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Takeaway: Coupled with rising volume in a choppy environment, the exchange group is self funding and thus has the lowest cost of capital in Financials

Coupled with a rare expansion in revenues and earnings in this environment, the exchanges strike industry leading margins on higher top line and thus tend to be self funding companies. This creates the lowest cost of capital in financial services, an important attribute as the economy sits late cycle/recession. For all other subgroups dependent on the capital markets for debt and equity capital, recessionary periods mark substantial increases in capital costs which are consternation for both management teams and investors. This group side steps that issue with higher incremental operating margins, low leverage, and thus lower funding costs.

HEDGEYE Exchange Tracker | Mind Your Exposures - chart1

HEDGEYE Exchange Tracker | Mind Your Exposures - chart2

Weekly Activity Wrap Up

Futures put up healthy volume this week, coming in at 20.5 million contracts traded per day through CME and ISE, raising the 2Q16TD average daily volume (ADV) to 18.9 million, +7% higher than the year-ago quarter. Additionally, CME's open interest currently tallies 116.4 million contracts, +27% higher than the 91.3 million pending at the end of 2015. This compares to ICE's OI growth of just +7% YTD. Meanwhile, cash equity and options volume came in below their 2Q16TD quarterly averages, although the former still maintains good year-over-year volume growth. Cash equities came in at 6.5 billion shares per day, bringing the 2Q16TD ADV to 7.0 billion, +10% higher year-over-year. Options volume of 14.3 million dragged down the 2Q16TD ADV  to 15.1 million, -1% lower than the 2Q15 ADV. 

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon16 1

U.S. Cash Equity Detail

U.S. cash equities trading came in at 6.5 billion shares per day this week, bringing the 2Q16TD ADV to 7.0 billion. That marks +10% Y/Y growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 25% share of second-quarter volume, which is +93 bps higher Y/Y, while NASDAQ is taking a 17% share, -137 bps lower than one year ago.

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon2

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon3

U.S. Options Detail

U.S. options activity came in at a 14.3 million ADV this week, bringing the 2Q16TD average to 15.1 million, a -1% Y/Y contraction. In the market share battle amongst venues, NYSE/ICE's 17% share of 2Q16TD volume is +31 bps higher than one year ago. Additionally, NASDAQ's 22% share is +25 bps higher year over year. BATS has also been taking share from the competing exchanges, up to an 11% share from 10% a year ago. Meanwhile, CBOE's 26% market share of 2Q16TD is down -107 bps Y/Y. Finally, ISE/Deutsche's 14% share is -152 bps lower than 2Q15.

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon4

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon5

U.S. Futures Detail

15.4 million futures contracts per day traded through CME Group this week, bringing the 2Q16TD ADV to 14.4 million, +8% higher Y/Y. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 116.4 million CME contracts pending, good for +27% growth over the 91.3 million pending at the end of 4Q15, an expansion from the previous week's +25%.

Contracts traded through ICE came in at 5.1 million per day this week, the highest weekly volume all quarter, bringing the 2Q16TD ADV to 4.5 million, a +5% Y/Y expansion. ICE open interest this week tallied 68.2 million contracts, a +7% expansion versus the 63.7 million contracts open at the end of 4Q15, an expansion from with the previous week's +5%.

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon6

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon8

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon7

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon9 

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 | Mind Your Exposures - ExMon10

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon11

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon12

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon13

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon14

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon15

Please let us know of any questions,

Jonathan Casteleyn, CFA, CMT 

  

  

 Joshua Steiner, CFA