Sector Overview – Financial Market Operators

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Welcome to a new iteration in the Sector Overview series of articles. In this article, I present an overview of a small subset of companies that is often overlooked by investors – although investors use their services on a day-to-day basis: financial market operators. These can include companies that operate stock markets, derivatives markets, bond markets, commodity markets, currency markets etc.

Whether the overall economy or “market” is up or down – investors always flock to trade their assets on these markets. Suffice it to say, these markets provide one of the most essential service in a capitalistic society. Whether its the need to trade commodities on a daily basis, or a startup company going public, these marketplaces play a crucial role in the corporate world. As mentioned – even though investors may use the services from these companies on a day-to-day or even hour-to-hour or minute-to-minute basis, the same investors overlook these companies as an investment choice. I want to highlight some of the major players in this space and some thoughts on investing options.

Sector Overview – Financial Market Operators

The major players amongst the North American markets are:  CME Group Inc (CME), Intercontinental Exchange Inc (ICE), Nasdaq Inc (NDAQ), CBOE Holdings Inc (CBOE), TMX Group Ltd (TSE:X).

FMO Overview Table

These are of course, not the only major players in the space – almost every stock market operator in the world is run by a company that is often tradable. For e.g., The Australian Stock Exchange — ASX Ltd (ASX:ASX) trades on ASX. Similarly, the London Stock Exchange Group plc (LON:LSE) trades on London stock exchange — and is in the midst of considering a merger with Deutsche Boerse AG (ETR: DB1) (Update: The two companies have agreed to merge in a $30B deal). There have been plenty of other mergers (including in N.America) over the years and the industry continues the path towards consolidation. But for the sake of brevity (listing and covering every financial market operator in the world is not possible in this article), I will only cover the N.American markets in this article.

The five listed market operators may not directly compete against one another – although ICE, NDAQ and TSE:X compete for the same (or similar) equity market listings. The direct competitors for each of these companies can other international markets where they compete for public companies to be listed. For e.g., when Alibaba Group Holdings Ltd (NYSE:BABA) went public in 2014, markets across the world were competing and it eventually came down to NYSE, NASDAQ or Shanghai market listing (Alibaba eventually decided to list on NYSE). So, keep in mind, that even though the companies listed are financial market operators – these may be apples-to-oranges comparisons, so to speak.

In order to put the relative size of the companies into perspective, the following charts are provided.

FMO - metrics

12 thoughts on “Sector Overview – Financial Market Operators

  1. Hey R2R,

    thx for making these high level sector overviews. I only discover them now. I will be reading more of them.

    It helps to understand a sector and the major players. For me, it is a solid basis to start my own research for sector ETFs or undevalued players in the sector.

    I jump onto the railroads now

    • Im glad you enjoy the mile-high overviews…Like you gather, its meant to be an introductory post showing who the major players are and learning something about the space. If the sector interests you, you can then drill down into each company or use sector ETFs – if you wish (although I doubt there is a sector ETF specifically for this sector or railroads).

      Let me know what you think of the railroad post. Also, be sure to check out the other side of the argurment – teh Sector Challenges. I just have one post in that series — on railroads. Heres the link: http://roadmap2retire.com/2015/11/sector-challenges-railroads/

      cheers
      R2R

  2. Hey R2R,

    Very interesting analysis R2R, I was only aware of 3 of those (ICE, NASDAQ and TSE). I find it very interesting how the exchanges gain their earnings, for me it’s quite difficult to gauge where future growth will come from..I’m sure there will be growth but I can’t make the connection.

    You mentioned the ASX, which is one player in the game. It nearly merged with the Singapore one, not too long ago. At the moment is a domestic player only, it will need to travel to other countries if it’s ever going to become something bigger – Australia isn’t a big enough market.

    Tristan

    • Hi Tristan,
      Thanks for commenting and sharing — providing us with some input from Down Under. I didnt know ASX tried to merge with the Singapore exchange…that would be a good way to grow the company I suppose. You are geographically close to Asia – where theres so much growth, im sure the agile companies will find a way to grow the earnings.
      ICE, NASDAQ and TSE get all the media coverage, but like the charts show, the commodity and options markets are also huge. Before I wrote this article, I didnt know CME was bigger than ICE and has such a huge market cap, better dividend growth story etc. Definitely worth a closer look – as the “markets” themselves arent going anywhere — we will always need them. They are the consumer staples of the capitalistic corporate society 🙂

      R2R

      • Hey R2R,

        By growth I meant for the Australian Stock Exchange company (ASX:ASX). There a number of Aussie companies that have expanded overseas (and into Asia) with varying degrees of success. Most of the ASX’s activity comes from Australian based companies.

        There are a handful of American small tech companies that listed in Australia simply because they could raise more here than in the USA – because Australia is a much smaller market in terms of number of companies, but has a lot more money to throw at new ideas.

        There are also a growing number of Asian, particularly Chinese, companies that seek to gain a certain ‘status / acceptance’ because they’re list on a respectable exchange like the ASX and the investors love the growing-Asia story. Buyer-beware though, nearly all of these Asian-ASX-listed companies have been terrible investments, their finances are opaque and they are at the whim of the Chinese Government to shut them down / steal investors’ money.

        24M people isn’t a lot to sustain the size of the Australian share market.

        Tristan

        • Thanks for sharing your thoughts. And for the reminder that the Asian companies are something to be careful about — true that it depends on the whim of the Chinese government. Its one of the reasons Ive avoided even large caps like Alibaba.

          R2R

  3. Between Simply Safe Dividends’ write up of McGraw Hill and now this, I’ve been humbled recently on how little about finance I actually know. But once you come to the realization that a private company owns the exchanges, it makes sense. Just as a private company owns a shopping mall and the Macy’s, Sear’s, and Old Navy are its tenants that pay to be there, the same holds true for the stock exchanges.

    Perhaps I missed it in your article, but how do the exchanges’ parent companies make money? Per trade, per listing, or a monthly/annual “rent”?

    Sincerely,
    ARB–Angry Retail Banker

    • Hi ARB,
      Theres always something to learn, isnt there? It is interesting that most investors do not focus on these companies…I just posted the article on SeekingAlpha too and barely got any pageviews (lowest record ever in all my writing so far) — which just goes to show that no one really follows these stocks.
      I am not familiar with the details of their business models. My guess is that they charge a transaction fee per-trade, but I could be wrong. I will have to dig deeper and find out how their rev & earnings are generated.

      R2R

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