Volume is in an uptrend!

Well it looks like the crash you expected is finally upon us. Most of you are probably aware of the carnage in worldwide markets over the past two days and the collapse in the US futures. To be honest I don't really have a whole lot to say about it, just look at some of the archived posts. For the past year we (the SG authors) have been talking about the seriousness of the issues facing the markets. Now that bear market is hitting the world in full force, well, who is really surprised? Ok, the fact that the crash of 2008 is upon us is a very serious matter, people have been financially destroyed by this event and there will be more blood on wall street before this is all said and done. For traders who will be taking advantage of the insanely high volatility tomorrow, please take these "circuit breaker" price declines into consideration.

Instead of getting all doom and gloom I thought that tonight I would write about a more positive scenario facing the exchanges, specifically the NYSE Euronext. The argument is simple, the exchanges charge small fees for every transaction that occurs. When volumes grow so do their earnings. After looking at a number of charts I have concluded that volumes swelled in the last bear market. This makes sense somewhat because volatility increases and that goes hand in hand with higher volume. Take a look at this ten year chart of the dow jones industrial average and note the volume 2000-2002:

You see pretty much the same trend on the new york stock exchange:


Volume seems to steadily increase until the end of a bear market when it spikes which is consistent with typical technical analysis. Furthermore, this seems to add to a longer term trend in volumes increasing over time. So it appears the exchanges have long term organic growth with some acceleration during bear markets. While the examples I gave are for stocks I think its safe to say you see the same thing in commodities and futures markets. In fact, the most recent headline on ICE is that they hit an all time high in futures volumes last Friday. With all the craziness in going on right now you can bet that they will be breaking that record for a fourth day in a row tomorrow.

Some have argued that with the credit freeze up the merger and acquisition activity is done for a while, but last week the New York Stock Exchange bought out the American Stock Exchange in what looks like a sweet deal for NYX. It seems like a takeover of ICE or NMX by CME or NYX is still on the table to support valuations. As far as the nyse/amex deal, the reason why seems so good for NYX is they are getting commisions on the biggest and most heavily traded etf's in the market. Take a look at these volume trends of amex ETFs over the past year (top). Notice a trend?

All of those etfs shown and options on them are now traded on the NYX owned exchanges. NYX is benefiting from both the etf boom, including the rise of inverse market etf's like QID from proshares and the increasing volume due to volatility. Now I'm no specialist on the sector but it seems pretty straightforward that the exchanges, especially NYX, are going to see a huge windfall from all this market activity. They seem to have timed their amex acquisition perfectly.

Now I know the sound of "stock exchange stocks could do well in a bear market" sounds somewhat suspicious but it makes sense to me. It would be a relatively simple thing to check if it weren't for the fact that every exchange traded exchange has come public in the last five years. Neither NYX, nor NDAQ, nor CME, nor ICE were publicly traded during the last bear market so we can't just go check their charts and see what happened. In fact the concept of a "for profit" exchange is relatively new in general, so maybe its the case that they will suffer materially in some unexpected (or expected?) way from a bear market. Let me know if you have any thoughts on this. If the markets go flat for a long time that will certainly be very bad for the exchange business, and thats a real possibility in my opinion. But for now volume is in an uptrend!

Disclosure: I have no position in NYX but I own some ICE calls.



Good luck out there tomorrow and be safe. I'll post an NYX chart tomorrow sometime, it doesn't make sense to do one until we see what happens in the morning. Stay tuned...