Low volumes take toll on earnings at US exchanges

21 Oct, 2012

US exchanges are expected to report lower profits for the third quarter as volumes in cash equities, options and derivatives slumped with retail investors on the sidelines amid low volatility in the markets. Daily equity volumes of NYSE-listed shares fell 29.4 percent from a year earlier, Arca/Amex-listed volume was down 47.9 percent and Nasdaq-listed volume slumped 23.9 percent, said Richard Repetto, an analyst at Sandler O'Neill + Partners.
"We suspect typical summer seasonality along with the persistent decline in volatility levels were the primary drivers" of the declines, Repetto said in a note to clients. Volume may remain tepid in the fourth quarter as investors keep cash on the sidelines due to uncertainty around the US election and the so-called "fiscal cliff," which could lead to deep federal spending cuts and tax increases at year end if Congress takes no action, said Keefe, Bruyette & Woods analyst Niamh Alexander.
"We expect cost control and capital management to dominate conversations again," she said of the exchanges. The year-ago quarter also makes for a tough comparison. Last August, volatility spiked on concerns over Europe's debt crisis and the downgrading of the US credit rating, leading to a big increase in trading as investors tried to keep up with wild market swings. This year, however, volatility was muted.
Nasdaq reports its results on Wednesday. The New York-based trans-Atlantic exchange operator may update on an expected decision by the US Securities and Exchange Commission on the company's $62 million compensation plan for Facebook's botched public offering on May 18.
Market makers and broker dealers are estimated to have lost upward of $500 million when a glitch led to hours of delays on confirmations for many orders in the highly anticipated IPO. At stake in the SEC decision is the extent to which US exchanges, which match hundreds of billions of dollars of securities transactions daily, can be liable for technical snafus.
Nasdaq Chief Executive Robert Greifeld has said the payback plan, if approved, would likely take effect by year end. Nasdaq is expected to report earnings of 60 cents a share, not including items, on revenue of $410.6 million, according to Thomson Reuters I/B/E/S. That compares with 67 cents a share on revenue of $438 million a year earlier.
CME, the biggest US futures exchange, reports on Thursday. Confidence in the futures industry, and in CME, has yet to recover after the collapse last October of futures brokerage MF Global left a shortfall of $1.6 billion in customer funds. Investors will be looking for clarity from new Chief Executive Phupinder Gill on how he intends win back clients.
Gill's plans for international expansion - CME expects to open its first non-US exchange in London next year - and for capitalising on new Dodd-Frank rules which are pushing over-the-counter swaps onto regulated exchanges, will also be in focus. The recent law mandates the clearing of OTC swaps in early 2013. Alex Kramm, an analyst at UBS, said he believes the clearing of interest rate swaps alone could add $500 million in revenue, or 25 percent, to earnings for CME in the medium term.
CME is expected to have earned 70 cents a share on revenue of $693.4 million in revenue. A year earlier, it reported a profit of 95 cents a share on revenue of $874.2 million. CBOE, the largest and oldest US stock options exchange, reports on November 1. CEO William Brodsky is banking on the exchange's exclusive indexes, like options on the CBOE VIX "fear" index, to cushion profits as overall stock-options trading declines and competition from both new and established exchanges rises.
Brodsky took the market public more than two years ago amid high expectations, so far unfulfilled, that CBOE would be bought by a competitor. In an October 8 note, Sandler O'Neill's Repetto speculated that CME, whose trading floor is across the street from CBOE, could buy CBOE and a second options exchange. Even without a deal, Repetto said, growth in VIX contracts "should increase the multiple and valuation of the CBOE."
CME announced plans to buy the Kansas City Board of Trade on October 17. The Chicago-based company is expected to have earned 38 cents a share on $124.2 million in revenue. That compares with 50 cents a share on $143.6 million in revenue a year earlier. Atlanta-based ICE reports on November 5. The commodities exchange switched all of its cleared OTC energy swaps and options to futures on October 15 to help its clients avoid burdensome new regulatory requirements on the swaps market under Dodd-Frank.
ICE said earlier this month its third-quarter average daily volume fell 4 percent from a year ago, with average daily commissions on OTC energy of $1.4 million, compared to $1.5 million in the year-ago quarter. "While 3Q12 data was sluggish and below our expectations, we still believe ICE is the best growing exchange in our space and look forward to upside from OTC clearing mandates in 4Q12 and '13," Macquarie Securities analyst Ed Ditmire said in a note.
ICE is expected to profit from the clearing of credit default swaps and energy swaps. Analysts, on average, expect ICE to have earned $1.73 a share, not including items, on $325.2 of revenue. That compares with a profit of $1.87 a share, on revenue of $340.8 million. The New York Stock Exchange parent reports on November 6. Transaction fees make up around half of NYSE's revenue and with retail investors largely on the sidelines, cash equity volumes have been soft. The Big Board parent is expected to update on cost cutting initiatives. The company is expected to have earned 42 cents a share, not including special items, on revenue of $572.2 million. A year earlier, it earned 71 cents a share on revenue of $704 million.

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