Exchange Stocks May Be Down for the Count

by Dan Burrows | December 5, 2012 10:43 am

Investors in everything from the S&P 500 to soybeans to silver are sitting on handsome gains for the year-to-date, but the same can’t be said for anyone holding shares of the two best-known exchange operators.

Lower trading volumes for everything from stocks to derivatives to futures contracts are taking a toll on all exchange companies, but only the two most prominent names in the industry are bearing the brunt of the market’s displeasure.

Shares in NYSE Euronext (NYSE:NYX[1]), operator of the iconic New York Stock Exchange, and Nasdaq OMX Group (NASDAQ:NDAQ[2]) are having a bad year. NYSE’s stock is off 11% so far in 2012, while Nasdaq is down more than 1%. The broader market, meanwhile, has gained 12% in 2012.

And yet slumping volumes have hardly ignited an industrywide sell-off. As famous and venerable as the New York Stock Exchange may be (tracing its history back to 1792), with a market capitalization of $5.6 billion, it’s not the sector’s biggest publicly traded company by a wide margin.

That distinction belongs to CME Group (NASDAQ:CME[3]) with a $18.4 billion market cap. CME Group is a powerhouse in futures and derivatives contracts. Formed by the 2007 merger of the Chicago Mercantile Exchange and Chicago Board of Trade

, it also houses the New York Mercantile Exchange.

CME’s total volume is off about 20% so far this year versus the year-ago period, yet its stock has gained 12%.

Partly it reflects that by some measures, NYSE volume is near 14-year lows, but it’s also the case that all the growth is in more lucrative derivatives and futures products, where the newer all-electronic exchanges are taking market share.

IntercontinentalExchange (NYSE:ICE[4]), which specializes in over-the-counter contracts, has seen its stock gain 9% for the year-to-date. CBOE Holdings (NASDAQ:CBOE[5]), the largest U.S. options exchange perhaps best know for the VIX volatility index, has enjoyed a 15% gain in 2012.

True, at a time when the move to all-electronic trading has contributed to glitches, screwed-up quotes and full-on flash crashes, there’s something to be said for the New York Stock Exchange’s hybrid human-electronic model. After all, people are still working on the exchange floor to spot a bad bid or ask and notice that something ain’t right.

But the long-term tale of the tape is downright ugly for NYX and, indeed, for all of the exchange stocks. NYX lost as much as 85% of its value during the depths of the 2009 market sell-off and is still down almost 80% from its pre-crisis peak. Nasdaq OMX fared better, but still got slammed: It’s down 50% from it’s pre-crisis peak.

ICE is off by about a third over the same period, and CME is down 60%. Only CBOE has held up relatively well: It’s off about 8% since going public in mid-2010.

The bullish argument on these stocks is the gradual recovery in volumes of all products — from straight-up equities to futures, options and derivatives.

But with sweeping regulation having put the big banks’ proprietary trading desks, in-house hedge funds and private equity shops essentially out of business, that rebound in volume may be a long time in coming.

If it ever comes back at all.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/12/exchange-stocks-may-be-down-for-the-count/

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