Exchanges Should Benefit From Reform
NEW YORK (
-- If the sell-off in financial stocks can be attributed to concerns about tougher-than-expected new regulatory reform proposals, exchanges ought to be among the better performers.
In fact, though, shares of
CME Group
(CME) - Get Report
,
NYSE Euronext
(NYX)
,
NASDAQ OMC Group
and
IntercontinentalExchange
(ICE) - Get Report
have mostly lagged the Financial Sector SPDR, a popular financial sector ETF, over the past month, three-month and six-month periods.
Things have been especially difficult over the past year for the equities-oriented NYSE and NASDAQ, as still-shaky markets have kept a lid on new listings activity.
Still, at their best, exchanges provide the opportunity for greater transparency and accountability. One of the major causes of the crisis was derivatives traded over the counter -- i.e. not on exchanges.
Though making the derivatives market more transparent was supposed to be a top legislative priority, the financial reform package passed by the House of Representatives in December contains significant exemptions, allowing banks like
JPMorgan Chase
(JPM) - Get Report
,
Goldman Sachs
(GS) - Get Report
,
Citigroup
(C) - Get Report
, and
Bank of America
(BAC) - Get Report
to continue to do lots of derivatives trades without going through an exchange.
While tough new
reform proposals
put forward by President Obama on Jan. 21 do not address derivatives directly, Obama's new regulatory front man, Paul Volcker, alluded to them in an
in
The New York Times
on Sunday.
More derivatives trading on exchanges would certainly be a benefit for CME Group and IntercontinentalExchange, but also for NYSE and NASDAQ, which already trade some derivatives and are likely to expand in this area.
In general, I am not a big believer in betting on proposed legislative or regulatory reforms to lift a lagging stock. However, even if derivatives reforms remain weak, there are other reasons for investors to look at the exchanges. The obvious one is that they will benefit from a continued market rebound -- which will lead to more trading, more listings and more sales opportunities in general.
One sometimes overlooked profit engine for exchanges is their proprietary data. They have lots of it, and the demand for financial data appears inexhaustible. Exchanges will continue to look for new ways of packaging this data and selling it, which should benefit the top line.
In short, the big exchanges still play too big a role in the financial markets to allow them to lag the sector forever. With reform talk dominating the headlines, it seems likely that stocks in this group could perk up in the coming weeks.
--
Written by Dan Freed in New York.