As Trade Volumes Soar, Exchanges Cash In

But there is a silver lining to even this latest market horror show, at least for the exchanges where the financial instruments change hands.

Businesses like the New York Stock Exchange and the Chicago Mercantile Exchange skim cents off each stock or contract bought or sold over their trading floors or computers. With the daily volumes of financial market contracts sent surging through their systems by nervous traders and investors up by billions, the latest trading rush is directly polishing their bottom line.

The effect, however, may be fleeting. The rising volumes have generally not translated into higher stock prices for the exchanges, and they and some analysts are worried that the volatility and downbeat economic news may frighten away investors in the long term.

“Volume is positive on a short-term basis but because it is based on negative macroeconomic factors, these volumes are not necessarily sustainable,” said Joseph M. Mecane, executive vice president for cash trading at NYSE Euronext, which operates the New York Stock Exchange.

The latest swings came Friday when the Standard Poor’s 500-stock index fell 2 percent in the morning, but climbed back up in the afternoon to finish 1.5 percent higher, as investors digested remarks by Ben S. Bernanke, the Federal Reserve chairman, that left the door open to further support for the economy. The Dow Jones industrial average swung about 363 points during the day, closing up 1.2 percent, to 11,284.54.

Across United States stock markets — including the big electronic exchanges like Nasdaq, BATS and Direct Edge — trading volumes so far in the latest quarter are 17 percent ahead of the same period last year, according to figures from Credit Suisse. Volumes have been hitting levels almost double what they normally are at this usually quiet time of year, Mr. Mecane said.

Markets have been sent wild this summer amid a number of exceptional events, like the showdown over the debt ceiling in Washington, the downgrade by the credit rating agency Standard Poor’s of the United States’ long-term debt on Aug. 5, the global fallout from Europe’s debt crisis and a raft of data pointing to a stalling United States economy.

On a couple of days earlier in August, stock market volumes touched about 15 billion daily trades, although volumes are now back to about eight billion or nine billion daily.

The stock exchanges on average charge 3.5 cents for every 100 shares traded, according to Credit Suisse. That has declined in recent years with greater competition between the exchanges, so the pop in volumes is not delivering as much to them in increased profits as it would have just a few years ago. The exchanges have also diversified into other business like providing trading technology to banks. That means revenue from stock and derivatives trading accounts for a smaller proportion of overall income. In the case of Nasdaq, for example, it makes up a third of overall sales.

The exchanges, most of which are public companies, generally will not comment on the effect these increased volumes will have on profits.

But analysts like Howard Chen, a financial analyst at Credit Suisse who watches the exchanges, said that because volumes were already tracking 15 to 20 percent above what he had been expecting, earnings should be up a similar amount.

It’s not just the stock market that is experiencing a lift.

Traders have been busily betting on interest rates, commodities, currencies and even volatility itself.

The Chicago Mercantile Exchange where these and other products like United States Treasury futures are in large part traded has recorded a big pick-up in trading volumes recently.

Aug. 9, for example, was a record day for the Chicago exchange, when nearly 25.7 million contracts were traded, beating the last record, which was during the so-called flash crash on May 6 last year, when 25.3 million contracts were traded, the exchange said.

So far during the third quarter, volumes on the Chicago exchange are up 39 percent compared with the same period a year ago, Credit Suisse said.

Futures in gold, oil and the broad stock market index, the S. P. E-Mini, are all up.

In an era when volatility has become the new norm, another instrument that has had a surge in volumes is the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the short-term implied volatility of options on the S. P. 500. Financial instruments based on the VIX are traded both electronically and in the exchange’s trading pits in Chicago — where there is a special VIX pit, and 60 dedicated VIX traders.

Article source: http://www.nytimes.com/2011/08/27/business/as-trade-volumes-soar-exchanges-cash-in.html?partner=rss&emc=rss