BONUS - The Exchange Analyst Starter Kit
My favorite resources to learn about exchanges.
I recently updated Front Month’s “thank you for subscribing” email to try to provide value to you, the reader, from day one. I created a collection of my favorite books, articles, podcasts, and more to build an initial foundation of knowledge about exchanges, and wanted current subscribers to have access to this work.
Below is what I call the Exchange Analyst Starter Kit, with links to each resource and some commentary on what you can expect from each link.
#1: An interview I did on Seeking Alpha
To start off, I answered a few questions on Seeking Alpha about my background, my interest in the exchange industry, and my initial thoughts on the top companies in the space. I would highly recommend giving this a read to get a sense for my views & what Front Month will be talking about each week.
#2: CME’s 2005 Introduction to Futures Manual
If you’re looking for an Exchanges 101 crash course, look no further. CME created a guide to help new traders grasp basic concepts about their markets, how trading works, and a history of the Board of Trade & the Mercantile Exchange. After getting comfortable with the terms & ideas discussed here, you’ll be comfortable branching into more complex topics. They even have end of chapter quizzes!
#3: NYU Securities Trading Course Notes
These are the teacher notes to an introductory NYU college course on trading and the markets. While a long read, the PDF takes readers from basic principles of open outcry & electronic markets to an overview of algorithmic trading & high frequency trading in particular. A read-through of this will leave you well-versed in equities trading & the perspective of a main customer group of exchanges.
#4: SIFMA Electronic Trading Market Structure Primer
SIFMA has a bunch of good materials for market structure journeymen, this primer among them. This report looks at the reasons markets are becoming more electronic, then guides readers through the many forms of electronic trading and the asset classes where certain forms work better than others, including fixed income and commodities trading.
#5: SIFMA US Equity Market Structure Primer
Another informative SIFMA primer, this time on the US equity markets. Whereas #3 gives a more academic, customer-centric view of equity markets, this report gives a more practical, exchange-centric view. Topics include a snapshot of market share among the top equities exchanges & dark pools, determinants of market volumes, and a history of exchanges & their consolidation into what they are today.
#6: SIFMA US Multi-Listed Options Market Structure Primer
A very similar report to #5, but this time for the options market. Options are a different beast entirely, with their own competing exchanges & trading strategies that SIFMA helps readers navigate brilliantly.
#7: From National Marketplaces to Global Providers of Financial Infrastructures: Exchanges, Infrastructures and Structural Power in Global Finance
This is a fabulous SSRN paper on the growing power of exchanges in global finance. This research argues that through globalization, technology advances and demutualization, exchanges wield immense power and have influence over market structure impacting all investors. Papers like this are why following exchanges is so valuable and important.
#8: Headlands Quantitative Trading Summary
In mid-2017, a Chicago-based algorithmic trading firm called Headlands published a summary of various quantitative trading strategies, and I’ve found it to be the best view to date of today’s modern trader. Rather than charming or negotiating their way to success, a quant firm uses science, logic & advanced technology to consistently profit. An exchange creates products & data services with customers like this in mind.
#9: The Specter of the Giant Three
One can’t follow the exchange industry without understanding the dynamics playing out in asset management, particularly the top three players – BlackRock, Vanguard and State Street. The above paper argues that the top 3 managers wield ever increasing power over the markets, and in the process explains their competitive advantages & impacts to investors AND exchanges. Certainly worth a read.
#10: Selected works from Mike Green & Chris Cole
Mike Green on Hidden Forces Podcast #1
Mike Green on Hidden Forces Podcast #2
Mike Green on Grant Williams Podcast
Mike Green YouTube Presentation
Chris Cole on Hidden Forces Podcast #1
Chris Cole on Hidden Forces Podcast #2
Chris Cole on Grant Williams Podcast
There are likely no two smarter minds in finance sharing their knowledge *for free* than those of Mike Green of Logica Funds and Chris Cole of Artemis Capital Management. Both share their deep research as it relates to volatility & the rising trend of indexation in multiple formats above – two trends that impact exchanges tremendously. I find myself coming back to these presentations frequently as their analysis is spot on, and some of their predictions are starting to come true.
