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News

Big Bets on the Bourses

Aaron Levitt Sep 21, 2016


The current volatility facing the markets is enough to make your head spin. FOMC this, Brexit that; there’s a lot of “noise” these days and stocks seem to be digesting every bit of it in a major way. The market’s roller coaster is back with a vengeance. As 200-point+ swings have become the norm again, traders are having a field day.


But that doesn’t mean us regular investors have to sit back and take the volatility in stride. We can profit from it, right alongside the traders. That is, if we bet on the right horses.

And we’re talking about the firms that operate the various exchanges stocks, bonds and commodities trade on.

The various market exchanges are on fire, and have quickly become dividend-growth champions as higher trading volumes and more money continue to flow through their platforms. At the end of the end, the market’s tollways are money-making machines.


The Backbone of the Markets


Most investors are pretty clueless about what happens when they click the “buy” button in their brokerage account. Behind the scenes is a complex web of market makers, specialists and computers that drive trading activity and move shares from one hand to another. The backbone of this complex network is composed of the various market exchanges.

And they’ve come a long way since 17th-century Amsterdam and the creation of the first stock exchange.

Today the total world stock market is worth just under $70 trillion dollars. The total world derivatives market has been estimated at a staggering $1.2 quadrillion dollars. That’s not a typo, and is roughly 10 times the size of the total world gross domestic product. Each day, millions of shares, options and futures contracts trade hands across the globe.

And each day, the various public exchanges function as a tollbooth facilitating this trade. Without them, it simply doesn’t happen. Think about trying to unload your shares in Johnson & Johnson (JNJ ) to an investor in another state or country, or across the ocean. It’s pretty much impossible.

For the exchanges, there’s big money to be had in providing that gateway and facilitating trade.

To start, they receive plenty of fees. Firms wanting to list their shares for trade on a certain exchange pay a listing fee. At the same time, those brokerage and investment houses that want to buy/sell stocks on a certain exchange pay their fair share of fees as well. Every time they buy or sell 100 shares of stock, an exchange collects a toll. And since the widespread adoption of computerized trading, the exchanges now exhibit very attractive and high margins.

Similarly, the options, futures and derivative exchanges also have comparable high fee structures. They also benefit from owning so-called clearing houses. In order to trade futures or other contracts, brokers must deposit funds to cover their balances; the derivative exchanges make interest income off this money sitting in escrow. Likewise, commodity exchanges can and do operate various storage warehouses to help deliver products to end users. Again, for a hefty fee.


Rising Volume


With the major exchanges making some serious ‘bank’ when anyone trades a stock, option or other contact, the continued growth in trading volume is a godsend for their bottom lines. According to the industry group, the World Federation of Exchanges, the total number of trades across the globe increased by 55% in 2015. That’s a staggering 23.7 billion stocks trading hands. Derivatives increased by nearly 12%.

Every time one of those shares traded, an exchange made money. With that in mind, the various exchanges have become immensely profitable, and they continue to share their wealth with their owners through rapidly rising dividends.


Exchanging for the Exchanges


Given their importance to the overall state of the markets and just much money they bank these days, investors looking for dividends may want to give the publicly traded bourses a try – two of the finest could be the CBOE Holdings (CBOE ) and CME Group Inc. (CME ).

When trading commodities, investors are most likely doing it over the CME. The former Chicago Mercantile Exchange & Chicago Board of Trade is one of the largest futures and options exchanges in the world. Investors can trade almost anything over the CME, including interest rates, equity indexes, foreign exchange, energy, agricultural commodities, rare and precious metals, weather and real estate. As a result, volumes continue to grow at the CME. Last quarter, it saw a 13% surge in trading volume, which has benefited investors in CME stock through continuous dividend increases and yearly special dividend announcements. CME currently yields 2.20%, when not including its special payouts.

Likewise, CBOE Holdings operates the largest options exchange: the Chicago Board Options Exchange. Today, CBOE trades over 1 billion contracts per year across more than 3,900 different securities. Fee income makes up about 75% of its revenues. The highly regulated nature of its business provides plenty of high margins and a growing 1.44% yield.

Finally, a great overall play could be the Intercontinental Exchange (ICE ). In addition to owning a very lucrative derivatives exchanges, ICE also owns the New York Stock Exchange. The NYSE continues to be the premier exchange for company listings and now ETFs. In the end, the ICE remains the best stock and derivatives play in the sector. The Intercontinental Exchange yields 1.21%.


The Bottom Line


Without the various market exchanges, finance simply doesn’t exist. The exchanges provide a very necessary link between buyers and sellers of various assets – and there is big money to be made in operating those exchanges. While initial dividend yields aren’t very exciting, the exchange stocks offer a great growing income play on rising trading volume. Investors may want to exchange some of their dividend stocks for the exchanges.

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