Tom Yeung here with your Sunday Digest.
In 1792, 24 merchants and brokers gathered on Wall Street to sign the Buttonwood Agreement, which became the foundation for the New York Stock Exchange (NYSE).
They got a great deal.
Over the following two centuries, entry into the fast-growing NYSE became harder and pricier to come by. By the 1990s, memberships (seats) were sold for over $6 million in inflation-adjusted dollars.
Now, the funny thing about these types of security “marketplaces” is that they are the ultimate network effect business. The more people on an exchange, the more trading that happens. That brings more action-seeking traders on board, which builds more liquidity, and so on.
Imagine trying to sell a rare baseball card on the secondhand market. The more people in that marketplace, the better the chance of selling the card for a great price.
Securities trading puts this in overdrive, since even a “small” institutional order might involve selling millions of shares to thousands of different buyers. An average retail investor might move hundreds of shares at a time.
That’s why exchange-type marketplaces are so incredibly valuable. Germany’s Deutsche Boerse (DBOEY), for instance, is the eleventh-largest stock on its own exchange. Hong Kong’s is its ninth, while Singapore’s is its sixth. The tiny margins these exchanges take from trades quickly add up.
Even better, some exchanges occasionally find a special sauce… a tradable asset that is either so new that no one else is trading it… or a proprietary one that only the exchange itself is allowed to move.
This might sound like a total racket. And sometimes it is. But it’s how many monopolistic exchanges turn ordinary trading activities into billion-dollar businesses.
Over the past year, you’ve seen me recommend several of these high-performing firms here in your Sunday Digest. On average, these picks have risen 23%, beating the S&P 500 more than twice over. Two of these are so conservative that the “Liberation Day” selloff barely registered on their stock prices.
In today’s Digest, I’d like to revisit my three recommendations, which highlight why it’s so important to get in early on these deals. I’ll also note why they’re still compelling trades.
The Futures King
The mid-1800s saw the completion of canal and railroad infrastructure around Chicago. For the first time, traders could move products between the Great Lakes and the Mississippi River without using horse-drawn wagons.
To handle this commerce, a group of merchants formed the Chicago Board of Trade. The exchange quickly became a central marketplace for grain, and a separate Chicago Mercantile Exchange was soon established to handle butter and eggs. To ensure product quality, each keg of butter was individually tasted – a job that surely had no shortage of applicants. Surplus butter was salted and stored in the basement for future sale… hence the establishment of “futures contracts.”
Today, these exchanges live on as the CME Group Inc. (CME), a global leader in futures trading. The Chicago-based exchange dominates certain types of futures contracts, including U.S. interest rate futures (over 95% market share), and issues 100% of all futures contracts on the S&P 500, Russell 2000, and Nasdaq indexes, where it has an exclusive license. It also remains a major player in agricultural futures… even though its butter tasters are now long gone.
That’s why I added this financial exchange to my list of top cyclical stocks to buy for 2025. Firms like CME thrive on volatility, and an unwarranted selloff in December 2024 created a perfect time to buy.
Since then, CME shares rose as much as 25% before settling at a 14% gain as of this week.
The recent selloff now provides a second opportunity to buy into a company that typically rises during periods of high volatility. 2007, 2019, and 2022 were banner years for CME, and shares will likely recover as traders cover their bets in the face of uncertain markets.
The Options Queen
In 1973, the Chicago Board of Trade created a separate exchange to list stock options.
Few people liked the idea at the time. Officials at the Securities and Exchange Commission compared options to gambling, advising, “Don’t waste another nickel on it.” Even the Chicago Board of Trade didn’t take the expansion project seriously at first; they crammed their new options exchange into a former smoking lounge next to its vast commodity trading floor.
But Cboe Global Markets Inc. (CBOE) surprised skeptics. Over the following years, options became a dominant force in risk management, pulling Cboe up along with it. Today, the firm maintains proprietary ownership over options on the S&P 500 and the Cboe Volatility Index (VIX). As a result, the Chicago-based spinoff has a 99% market share in index options.
That’s helped Cboe notch a 24% return since I also added it to my list of top cyclical stocks to buy for 2025. The firm has reported accelerating revenue growth (from 5% in the fourth quarter of 2024 to 14% in the most recent quarter), and rising volatility should continue pushing shares higher in the medium term.
In addition, zero-day-to-expiry (0DTE) options have become wildly popular among retail traders. Volumes of 0DTE options have risen fivefold over the past three years, boosting revenues at Cboe to even-higher records.
That’s why analysts expect Cboe to report a 13% increase in earnings per share this year, and for that figure to keep rising at 7% for the foreseeable future. Though options are now a relatively mature industry, Cboe has managed to keep an iron grip on some of the world’s most traded options.
The Day Trading “Prince”
Finally, there’s Robinhood Markets Inc. (HOOD), a firm that took quick advantage of the meme stock rally of 2020 to hook a new generation on trading. I recommended shares in June after one of our top AI systems flagged the stock right as interest in day trading was bouncing back. Robinhood has traditionally benefited from this lucrative business.
Since then, shares of Robinhood have risen 30%.
The company is now encountering a new opportunity in prediction markets – an industry that only recently became legal in America. Prediction market trading has become incredibly popular among younger traders, and Robinhood has moved aggressively to expand its market share before anyone else. Remember, exchanges have phenomenal first-mover advantages since traders gravitate towards the marketplace with the highest liquidity, creating a virtuous cycle.
That could create an unexpected boom for Robinhood’s business. Some analysts believe prediction market betting will grow 28% annually through 2030, and this potential $80 billion market isn’t yet reflected in Robinhood’s share price.
In addition, prediction markets offer opportunities for institutional investors and companies to reduce risk, which could help Robinhood expand its customer base. For example, a government contractor at risk of getting furloughed can bet on a federal government shutdown on November 21. If the government stays open, the contractor gets paid by the government. And if not, the prediction markets pay out. Either way, the contractor can make payroll that month.
Now, it’s important to note that Robinhood remains far riskier than CME or CBOE. The newer exchange has a history of aggressive marketing; it has paid millions in fines to FINRA and the SEC as a result. However, Robinhood now finds itself in a perfect position to dominate an entirely new market. Rival exchange Polymarket remains off-limits to American citizens. Kalshi, a separate prediction market, is still relatively unknown among traders. It won’t be a cakewalk for Robinhood, either. But the potential payoffs from success are vast.
The $4 Trillion Opportunity Hiding in Plain Sight
Most folks are aware of prediction markets. Analysts use them to establish baseline probabilities, while gamblers might even use it to pick out a fantasy sports team. It’s only a matter of time before they open an account and make trades directly.
Now, InvestorPlace Senior Analyst Luke Lango believes he’s found something even more compelling… a $4 trillion trading market so new that few exchanges have yet figured out how it works.
But Luke has.
He sees an incredible opportunity brewing – and it’s all thanks to President Donald Trump’s Executive Order 14178. So, tomorrow, at 1 p.m. Eastern, Luke will be hosting a groundbreaking broadcast called President Trump’s “Project Yorktown” Summit to discuss this order and the financial revolution it’s set to unleash on global financial markets. He will also cover the exchanges trading these new assets, and how they are unlike anything the financial world has seen before.
You’ll also learn how positioning yourself now could lead to 10X gains in 12 months… 30X gains in three years… and even potentially 100X gains by 2030.
Plus, Luke will give away a free stock pick poised to double within 12 months.
Until next week,
Thomas Yeung, CFA
Market Analyst, InvestorPlace
