Wednesday, April 6, 2016

Sector Overview – Financial Market Operators

Welcome to a new iteration in the Sector Overview series of articles. In this article, I present an overview of a small subset of companies that is often overlooked by investors – although investors use their services on a day-to-day basis: financial market operators. These can include companies that operate stock markets, derivatives markets, bond markets, commodity markets, currency markets etc.

Whether the overall economy or “market” is up or down – investors always flock to trade their assets on these markets. Suffice it to say, these markets provide one of the most essential service in a capitalistic society. Whether its the need to trade commodities on a daily basis, or a startup company going public, these marketplaces play a crucial role in the corporate world. As mentioned – even though investors may use the services from these companies on a day-to-day or even hour-to-hour or minute-to-minute basis, the same investors overlook these companies as an investment choice. I want to highlight some of the major players in this space and some thoughts on investing options.

Sector Overview – Financial Market Operators

The major players amongst the North American markets are:  CME Group Inc (CME), Intercontinental Exchange Inc (ICE), Nasdaq Inc (NDAQ), CBOE Holdings Inc (CBOE), TMX Group Ltd (TSE:X).
These are of course, not the only major players in the space – almost every stock market operator in the world is run by a company that is often tradable. For e.g., The Australian Stock Exchange — ASX Ltd (ASX:ASX) trades on ASX. Similarly, the London Stock Exchange Group plc (LON:LSE) trades on London stock exchange — and is in the midst of considering a merger with Deutsche Boerse AG (ETR: DB1) (Update: The two companies have agreed to merge in a $30B deal). There have been plenty of other mergers (including in N.America) over the years and the industry continues the path towards consolidation. But for the sake of brevity (listing and covering every financial market operator in the world is not possible in this article), I will only cover the N.American markets in this article.
The five listed market operators may not directly compete against one another – although ICE, NDAQ and TSE:X compete for the same (or similar) equity market listings. The direct competitors for each of these companies can other international markets where they compete for public companies to be listed. For e.g., when Alibaba Group Holdings Ltd (NYSE:BABA) went public in 2014, markets across the world were competing and it eventually came down to NYSE, NASDAQ or Shanghai market listing (Alibaba eventually decided to list on NYSE). So, keep in mind, that even though the companies listed are financial market operators – these may be apples-to-oranges comparisons, so to speak.
In order to put the relative size of the companies into perspective, the following charts are provided.


FMO - metrics

CME Group Inc (CME)

CME Group Inc is the behemoth in the financial market industry with a big focus on the commodity markets, although the company operates other markets too. It owns and operates large derivatives and futures exchanges in Chicago and New York City, as well as online trading platforms. In 2014, it gained regulatory approval to open a derivatives exchange in London. It also owns the Dow Jones stock and financial indexes, and CME Clearing Services, which provides settlement and clearing of exchange trades. The exchange-traded derivative contracts include futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, rare and precious metals, weather, and real estate.
From Yahoo! Finance:
CME Group Inc., through its subsidiaries, operates contract markets for the trading of futures and options on futures contracts worldwide. The company offers a range of products across various asset classes, based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, and metals. Its products include exchange-traded; and privately negotiated futures and options contracts and swaps. It executes trade through its electronic trading platforms, open outcry, and privately negotiated transactions, as well as provides hosting, connectivity, and customer support for electronic trading through its co-location services. The company also provides clearing and settlement services for exchange-traded contracts, as well as for cleared swaps; and regulatory reporting solutions for market participants through its global repository services in the United States, the United Kingdom, Canada, and Australia. In addition, the company offers a range of market data services, including live quotes, delayed quotes, market reports, and historical data service, as well as index services. CME Group Inc. serves professional traders, financial institutions, institutional and individual investors, corporations, manufacturers, producers, governments, and central banks. The company was formerly known as Chicago Mercantile Exchange Holdings Inc. and changed its name to CME Group Inc. in July 2007. CME Group Inc. was founded in 1898 and is headquartered in Chicago, Illinois.

Intercontinental Exchange (ICE)

Intercontinental Exchange is the operator behind NYSE – the largest market in the world by market cap. But that is the one of the subsidiaries and ICE operators numerous other markets (23 in total), exchanges, clearing houses in a number of countries.
From Yahoo! Finance:
Intercontinental Exchange, Inc. operates regulated exchanges, clearing houses, and listings venues for financial and commodity markets in the United States, the United Kingdom, Continental Europe, Asia, Israel, and Canada. The company operates marketplaces for trading and clearing an array of derivatives and securities contracts across various asset classes, including energy and agricultural commodities, interest rates, equities, equity derivatives, credit derivatives, bonds, and currencies. It primarily provides trade execution, listing, price discovery and transparency, trade processing and repositories, clearing, benchmark administration, and market data services. The company operates exchanges and marketplaces, such as ICE Futures Europe, ICE Futures U.S., ICE Futures Canada, ICE Endex, NYSE Amex Options, NYSE Arca Options, and ICE Futures Singapore, as well as over-the-counter markets for physical energy and credit default swaps, and central counterparty clearing houses. It serves financial institutions, money managers, trading firms, commodity producers and consumers, institutional and individual investors, and other business entities. The company was founded in 2000 and is headquartered in Atlanta, Georgia.