#11: Lessons from the Collapse of Amaranth Advisors
Everything about the rise and fall of Amaranth Advisors fascinates me. Apart from being a great story, the research on what caused Amaranth’s collapse and the industry changes that follow reveal volumes about how regulators and exchange management view the world. The markets in question focus on energy, but the event’s impacts cascade down to many other asset classes.
#12: Euronext: The Fight for LIFFE
Europe serves as a heated modern exchange battleground. The story of LIFFE, a pivotal business at the center of many global exchange rivalries, is a good way to quickly learn about European competition & the stories that made the industry what it is today. Euronext successfully acquires LIFFE in the early 2000s, but the twists and turns involved are worth reading, and the story is far from over even when the sale papers are signed.
#13: SIFMA Analysis of Market Data Fees
A controversial yet critical piece of the exchange puzzle revolves around market data pricing, and the above SIFMA paper sheds light on what makes the topic polarizing. As technology & market dynamics have evolved, the quantity, quality, and price of exchange data has exponentially grown. What’s more, most global exchanges are bolstering their data businesses with product launches and M&A, making this topic even more important.
#14: The Cost of Exchange Services by IEX
A continuation of the market data research, this time from a seasoned competitor rather than a third-party regulator. IEX is trying to stress a point in this report – that market data services are too expensive – but the embedded analysis of exchange products & technology is valuable. IEX made a hilarious TV spot in conjunction with the report’s release (watch it here)
#15: Determinants of Volume in Dark Pool Crossing Networks
This is a great paper looking at the practical, detailed makeup of dark pools and their underlying mechanics. Just under 50% of all stock market volume trades on a venue separate from the public exchanges, so the value of understanding how these other venues work and who owns them is extremely invaluable.
#16: The Electronic Evolution of Corporate Bond Dealers
This is the best explanation I’ve read to date of the electronic bond platforms. Researchers from Cornell and the Fed do great work with proprietary MarketAxess data to quantify their market share in corporate bonds and chart a path for their addressable market. If you own the stock, you need to read this paper.
#17: Selected Works on Seeking Alpha
Before Front Month, I published an intro article for each company I follow & write about consistently, giving a quick explanation of each business and my outlook for the stock. Although some of my thoughts have changed since each article was posted, reading my past work will help frame what’s changed & give a practical starting point for further research on each stock.
#18: Zero-Sum Game: The Rise of the World's Largest Derivatives Exchange
The history of exchange consolidation is filled with multiple wild, roller-coaster stories. One such story is the merger of CME and the Chicago Board of Trade in 2007. A deal to create the world’s largest exchange was almost squashed by a competing bid from ICE, a smaller Atlanta firm with advanced trading technology & big ambitions. Reading this book will give readers not just the factual timeline of events, but the qualitative, emotional recount of the fight for CBOT from interviews with exchange executives who are still around today.
#19: Case Studies on the Success or Failure of Futures Contracts
The exchange industry comes with a highly unique set of economics & strategies to succeed, not the least of which is the launch & growth of new trading products. The above paper chronicles some of the most successful product launches and biggest flops, examining the factors that underpinned their rise & fall. The principles outlined in this report still apply to new product launches today.
#20: Best Practices for Equity Research Analysts
I’ll end the Exchange Analyst Starter Kit with a non-exchange resource. This book by a former equity research analyst takes a detailed look at the methods used by professionals to value stocks & study businesses. I find this resource extremely valuable not only for approaching the exchange stocks, but for understanding how today’s sell-side analysts arrive at their price targets & opinions. Anyone interested in equity research will the glad they read this book.
Thank you for reading through the Exchange Analyst Starter Kit. I hope these resources give you a good starting point for further research on exchanges. Please reach out to me via email or Twitter if you have any questions or feedback, and be sure to share this with colleagues who would find it valuable.