Volumes Rise Amid Exchange Consolidation

by: Mike Maher

While the ongoing takeover battle for NYSE Euronext (NYSE:NYX) between Deutsche Boerse and a combined Nasdaq (NASDAQ:NDAQ) and Intercontinental Exchange (NYSE:ICE) has been attracting headlines in the exchange space as of late, the takeover speculation is not the only reason to buy into the space. Press releases by the exchanges in recent days have showed record volumes at several U.S. exchanges, with volume supported by the turmoil in the Middle East and North Africa as well as a growing acceptance of options by investors. Here's a look at the recently announced volumes from ICE, CME, and Chicago Boards Options Exchange (NASDAQ:CBOE).

ICE: The all electronic exchange announced record futures volumes and average daily volume (ADV) for Q1 2010, with ADV increasing 24% year over year. The firms OTC energy business also had record average daily commissions of $1.63 million during Q1, up 19% YoY. Strength in ICE's volumes were driven in part by record volumes in March for the ICE Brent contract, which traded 11.1 million contracts in March, and the Gasoil contract, which traded 6.6 million contracts. Agricultural commodity contracts for Cocoa, Coffee, Cotton No. 2, Orange Juice, and Sugar No. 14 and Sugar No. 16 saw ADV increase 40.7% YOY.

CME: The giant derivatives exchange announced first quarter ADV of 13.8 million, an increase of 19% YoY and the second highest ADV ever recorded for a quarter. Strength was seen in CME's Interest Rate products, up 25% in the quarter compared to last year's period, as well as Energy and Commodities, up 23% and 47% YoY. The WTI futures and options set quarterly ADV records in Q1, as did the Henry Hub Natural Gas Futures, and the Heating Oil futures.

CBOE: The options exchange announced ADV of 4.67 million contracts in March, up 3% YoY. Through March of this year, ADV had increased 7% YoY. The exchange is seeing strong growth in it's VIX brand, and VIX options traded a record 10.67 million contracts in March, setting an ADV record of 463,793 contracts. The VIX Futures set a monthly record with 1.07 million contracts traded, up 391% YoY and 35% over February. ADV was 46,320 in March, up from 41,521 in February and 9,426 in March 2010.

Going forward, expect some volatility in these names as the NYX situation plays out. ICE shares dropped 3% after the bid for NYX, and the bid could keep pressure on shares until NYX is absorbed by someone. CBOE shares have seen major volatility, as the company spiked as deal activity came into the space, and then fell hard last week after analysts said there are no buyers for CBOE in the near term. Shares of CBOE are still elevated from where they were before talks of NYX being sold emerged, though they are still $2 off their recent spike above $29 at the end of February. Shares of CME have been drifting lower as well, trading right around $300, as investors try to decide if CME will end up making a competing bid for NYX, or possibly another exchange.

All three of these exchanges stand to benefit from the further expansion of electronic trading, as well as from the consolidation in the industry. The growth in the VIX brand, and of the higher margin futures contracts, leads me to favor derivative exchanges like these over equity businesses like the Nasdaq. While I think the CME, ICE, and CBOE all provide good investment opportunities here, the CBOE story is the most exciting to me. The firm was late in getting into electronic trading with the C2 platform, so it stands to benefit as that rollout gains steam. The VIX brand is growing rapidly, as is the Futures business, which has much higher rates per contract (RPC) than equity and index options. The firm has also said it is open to a sale, so there is always a possibility of a bid in the next several months. Investors who can pick up shares of CBOE on weakness will be able to benefit from rising volumes, an expansion of the VIX brand, and a likely sale of the company sometime down the road.

A closer look at the ICE can be seen here, and a look at CBOE here.

Disclosure: I am long ICE, CBOE.