Weekly Activity Wrap Up
U.S. cash equities are coming out of the gate strong so far in the fourth quarter. Fourth-quarter daily volume is averaging 7.9 billion, a +12% year-over-year and +8% quarter-over-quarter expansion. Meanwhile, options and futures have not started with the same gusto with tougher comps. U.S. equity options activity is averaging 17.2 million contracts per day in the new quarter, 0% growth versus the fourth quarter of 2014 and a -5% contraction versus 3Q15. Futures activity is averaging 19.0 million contracts per day in the fourth quarter, a -1% year-over-year contraction and +2% quarter-over-quarter expansion.
U.S. Cash Equity Detail
U.S. cash equity trading is running at 7.9 billion shares traded per day in the fourth quarter to date. This is +12% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 25% share of fourth-quarter volume, a +3% year-over-year increase, while NASDAQ is taking a 19% share, a -7% year-over-year decline.
U.S. Options Detail
U.S. options activity came in at a 17.8 million ADV this week, bringing the 4Q15TD average to 17.2 million, 0% Y/Y growth and a -5% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -12% its of share year-over-year settling at just 18% of options trading currently. Additionally, CBOE's market share has been falling recently and has started off the fourth quarter at 26%, -16% lower than 4Q14. NASDAQ, on the other hand, started the quarter strong, increasing its market share by +16% compared to 3Q15, bringing itself back into line with the 24% share it held a year ago. BATS' share has been falling recently but at 9% in 4Q15TD it remains +40% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +67% Y/Y growth.
U.S. Futures Detail
CME Group volume came in this week at 13.9 million contracts per day and is averaging 14.1 million for the fourth quarter, a -5% year-over-year contraction. However, CME open interest, the most important beacon of forward activity, currently tallies 99.1 million CME contracts pending, good for +18% growth over the 84.1 million pending at the beginning of 2014, an expansion from the prior week's +15%.
Activity levels on the futures side at ICE hit 4.8 million contracts this week and are averaging 4.9 million contracts per day in the fourth quarter, a +13% year-over-year expansion. ICE open interest this week tallied 64.7 million contracts, a -7% contraction versus the 69.2 million contracts open at the beginning of 2014, an improvement from the prior week's -8%.
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.
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