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6 Securities and Exchanges Set to Benefit From Trading Volatility

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Tanuka De
·9 min read
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A compelling and diversified product portfolio helps drive revenues of Zacks Securities and Exchanges industry players. Increase in trading volumes and product expansion through prudent acquisitions are expected to benefit Intercontinental Exchange (ICE), Nasdaq (NDAQ), MarketAxess Holding (MKTX), Cboe Global Markets (CBOE), CME Group (CME) and OTC Markets Group Inc. (OTCM).

However, alterations in investment patterns and priorities, and compliance with regulations pose challenges.

About the Industry

The Zacks Securities and Exchanges industry comprises companies that operate physical or electronic marketplaces, which facilitate the buying and selling of stocks, stock options, bonds or commodity contracts.

These companies generate revenues from fees received from the listed companies on their exchanges. The industry players also provide a range of data and listing services to global financial and commodity markets, including pricing and reference data, exchange data, analytics, feeds, index services, desktops and connectivity solutions as well as corporate and ETF listing services on the cash equity exchanges of the industry players.

3 Trends Shaping the Future of Securities and Exchanges Industry

Volatility fuels trading volume: The players in the industry are largely dependent on product and service portfolios for revenues. Major services include trade execution, clearing, settlement services for securities and commodity contracts, listing services plus trading, and clearing systems services. Other revenue sources include data products, and financial indexes along with information and public company services. Maximization of transaction and clearing fees and lowering of transaction-based expenses drive profits. Sustainable trading volume growth, driven by trading volatility, fuels transaction and clearing fees (a major component of the top line of industry players).

Mergers and acquisitions: The industry continues to witness mergers and acquisitions with companies evaluating opportunities to supplement their internal growth story by forging strategic alliances or acquiring businesses or technologies. These enable them to penetrate untapped markets, provide new products or services and enhance the value of their platform and the existing trade-related operations. Additionally, strategic buyouts lead to a diversified product portfolio (the primary growth catalyst) and help industry participants to maintain their domestic market share as well as fortify global footprint.

Adoption of technology: Focus on building a strategic economic market model via technological advancements and upgrade of products and services will help all exchanges to stay afloat amid changing industry dynamics. In the recent years, the players have launched a number of innovative technologies that rely on machine-learning, automation and algorithms designed to improve trading decisions while reducing trading inefficiencies, cyber threats and human errors.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Securities and Exchanges industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #95, which places it in the top 38% of the 253 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, reflects attractive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have been gaining confidence in this group’s earnings growth potential. Evidently, the industry’s earnings estimate for the current year has moved up 1.6% since August 2020.

Before we present a few securities and exchanges stocks worth considering for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms Sector and S&P 500

The Zacks Securities and Exchanges industry has underperformed the broader Zacks Finance sector as well as the Zacks S&P 500 composite over the past year. The industry has gained 29.3% compared with the broader sector’s increase of 52% and the Zacks S&P 500 composite’s rise of 53.8% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month price-to-book (P/B), which is commonly used for valuing finance stocks, the industry is currently trading at 3.58X compared with the S&P 500’s 6.79X and the sector’s 3.14X.

Over the last five years, the industry has traded as high as 3.61X, as low as 1.88X and at the median of 2.6X as the chart below shows.

Price-to-Book (P/B) Ratio (TTM)

Price-to-Book (P/B) Ratio (TTM)

6 Securities and Exchanges Stocks to Keep an Eye on

We are presenting one Zacks Rank #1 (Strong Buy) and one Zacks Rank #2 (Buy) stock from the Securities and Exchanges industry. We are also presenting four stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

OTC Markets Group : Headquartered in New York, NY, this Zacks Rank #1 company engages in the financial market business in the United States and internationally. The company is poised to grow on the strength of growing subscriber base driving transactional revenues, price increases and a compelling portfolio.

The Zacks Consensus Estimate for 2021 EPS indicates a rise of 5.2% while that for 2022 projects 6.8% increase from the year-ago figure. It came up with a four-quarter average surprise of 22.71%. The expected long-term earnings growth is pegged at 9%, better than the industry average of 5.6%. The consensus estimate for 2021 and 2022 has risen 7.3% and 6.2% in the past 30 days.

Price and Consensus: OTCM

Intercontinental Exchange: This Zacks Rank #2 leading global operator of regulated exchanges, clearing houses and listings venues, and a provider of data services for commodity, financial, fixed income and equity markets is based in Atlanta, GA. Its compelling portfolio, broad range of risk management services, timely achievement of cost synergies and solid capital position strengthen Intercontinental’s growth trajectory.

The Zacks Consensus Estimate for 2021 EPS indicates a rise of 9.3% while that for 2022 projects 8.1% increase from the year-ago figure. It came up with a four-quarter average surprise of 3.67%. The expected long-term earnings growth is pegged at 10.5%, better than the industry average of 5.6%. The consensus estimate for 2021 and 2022 has risen 0.2% each in the past 30 days.

Price and Consensus: ICE

MarketAxess Holdings: This New York-domiciled leading multi-dealer trading platform provides institutional investors with access to global liquidity in products like U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit derivatives, and other fixed-income securities. It carries a Zacks Rank of 3. The company is poised to grow riding on increase in revenues, strategic acquisitions, strong financial position and an expanding international business.

The Zacks Consensus Estimate for 2021 EPS indicates a rise of 9.6% and 12.9% increase for 2022 from the year-ago figure. It came up with a four-quarter average surprise of 10.73%. The consensus estimate for 2021 and 2022 has risen 0.6% and 1%, respectively, in the past 30 days.

Price and Consensus: MKTX

Nasdaq: Headquartered in New York, Nasdaq is a leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services. It carries a Zacks Rank of 3. Its strategy of accelerating its non-trading revenue base, successfully maximizing opportunities as a technology and analytics provider and growing core marketplace businesses as well as intensifying focus on Market Technology and Information Services businesses should continue to drive Nasdaq’s growth.

The Zacks Consensus Estimate for 2021 EPS indicates a rise of 3.6% while that for 2022 implies 6.6% increase from the year-ago figure. It came up with a four-quarter average surprise of 6.01%. The consensus estimate for 2020 and 2021 has risen 0.2% and 10.1%, respectively in the past 30 days. The expected long-term growth rate is pegged at 4.1%.

Price and Consensus: NDAQ

Cboe Global Markets: Based in Chicago, IL, this Zacks Rank #3 company is one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading. It carries a Zacks Rank of 3. The company is poised for growth given expanding product line across asset classes, broadening geographic reach, diversifying business mix with recurring revenues and leveraging technology.

The Zacks Consensus Estimate for 2022 EPS indicates a rise of 5.7% and has risen 0.4% in the past 30 days. It came up with a four-quarter average surprise of 3.72%.

Price and Consensus: CBOE

CME Group: Headquartered in Chicago, IL, this Zacks Rank #3 company boasts the largest futures exchange in the world in terms of trading volume as well as notional value traded. Efforts to expand futures products in emerging markets, non-transaction related opportunities, OTC offerings, cross-sell through alliances, strong global presence, and solid liquidity should drive CME Group’s growth.

The Zacks Consensus Estimate for 2022 EPS indicates a rise of 9%. It came up with a four-quarter average surprise of 1.48%. The expected long-term growth rate is pegged at 3.1%.

Price and Consensus: CME

Zacks Top 10 Stocks for 2021

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Intercontinental Exchange Inc. (ICE) : Free Stock Analysis Report

Cboe Global Markets, Inc. (CBOE) : Free Stock Analysis Report

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