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Publicly Traded Exchanges: How to Beat the House


Focus on CME, ICE instead of individual equities.

Everyone is well aware of the meltdown in the financial stocks that's resulted from the credit crisis. Less attention has been paid, however, to the fact that the shares of the exchanges on which these stocks, bonds, and all the related options and derivatives trade, have also seen their own valuations cut in half in the last 18 months.

The question is: Do any of the publicly traded exchanges now represent buying opportunities?

Overall, I'm bearish on the group, as the bloom certainly seems to be off the rose. But I'm bullish over 2 names -- CME Group (CME) and Intercontinental Exchange (ICE) -- over the traditional stock exchanges, such as NYSE-Euronext (NYX) and NASDAQ (NDAQ). Before getting to the specifics, let's take a look at the arc and architecture that's led to the rise and fall of this sector of stocks.

Way back in March of 2003, when the US was decimating worthless land to get at the subterranean lubricant that's needed to keep the global economy humming, the Chicago Mercantile Exchange laid out its own version of shock-and-awe by performing an initial public offering to become a publicly traded exchange in the US. And, unlike the debacle in Iraq, it was greeted with flowers, goodwill, and a soaring stock price. Its shares gained some 600% over the next 4 years -- peaking at $710 in late 2007. They now trade around $325 a share.

The CME's IPO was quickly followed in issuance by the New York Stock Exchange, the International Securities Exchange, New York Mercantile Exchange (NMX) and the Intercontinental Exchange. The NASDAQ had been the front runner and was a publicly traded entity since 2002.

The timing in market conditions made these darlings of both investors and momentum traders. It was a perfect storm of a bull market in both stocks and commodities, and the real kicker -- consolidation on a global scale.

And there was a reality behind the rosy outlook: The NYSE merged with Euronext and has taken stakes in a variety of foreign exchanges; the CME bought the Chicago Board of Trade; the NASDAQ purchased the Philadelphia and the Nordic OMX Exchange; and the ISE was purchased by the Deutsche Bourse for a nearly 50% premium.

All the above names saw their share prices ring up triple-digit percentage gains within a matter of 3 years since their IPOs. These increases in volume, consolidation, economies of scale, and the evolution toward an integrated trading platform propelled revenue and earnings growth.
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No positions in stocks mentioned.

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