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*Author’s note - I’ll be taking a break next week & will be continuing with normal publishing starting Friday, January 7. Happy Holidays!
News
A Year In Review: And just like that, the market structure circus that was 2021 comes to a rapid close. One of the pandemic’s primary effects on me personally is a warped sense of time - some things in the distant past feel like they happened yesterday and it shocks me to remember that others only happened a few weeks or months ago. The same applies to my review of the exchange & trading landscape this year. Below are the major industry changes that 2021 can claim as its own:
Meme stonk mania: This may be the most over-written part of the year so I won’t spend too much time here, but at the beginning of 2021 almost no one gave thought to the collective power of a few retail traders gambling on their phone, Reddit boards, or the DTCC. DeepF***ingValue was not a household name. Very few people spent their mental energy or Twitter anger debating payment for order flow or the intricacies of wholesalers. The level of attention & change the Reddit meme stonk movement has brought to exchanges & market structure more broadly cannot be overstated. That all happened this year.
Crypto chaos: The price of Bitcoin on January 1, 2021 was ~$29,000. Ethereum traded at ~$700. Facebook wasn’t Meta, Coinbase wasn’t a public company, and only the truest of crypto die-hards owned or had ever heard of an NFT. We’ll likely look back on 2021 as the true crypto adoption S-curve moment, when crypto & the ‘metaverse’ went from a somewhat fringe, uncertain & scammy place to invest to a legitimate institutional asset class.
Honorable Mentions: CME almost bought CBOE, Gary Gensler became chairman of the SEC, Robinhood went public, Archegos blew up, more equity volume traded off exchange than on at one point, Tradeweb bought eSpeed, and Ken Griffin bought the Constitution.
Exchanges crushed it:
FactSet Reports Results For First Quarter 2022: Amid the seasonal slowdown in market activity & news, FactSet reported their fiscal Q1 earnings & gave spectators a window into what industry results may look like when most companies report in February 2022.
If FactSet is a good proxy for the industry, the future looks quite bright. The company reported healthy ASV, revenue & EPS growth figures with broad-based strength across products & geographies. FactSet’s business can generally be split into two halves - Research, the large, slow growth, US bank-focused business accounting for ~40% of ASV, and its higher growth segments that cater to wealth management & front/middle office clients globally. At the beginning of this year I was rather cautious on FactSet because I was uncertain about bank hiring & investment plans after they reported lackluster results in late 2020. If banks are facing margin pressure they’re likely to cut back on staff & incremental data subscriptions including FactSet’s analytics platform that charges on a per-user basis. As markets roared higher in 2021 & banks performed better than expected, FactSet’s Research sales beat expectations in tandem.
This pattern largely held steady in Q1 2022 - Sell-side ASV grew +13% YoY with Research as a primary contributor. Management reiterated 2022 guidance of +7% ASV growth & +9% EPS growth at the mid-point, implying they don’t see many headwinds to their plan of expanding in Asia & driving additional sales with new content & service additions to their data platform. I’m taking FactSet’s results as a signal that its peers - MSCI, S&P Global, Moody’s, and to a lesser extent Nasdaq - could reveal similarly rosy outlooks in 2022.
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Other Stories I’m Reading
More Than 130 Groups Call on CFTC to Shut Down 'Dystopian' Water Futures Market
DV Group to Acquire Business of Allston Trading
Acquisition of Trading Technologies by 7RIDGE now complete
Bakkt President Adam White Announces His Departure
Chart of the Week
December isn’t even over yet & we can already celebrate a new all-time record high for annual US equity volumes. Comparing to 2020 may bury the real story this year, which is that market activity in 2021 was more than twice as high as a pre-COVID year would normally be. Zooming out ever so slightly helps put the post-COVID era into better context. No wonder so many new stock exchanges have launched in recent years.
Those who thought 2020 was an extreme outlier year have been soundly rebuffed - will 2022 leave skeptics equally dumbfounded?
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, NDAQ and VIRT. I am also long Solana.