HEDGEYE Exchange Tracker | The Sweet Spot

Takeaway: The VIX is settling into the sweet spot of 20-40 which historically is the best range for incremental exchange volume.

Weekly Activity Wrap Up

Futures activity continues to rise, coming in strongly this week at an average 19.8 million contracts per day, exceeding the third-quarter-to-date average of 18.8 million. That brings the third quarter to a +7% year-over-year and +7% quarter-over-quarter expansion. Our Best Idea in the sector continues to be the CME Group (CME). As the chart below shows, volatility tends to be seasonally high as we move into the "back to work" months of September and October and CME Group exchange volumes have already begun to benefit from this trend. See our recent note on the company which highlights the back-end-loaded nature of the stock's returns given historical Fall volatility and a year-end special dividend.


HEDGEYE Exchange Tracker | The Sweet Spot - XMon18


U.S. cash equity volume averaged 6.4 billion shares this week, bringing the third quarter to a 7.2 billion ADV, an expansion of +27% Y/Y and +14% Q/Q. U.S. equity options activity averaged 16.7 million contracts this week. Year-over-year growth in U.S. options is tracking at +16%.


HEDGEYE Exchange Tracker | The Sweet Spot - XMon1


U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 6.4 billion shares traded which is blending to a 7.2 billion daily average thus far for the 3rd quarter of 2015. This is +27% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed. The New York Stock Exchange/ICE's share of third-quarter volume remains at 24%. NASDAQ's share also remained unchanged week over week at 19%, 100 bps lower than last year, a -4% decline.


HEDGEYE Exchange Tracker | The Sweet Spot - XMon2


HEDGEYE Exchange Tracker | The Sweet Spot - XMon3


U.S. Options Detail

U.S. options activity came in at a 16.7 million ADV this week which is blending 3Q15 activity to 18.3 million contracts per day, up +21% quarter-over-quarter and +16% 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 | The Sweet Spot - XMon4


HEDGEYE Exchange Tracker | The Sweet Spot - XMon5


U.S. Futures Detail

CME Group volume came in this week at 14.6 million contracts. That blends 3Q15 volume to a 14.6 million average level, a +8% year-over-year expansion. CME open interest, the most important beacon of forward activity, currently tallies 97.2 million CME contracts pending, good for +15% growth over the 84.1 million pending at the beginning of 2014, a contraction from the prior week's +25%.


Activity levels on the futures side at ICE hit 5.2 million contracts this week, with 3Q15 blending to a 4.2 million daily average, a +4% year-over-year expansion. ICE open interest this week tallied 63.1 million contracts, a -9% contraction versus the 69.2 million contracts open at the beginning of 2014, a deterioration from the prior week's -6%.


HEDGEYE Exchange Tracker | The Sweet Spot - XMon6


HEDGEYE Exchange Tracker | The Sweet Spot - XMon8


HEDGEYE Exchange Tracker | The Sweet Spot - XMon7


HEDGEYE Exchange Tracker | The Sweet Spot - 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 | The Sweet Spot - XMon10


HEDGEYE Exchange Tracker | The Sweet Spot - XMon11


HEDGEYE Exchange Tracker | The Sweet Spot - XMon12


HEDGEYE Exchange Tracker | The Sweet Spot - XMon13


HEDGEYE Exchange Tracker | The Sweet Spot - XMon14

 HEDGEYE Exchange Tracker | The Sweet Spot - 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 | The Sweet Spot - 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 | The Sweet Spot - XMon20


 Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





Keith's Daily Trading Ranges [Unlocked]

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CHART OF THE DAY: No #Fed Rate Hike In December?

Editor's Note: The chart and brief excerpt below are from this morning's Early Look written by Hedgeye CEO Keith McCullough. We're not going to try and tell you how to go about living your life or anything. But subscribing? It's a really smart idea. We'll leave it to you.


CHART OF THE DAY: No #Fed Rate Hike In December? - zz chart day 09.18.15 chart2


...[W]hat to do with this mess of market forecasts and expectations?


  1. GROWTH – the Fed is going to be wrong on 2H forecasts (again), but just cut their 2016 GDP to a range of 2.2-2.6%
  2. INFLATION – the Fed’s PCE forecast of 0.3-0.5% for 2015 implies no rate hike in DEC


No hike in DEC?


Fed Fades

“Space by itself, and time by itself, are doomed to fade away into the mere shadows, and only a kind of union of the two will preserve independent reality.”

-Albert Einstein


I like to use short quotes – because, in this day and age, people tend to have a short attention span. I’m one of those people. Most of us all are. It’s ok, really – to talk and write about our human issues. Most of us have them.


I’m using a longer-form quote this morning because, if you read it slowly, you’ll find the essence of our macro forecasting #process. Instead of time and space, substitute growth and inflation – and you’ll get the rate of change point on policy.


Rate of change with a dynamic/accurate forecast - that’s all we’re using to front-run the Fed. We don’t need inside information. It’s all there, in the data. Growth and inflation slowing. The Fed eventually sees this reality, but on a lag.

Fed Fades - No rate hike cartoon 09.17.205

NOTE: Join Keith LIVE this morning on The Macro Show. Joining him will be a special guest ... maverick Energy/MLP analyst Kevin Kaiser. Click here for access.


