positively on both of these fronts.



Encore Capital (ECPG) | Speedbumps on the Short Highway - relative subsector performance chart v2



There have been three recent CFPB enforcement actions in the debt collection space. 


Recent CFPB Enforcement Actions

  • On July 8, the CFPB announced a $216 million enforcement action against JP Morgan Chase for selling debt that was not legally collectible to third-party buyers and for robo-signing affidavits to sue consumers for unverified debt.
  • On July 21, the CFPB announced a $700 million action against Citi, $23.8 million of which was related to an expedited payment fee that Citi charged and failed to properly disclose to customers when collecting overdue debts.
  • On July 22, the Bureau announced an $18.5 million action against Discover for overstating minimum payments, misrepresenting interest paid, making early morning and late night collection calls, and failing to provide adequate notice to debtors whose debt it had acquired from Citibank.

Possible Effect on the Debt Collection Industry

As the CFPB concludes more investigations, the go-forward environment will become more defined, and issuers like JPM and Citi may become more comfortable developing plans to return to consumer debt sales. If those issuers do return to selling charged-off consumer debt, it would increase the debt supply available to Encore and decrease some of the upward pricing pressure on that supply.


Upcoming Settlement

As mentioned by management on recent conference calls, Encore is in ongoing discussions with the CFPB regarding past practices that could result in a settlement and one-time pretax charge in excess of $35 million. Given the recent high frequency of CFPB settlements with major institutions involved in debt collection, a resolution with Encore seems likely to materialize sooner than later. Most likely, a settlement would be a positive, as it would dissipate one of the clouds hanging over Encore. 


Maintaining the Short Call

In spite of these possible developments, we are maintaining our short recommendation. Although the return of large suppliers and/or the resolution of CFPB negotiations may be speedbumps for the short case, the credit cycle remains late cycle. Jobless claims hitting their lowest level since 1973 a few weeks ago is further evidence of the credit cycle at/near its peak. As the cycle heads in the other direction, we expect Encore’s ability to collect on its purchased debt to suffer. Additionally, some regulatory uncertainty will remain even after the slew of CFPB settlements slows down. The Bureau has yet to complete its broad debt collection rulemaking and currently has pre-rule activities scheduled for December 2015.


These observations are not a waiver from the short thesis but a “heads up” in regards to a few speedbumps that may materialize in the short to intermediate term.




Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Aggressive Enough?

“I wasn’t aggressive enough, and the match turned completely.”

-Justine Henin


That’s how Belgian tennis great, Justine Henin, explained losing in the 2006 Wimbledon final to France’s Amelie Mauresmo. This came after Henin won the 1st set 6-2 hitting “twice as many winners as unforced errors.” (Top Dog, pg 131)


Henin has never won at Wimbledon, but she’s won 7 Grand Slam titles. She won the Olympic Gold medal in 2004 too. At the highest level of competition, she gets #winning and what happens when you don’t play to win.  That’s where the best players beat themselves.


Aggressive Enough? - Justine


While I wouldn’t characterize last night’s competitors in the #GOPDebate as the best leaders in the world, however mediocre the bar for American politics has become, you could clearly see who was playing to win (Fiorina) vs. who was playing not to lose (Bush).


Back to the Global Macro Grind


Since I support neither the Republican nor Democrat party (because, much like during the Nixon/Carter decade, under Bush/Obama both parties have had the same currency, debt, and monetary policies), I guess I’m not your US political party fan boy.


Political partisans can consider me whatever they’d like as a result of that. In case you haven’t noticed, I don’t particularly care what people think about me. On free-markets and economic matters, I’m happy to continue to think for myself.


On that front, I haven’t heard much of anything that is in the area code of aggressive enough from either party’s candidates, yet. Yeah, Trump is Mr. Big Time – great for him, personally. But he’s a protectionist – and that defensive posture is never going to win, globally.


Moving along…


Even though it’s an un-elected body of bureaucrats (that no one in the debate addressed last night), after being wrong 65-75% of the time, one office of the US Federal Reserve has evolved their forecasting process in the last few years.


The Atlanta Fed uses a “GDP Now” tracker (i.e. they update their model in real-time as opposed to plugging in an outcome they’d like to see and retrofitting the model to those 3-4% GDP assumptions). And it’s been better than bad, directionally, as of late.


We have a tracker too (short-form for predictive tracking algorithm) and the Atlanta Fed now has one of the few widely followed forecasts that is tracking in the area code of ours:


  1. Hedgeye Risk Management Q3 GDP +1.4% q/q SAAR, +1.6% y/y
  2. Atlanta Fed Q3 GDP +1.0% q/q SAAR (no y/y forecast)


“No y/y” means that they don’t model either growth or inflation like we do (on a year-over-year basis). The most bullish estimates I’ve seen on Q3 GDP come from the likes of Nancy Lazar at Cornerstone Macro. She just cut her forecast to 3.5% (from 4.0%) q/q SAAR.


Never mind being aggressive enough (i.e. changing your forecasts as the readily available data does), America deserves a President who understands why Washington’s “blue chip” economic forecasting and risk management hasn’t evolved, at all.  


If consensus economists aren’t forced to debate the most accurate pros on the most important rates of change, we’re really not having a free-market debate about anything tangible anyway.


This morning we’re going to get latest #LateCycle slowing update on the US jobs market. Here’s what I’m set up for ahead of that:


  1. Slower-for-Longer (so I’m long Long-term bonds and stocks that look like bonds = TLT, XLU)
  2. US Dollar immediate-term TRADE overbought within a developing bullish TREND
  3. Oil, Gold, etc. immediate-term TRADE oversold within nasty #deflation TAIL risks


In other words, another rate-of-change slowing in the US labor cycle (which we’ve already seen this week from both the ADP and Challenger Jobs Cuts reports), would be short-term bearish for the USD and reflate some of the deflations.


But where does that put the US economy? It’s still in a #LateCycle slowdown (if your perma bull strategist doesn’t get that, show them the negative returns you have being levered long cyclicals, including media stocks who have this thing called the advertising cycle).


And it still has me asking when 1 of the 17 people from last night’s grand-stage of political life is going to get aggressive enough on a #StrongDollar policy that would require us all to accept more asset deflation in the short-term, for long-term All-American gain.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.15-2.29%

SPX 2068-2098
USD 96.50-98.44
Oil (WTI) 43.89-46.77

Gold 1080-1098


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Aggressive Enough? - NFP Jul

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