There has been a lot of media coverage lately about how to protect one’s portfolio from the trade war. We came across an unusually clever idea recently, however, that has nothing to do with trying to forecasting the impact of tariffs on different sectors. Here is the strategy: buy exchange stocks (meaning the stock of stock exchanges, like the Nasdaq). The argument is that panicked buying and selling alongside a trade war will boost trading volumes, which in turn boosts revenue.
FINSUM: We think this is a brilliant strategy. If volatility rises, exchange stocks will likely do well. If volatility is down, meaning less trading volume, the rest of your portfolio is likely to be doing well.
Bitcoin’s fall has continued. The cryptocurrency, which was trading around $20,000 just a handful of days ago, has recently traded well under $14,000. Bitcoin plunged on fears that exchanges for the currency could be shutdown in South Korea. Asia’s #4 economy is a hotbed of activity for Bitcoin, and the loss of exchanges there would cut off a major source of demand.
FINSUM: Bitcoin has a lot of fragility in its infrastructure because it largely operates outside the regulatory norms in which most of finance is firmly entrenched. This makes it very risky and volatile, so it is no surprise to see these kinds of losses.
Barron’s has run a piece today picking what its says is a straightforward stock with good upside. That stock? It’s the CBOE. While a large derivatives exchange may not seem like a simple stock, it actually is. Its whole business model is basically transactional—the more contracts that trade the more money it makes, so one needs to understand little about the underlying products. The business is non-cyclical by nature, with sustainable revenues and predictable costs. Perhaps best in this high-disruption environment, it has an iron clad business model with very high barriers to entry.
FINSUM: The article on Barron’s was from Sumzero, which are often written by people with a position in the stock. Still, the CBOE looks attractive.
Led by Mary Jo White, the US’ SEC is coming down like a hammer on major equity exchanges such as the Nasdaq and NYSE. New rules are being put in place which will make the exchanges more accountable for the increasingly frequent “flash crashes” that have been happening across major markets. The SEC says investors deserve better than to see billions wiped off equity markets in a matter of minutes, such as has happened in numerous stocks and many exchanges over the past four years. Last year, Nasdaq was hit with a $10m fine for its failure in Facebook’s IPO. The exchange’s system became overwhelmed with the volume of orders, causing investors to lose millions in a matter of minutes. The new rules arrive just a day after Home Depot became the most recent company to suffer a flash crash, with the company’s shares dropping in value by $12 bn before the NYSE suspended trading. Many are calling for the SEC to extend the regulation to brokers in addition to exchanges.
FINSUM: This seems a step in the right direction. Some of the errors that exchanges have made in recent years are simply unacceptable and have led to serious erosions of value, which in turn have worked to undermine some of the confidence in American securities markets.
The US securities industry, led by the Securities Industry and Financial Markets Association (Sifma), is pushing for lower fees for broker-dealers on equity exchanges as part of a broad push to clean up the fragmented and opaque equity market structure of the US. Sifma is arguing that the fees charged to brokers distort equity market prices by giving unequal access to different parties, and have more broadly been responsible for the seemingly inexhaustible technological arms race that has caused numerous flash crashes in the industry. “All users of market data should have access to data at the same time. This is imperative to help avoid disparate treatment of investors,” Sifma said. The issue was first brought to light in Michael Lewis’ popular book Flash Boys, and the recommendations come at a time when the SEC has decided to review the issue amidst a lawsuit by the New York State Attorney General.
FINSUM: Just as the Private Equity industry has come under scrutiny, so has the opaque world of dark pools and electronic trading. It looks like big changes are on the cards, most likely to the benefit of broker-dealers.