High-Quality Assets: Investing In Stock Market Operators

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Includes: CBOE, HKXCY, ICE, JPXGY, LNSTY, NDAQ, OTCM
by: Kevin Quon

Summary

Marketplace exchange operators control critical assets that are vital for the global economy.

The ability to collect various kinds of fees allows for exchange operators to tap directly into market trading activity.

These operators revolve around stable assets in an industry with high barriers of entry and limited competition.

With global stock indices trading at all-time highs alongside the bond markets, investors are becoming increasingly nervous over how to allocate their portfolio. Where does one find safe yields in a world where central banks around the world are depreciating their currencies through ever lower interest rates? One such industry for investors to consider might be in the operators of stock markets exchanges themselves.

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In this series of articles, I'm writing to explore the niche and specialized assets that are controlled through some companies with the authority over key infrastructure bottlenecks that are essential for the world to function. As markets approach new highs, the intent is for investors to consider rotating into safer investments that are less likely to be at risk regardless of the world's condition around them. In my last article found here, I wrote about airport operators and their ability to leverage monopolistic control over particular geographic regions. In this article I want to look at operators of the very markets investors rely upon.

The advantage of marketplace operators is that they continue to generate revenue as long as the markets themselves continue to function. Operators typically charge various kinds of fees that allow them to prosper based on market activity. There are transaction fees, access fees, and regulatory fees to name a few.

Various kinds of market services along with data services or listing services also provide differentiated channels to generate revenue. For example, the capacity to even charge clients for their ability to view exchange data should not be underestimated. For investors, it serves as yet another passive source of stable cash flow from those wanting to participate in trading activity.

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With interest rates around the world continuing to fall, marketplace exchanges continue to be some of the primary beneficiaries of increased trading activity. People finding severely limited yield in their savings accounts at their banks have increasingly turned to the markets in order to find income. This has only increased the revenue generated for exchange operators.

Even when the next recession inevitably comes, the downturn in the economy is unlikely to lead to a sustained market freeze. Although market activity may decline in these periods, the long-term viability for operators to endure is practically a given even in the roughest of economic environments. In the same fashion, new competition in similar geographies is difficult to come by. Exchanges operate at scale and the number of barriers to entry remains high. As such, the established marketplaces are likely to remain influential for extended periods of time.

The following is a list of just some of the exchange operators available for US investors. The list is by no means exhaustive, and some of the best opportunities can exist in the form of American Depositary Receipts [ADRs]. For these ADRs, investors should be aware that limited trading volume could make investing conditions less than ideal due to wider gaps in the market maker spread. All prices were as of the close on August 5.

Company Name Price Mkt. Cap. Price-to-Earnings Ratio Price-to-Book Ratio Fwd. Dividend Yield
Nasdaq, Inc. (NASDAQ:NDAQ) $71.18 $11.71 Billion 24.63 2.05 1.79%
CBOE Holdings, Inc. (NASDAQ:CBOE) $68.73 $5.59 Billion 25.99 21.02 1.45%
Intercontinental Exchange, Inc. (NYSE:ICE) $278.07 $33.1 Billion 23.81 2.20 1.22%
London Stock Exchange Group plc (OTCPK:LNSTY) $9.27 $12.91 Billion 30.21 3.57 0.98%
Hong Kong Exchanges & Clearing Limited (OTCPK:HKXCY) $24.91 $29.97 Billion 29.72 7.42 3.02%
Japan Exchange Group, Inc. (OTCPK:JPXGY) $7.20 $7.91 Billion 18.97 3.34 3.75%
OTC Markets Group Inc. (OTCQX:OTCM) $16.90 $193 Million 18.31 10.19 3.33%
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Two companies that I want to highlight in particular are CBOE Holdings, Inc. and OTC Markets Group Inc. CBOE is increasingly becoming an important part of the investment world as retail investors have begun to become more familiar in the trading of options and futures. Growth in these derivatives markets has allowed for the company in particular to prosper over the past decade.

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A look at the charts above show the steady growth rates the company has recognized. Yet from an investment standpoint, CBOE's affiliation with securities that offer investors downside protection also makes the company an interesting prospect to consider. Apart from options that can be used as equity hedges, the company also offers futures on the VIX Index which is often turned to in times of market volatility. As a result, the company itself can continue to see increased market activity even in times of more bearish market conditions.

As for an exchange operator that continues to fly under the radar, investors need not to look much further than the OTC Markets Group. OTCM controls the less reputable over-the-counter financial markets including that which was formerly known as the Pink Sheets. Although the securities themselves that trade on the over-the-counter markets are often met with skepticism with justifiable rationale, the marketplace itself is increasingly becoming an essential institution in the investment world. This is particularly the case as it serves as a low-cost option for listing securities.

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A look at the charts above also show the steady and predictable growth rate that OTCM has realized over the past few years. This is despite its small market size and less respected offerings. With the ability to offer companies reduced listing costs in comparison to other nationally recognized exchanges, OTCM has increasingly become the marketplace of choice for listing ADRs of foreign companies and other thinly-traded public enterprises.

To be quoted on the platform, companies are also not required to file with the SEC, even though many tend to do so anyways. These relaxed regulatory requirements also serve as a distinguishing factor for the exchange. Altogether, more than 10,000 US and global securities can be accessed via the financial markets of the OTC Markets Group. Investors looking at OTCM should consider that the company will likely continue to face even more growth as the world continues down a path of greater interconnectedness. This is due to the rising number of foreign companies listing on this exchange.

Final Thoughts

Exchange operators offer risk-averse investors an ability to own the operation of some of the most critical assets in the financial world. These are the market exchanges themselves. As stable assets with high barriers of entry and limited competition, these companies are poised for long-term growth. Such investments continue to provide reliable cash flows as market activity continues to grow worldwide.

With few financial tools available for the public to use in order to keep up with inflation, securities will inevitably play an important role for those saving for retirement and beyond. As such, these institutions will continue to be relied upon for the generation of wealth for many decades to come.

Disclosure: I am/we are long CBOE, HKXCY, OTCM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.