Brokerage and Exchange Stocks

About Brokerage and Exchange Stocks

The exchanges are among the best businesses in finance and priced accordingly. They are near-monopolies on their own order flow, they charge a fee on every trade they match, and then they sell the data that matching produces and license the indexes built on top of it. That data and index revenue is a subscription business bolted onto a toll booth.

The useful thing about the group is that it is long volatility. When markets panic, people trade, and trading is what these firms bill for. Revenue can rise in a falling market, which makes exchanges and brokerages one of the few financial exposures that does not need everything to go well.

The rest of the label is more mixed. Retail brokerages earn heavily on interest from customer cash sitting uninvested, which makes them a rates play wearing a technology multiple. Investment banks carry trading positions and depend on deal flow, so their earnings are cyclical and their multiples reflect it. Rating agencies get paid when debt is issued, which is a lovely business that stops abruptly when issuance does.

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