Back to the Global Macro Grind


I watched the Fed presser from my wife’s room in the hospital. That was a first. The perspective of the moment gave me tremendous pause. After being incredibly blessed with the gift of our 4th child (Reese McCullough), I could actually think.


And I wasn’t thinking so much about why the Fed didn’t raise rates. Unless your investment process lives in a Newtonian framework (where time and space are constant), you get what we have been explaining (via the data) all year long:


  1. GROWTH: is #LateCycle and will be slower (again) in Q3 than it was in Q2
  2. INFLATION: misreported, yes – in the area code of the Fed’s 2% “target”, no


I was actually thinking about what I never would have thought a child born into a life in America would have to endure: un-elected-central-planners and bureaucrats determining not only the purchasing power of The People, but market direction.


While moneys may be “cheap”, these markets aren’t “free.” Are they politicized? Yes. But, much more importantly, they are hostage to the most un-American ideal of all – mediocrity.


Why, in a country where immigrants like me are pursuing the American dream, has one of the beacons of capitalism (the US stock market) been drowned by mediocre analysis and forecasting? What happened to the pursuit of excellence?


I digress…


I know the establishment doesn’t want me to inspire change or give them a speech. There’s no compensation scheme for them in that. Back to what most people want – what to do with this mess of market forecasts and expectations?


  1. GROWTH – the Fed is going to be wrong on 2H forecasts (again), but just cut their 2016 GDP to a range of 2.2-2.6%
  2. INFLATION – the Fed’s PCE forecast of 0.3-0.5% for 2015 implies no rate hike in DEC


No hike in DEC?


This isn’t that complicated. Get the forecast right, and you’ll get the Fed’s next move right. Not only is Yellen’s 2016 GDP estimate still way too high, but she said, point blank, that the Fed won’t raise until “inflation is at 2%.”


You realize that you’d need to see Oil reflate back to something > $75/barrel to get anywhere close to that PCE inflation number, right? Ed, is that the next bull market catalyst? Higher gas prices and higher-all-time-highs in US rents?


It’s a good thing that through Policies to Inflate asset prices via Down Dollar, that Yellen says the Fed has had no impact on inequality in America. What would the all-time highs in the #1 cost of living (shelter) have to do with it?


Markets re-priced those assets (rate sensitive ones)  in a hurry yesterday:


  1. Housing UP
  2. Utilities UP


Bonds (and any stock that looks like a slow-growth Yield Chasing bond) straight up, as 2-year Treasury Yields crashed in a few hours of trading (dropping from 0.83% to 0.66%, in yield terms). Oh, and our new long Gold position? Up too!


I think the Fed calls that “price stability”, or was it “transitory”?


What’s also transitory is this thing called the economic cycle. And since US employment, wage growth, and consumer confidence, have all already put in their #LateCycle peaks, what’s next is trivial. More slowing, in rate of change terms.


So give this thing some time and space and ask yourself what the Federal Reserve is going to do in December when GDP, at best, has a 1% in front of it. It could easily have a 0% in front of it for Q3. That’s when the Fed will fade, again.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.12-2.24% (bearish)

USD 94.11-95.69

Gold 1099-1145


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Fades - zz chart day 09.18.15 chart2


Client Talking Points


The UST 2YR Yield completely jacked whoever was looking for the rate hike, dropping 20% (crashing) from 0.83% to 0.66%, in a day! This is exactly what happened in OCT of 2011 don’t forget – and as U.S. growth data slowed in Q4 of 2011, yields plummeted.


Gold is one of the best assets to be long (and stay long, as opposed to U.S. Equity beta) into the Fed meeting showing +0.6% follow through this morning; as the Fed tries to devalue the Dollar + Rates fall, Gold loves that.


German stocks do not love Dollar Down, Euro Up (to $1.14 this morning, top-end of its current 1.12-1.14 risk range). Don’t forget our #EuropeSlowing Macro Theme as the DAX drops -1.9% this morning and moves into crash territory (-20% from the April peak).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is one of Sector Head Howard Penney's favorite names. He thinks McDonald's is finally emerging from the doldrums and is doing everything they need to do to fix the company domestically.


Penney believes there is not only a huge inflection point coming for the profitability of the company, but also for their sales. He thinks this means Wendy’s, Jack In the Box, Sonic will suffer a bit as MCD begins to take its market share back.


Bottom Line here? September regional gaming revenue growth should accelerate meaningfully from August and provide a catalyst for the stock. Our bull thesis on PENN appears very much intact.


In a higher volatility, growth-slowing environment, you want low-beta exposure (stocks that move less than the market) and a larger allocation to long-term Treasuries.


In the recent Macro Overlay video series exclusively for Investing Ideas subscribers, Keith rank-orders our top investing ideas positions from a fundamental macro and style factor perspective (low-beta, big cap liquidity, slower growth):


  1. Treasuries (TLT)
  2.  “Something that looks like Treasuries” (EDV)
  3. Gold (GLD)
  4. Low-Beta, Big-Cap liquidity: McDonalds
  5. Low-Beta, Big Cap Liquidity: General Mills

Three for the Road


We Made the Call (AGAIN) … via @hedgeye

#Fed #Rates #markets

cc @KeithMcCullough @mablum



Vision is the art of seeing the invisible.

Jonathan Swift


86% of the time spent on mobile devices is behind apps.

The Macro Show Replay | September 18, 2015


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