Trading the Exchanges

While everyone is well aware of the meltdown in the financial stocks that has resulted from the credit crisis, less attention has been paid to the fact that the shares of the exchanges on which these stocks, bonds, and all the related options and derivatives on which these trade have also seen their own valuations cut in half in the past year. The question is do any of the publicly traded exchanges now represent buying opportunities?

On the whole, I'm bearish on the group, as the bloom certainly seems to be off the rose. I am bullish over the next year on CME Group (CME - commentary - Cramer's Take) and bearish on the Intercontinental Exchange (ICE - commentary - Cramer's Take). Before getting to the specifics of some suggested option positions, let's take a look at the arc and architecture that has led to the rise and fall of this sector of stocks.

Way back in March of 2003, when the U.S was decimating worthless land to get at the subterranean lubricant that is needed to keep the global economy humming, the Chicago Mercantile Exchange laid out its own version of shock and awe by performing an initial public offering to become a publicly traded exchange in the U.S. And, unlike the debacle in Iraq, it was greeted with flowers, goodwill and a soaring stock price. Its shares gained some 600% over the next four years, peaking at $710 in late 2007. They now trade around $325 a share.

The CME's IPO was quickly followed in issuance by the New York Stock Exchange (NYX - commentary - Cramer's Take), the International Securities Exchange, New York Mercantile Exchange (NMX - commentary - Cramer's Take) and the Intercontinental Exchange (ICE - commentary - Cramer's Take). The Nasdaq (NDAQ - commentary - Cramer's Take) had been the front runner and was a publicly traded entity since 2002.

The timing was that market conditions made these darlings of both investors and momentum traders. It was a perfect storm of a bull market in both stocks and commodities, and the real kicker became consolidation on a global scale.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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