Nasdaq Inc (NDAQ)

Nasdaq Inc is the operator of NASDAQ stock market – the second largest exchange in the world by market cap. In addition, the company operates eight European stock exchanges via its Nasdaq OMX subsidiary which includes – Armenian Stock Exchange, Copenhagen Stock Exchange, Helsinki Stock Exchange, Iceland Stock Exchange, Riga Stock Exchange, Stockholm Stock Exchange, Tallinn Stock Exchange, and NASDAQ OMX Vilnius.
From Yahoo! Finance:
Nasdaq, Inc. provides trading, clearing, exchange technology, regulatory, securities listing, information, and public company services worldwide. It operates in four segments: Market Services, Listing Services, Information Services, and Technology Solutions. The Market Services segment offers equity derivative trading and clearing; cash equity trading; fixed income, currency, and commodities trading and clearing; and access and broker services. This segment operates various exchanges and other marketplace facilities across various asset classes, including derivatives, commodities, cash equity, debt, structured products, and exchange traded products; and provides clearing, settlement, and central depository services, as well as offers transaction-based platforms. The Listing Services segment operates various listing platforms, which offer capital raising solutions for private and public companies. Its primary listing markets include The NASDAQ Stock Market, and the Nasdaq Nordic and Nasdaq Baltic exchanges. The Information Services segment sells and distributes historical and real-time quote and trade information to market participants and data distributors; and develops and licenses Nasdaq branded indexes, associated derivatives, and financial products, as well as provides custom calculation services for third-party clients. The Technology Solutions segment offers corporate solutions in investor relations, public relations, multimedia solutions, and governance. It also provides technology solutions for trading, clearing, settlement, surveillance, and information dissemination; facility management and systems integration, and advisory services; and broker services, as well as enterprise governance, risk management, and compliance software and services. The company was formerly known as The NASDAQ OMX Group, Inc. and changed its name to Nasdaq, Inc. in September 2015. Nasdaq, Inc. was founded in 1971 and is headquartered in New York, New York.

CBOE Holdings Inc (CBOE)

CBOE Holdings Inc is the operator of the largest US options exchange. CBOE offers options on over 2,200 companies, 22 stock indices, and 140 exchange-traded funds (ETFs).
From Yahoo! Finance:
CBOE Holdings, Inc., through its subsidiaries, operates as an options exchange and creator of listed options in the United States. It offers marketplaces for trading options on various market indexes; futures on the VIX Index; options on the stocks of individual corporations comprising equity options; and options on other exchange-traded products that include ETP options, such as exchange-traded funds and exchange-traded notes. The company owns and operates CBOE primary options market, which offers trading for listed options through a single system that integrates electronic trading and traditional open outcry trading on its trading floor in Chicago; CFE, an all-electronic futures exchange, which offers futures on the VIX Index, as well as on other products; and C2, an all-electronic exchange that also offers trading for listed options. Its exchanges operate on its proprietary technology platform, known as CBOE Command. The company has a strategic relationship with S&P OPCO LLC, Frank Russell Company, NASDAQ, Inc., MSCI, and S&P Dow Jones Indices. CBOE Holdings, Inc. was founded in 1973 and is based in Chicago, Illinois.

TMX Group Inc (TSE:X)

TMX Group Limited operated equities, fixed income, derivatives, and energy markets. TMX Group is the operator behind Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV). The company provides services encompassing listings, trading, clearing, settling and depository facilities, information services as well as technology services for the international financial community.
From The Globe And Mail:
TMX Group Limited is a Canada-based company, which operates in equities, fixed income, derivatives and energy markets. The Company provides services encompassing listings for its issuers, trading, clearing, settlement and depository facilities, information services, as well as technology services for the international financial community. Its products and services include issuer services; trading, clearing, depository and related services, which include cash trading, clearing and depository (consisting of equities trading, fixed income trading and equities and fixed income), derivatives trading and clearing and energy trading and clearing; information services, and technology services. The Company operates through Toronto Stock Exchange, TSX Venture Exchange, TMX Select Inc., Alpha, The Canadian Depository for Securities Limited, Shorcan Brokers Limited, CanDeal.ca Inc., Canadian Derivatives Clearing Corporation, TMX Technology Solutions and Montreal Exchange Inc., among others.

Summary

The Sector Overview series of articles provide a mile-high view of a sector, highlighting some of the major players in the space. This article takes a look at the financial market operators and focused on five major players in the North American market. Market operators are often overlooked by investors as an investment, even though they use the services and happily pay the service fee on a day-to-day basis. While some of these operators listed in this article may compete directly against each other, each market is in reality competing with every other market in the world. These market operators (in case of equity markets) want the next hot company going public listed on their exchange, so that investors trading these stocks pay the fee improving a company’s cash flow. Note that while retail investors may focus on stocks – other financial markets such as commodity markets are thriving and a market operator such as CME Group is much bigger than other stock market operators. Do you invest in any of the financial market operators listed? What are your thoughts on investing in them? Share your insight below in the comments section.

This article was written by Roadmap2Retire. If you enjoyed this article, please consider subscribing to my feed at Roadmap2Retire.com/feed

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