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Volatility May Bring Vigor to Stock Exchange Shares

3 February 2016 in Trading Ideas

Key Takeaways

  • Heightened volatility generally means higher trading volumes for stock exchanges.
  • NYSE's parent company reports earnings on Thursday; its shares could rally.
  • Motifs mentioned: Electronic Trading

This just in – the stock market has become a much more volatile place.

Investors have been experiencing this new normal for more than three months — and last week was just one example. With stocks looking like they were set to lose as much as 8% in January, a two-day week-ending rally mitigated the damage to just 5.1%.

Of course, few are forgetting that stocks are still down by 8% in the last two months, as concerns about the Chinese economy and the oil supply-and-demand dynamic have shaken an investment community that not long ago had no reason to be anything but optimistic.

The market’s “fear gauge” – the Volatility Index — has been rising since late October and was recently at a five-month high before rapid stock declines began to dissipate.

As investors continue to struggle with what sectors or stock can works amid a rockier trading environment, it appears they continue to make trades to find a better fit – and that could boost the operating results and stock prices of publicly traded stock exchanges.

In a recent research note by Barclays, analysts noted that the second trading week of the year saw both US equity volumes and options volumes jump. Specifically, US cash equities average dollar value was up 20% week-over-week and up 27% year-over-year.1

The analysts said total volume at CME Group Inc (NASDAQ:CME) was up 42% week-over-week and up 5% year-over-year. At Intercontinental Exchange Inc (NYSE:ICE), the parent of the New York Stock Exchange, exchange futures volumes increased 16% week-over-week.

At the time, Barclays analysts wrote that they expected activity to stay at elevated levels over the near term as declining energy prices and Chinese equity anxieties continue to increase market participation.

“We believe 1Q [earnings] estimates have room to move higher if current activity levels persist,” they wrote.

The volatility-induced bullishness also was recently echoed by Goldman Sachs, which recommended an options trade on the expectation that shares in Intercontinental Exchange could rally after its earnings report this Thursday.2

As Barrons.com noted, though some investors see Intercontinental as equivalent to a stodgy utility, Goldman believes the company’s revenue will benefit from energy sector volatility, rising volatility in European Union interest rates, and credit-default-swap trading.

“ICE fundamentals benefit from higher volatility and a higher volume tape,” Katherine Fogertey and John Marshall, Goldman’s derivatives strategist, told clients.

Barrons.com pointed out that Intercontinental offers trading in just about every financial asset that has a public market anywhere in the world. Including the NYSE, it operates 11 exchanges, and offers trading in more than 12,000 securities across nine asset classes. The company runs commodities exchanges, dominating trading in oil, and also owns seven clearing firms that essentially focus as brokerage firms to brokerage firms.

As Barrons.com put it: “When anything happens in the world markets, someone usually ends up paying ICE.” The exchange collects transaction fees anytime a product changes hands, and collects money when those trades settle, and even when people look at ticker quotes on trading terminals.

Shares of Intercontinental comprise a nearly 21% weighting in the Electronic Trading motif, which also happens to be the current Motif of the Week (you can trade it commission-free through this Friday).

The motif is flat over the past month. In that same time, the S&P 500 is off 5.1%.

Over the past 12 months, the motif has risen 18.1%; the S&P 500 is down 2.1%.

Consider a look at Electronic Trading if you’re interested in an alternative investment in stocks that may benefit from extended market volatility.

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(Click here to see Motif Investing CEO Hardeep Walia talk about the Electronic Trading motif recently on CNBC).