Exchange Equity Research 101
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Despite a great deal of critique & plenty of gloomy predictions for the practice, the fact remains that sell-side equity research still holds significant influence on Wall Street. Research reports still support much of the institutional discourse about a stock & consensus estimates continue to drive a hefty portion of equity returns over short & medium time frames. In industries where institutions make up most of a stock’s ownership - like exchanges - sell-side influence carries even more weight.
Another fact remains - this valuable sell-side research, including detailed financial projections, consistent analysis of current events, and management access, remains locked in an expensive bubble away from most retail & even institutional consumption. How can such an isolated & walled-off practice still carry so much influence in the modern era of trading & markets?
This is where I think platforms like Substack will emerge - and already are emerging - as serious threats to the walled garden of sell-side research that exists today. A number of independent publications exist that provide a comparable level of industry research to sell-side firms at a tiny fraction of the price, giving everyone a chance to consume high quality financial & qualitative analysis about the companies they follow.
Over time, I hope to become this kind of affordable & high-quality alternative to sell-side research in the exchange space. At its core, equity research works to form convincing, evidence-based & differentiated views about the future of a particular company, and uses those views to make unique stock calls & generate alpha for clients. Resources like my 2021 exchange industry guide & quarterly earnings reviews are ways I try to bring equity research to readers in a free or low-cost way.
Today I’m starting a series that adds another resource to this list - detailed & driver-based financial models for a number of different exchanges & market data providers, starting with CME Group. This post begins with a walkthrough of a model I built to project the exchange’s future results, then digs into the drivers that have the most impact on EPS and where my views on those drivers differ from sell-side consensus. By sharing the underlying data, I hope to give readers a way to make their own differentiated views about the industry & challenge the analyst “consensus” that drives so much of the short term trading & discussion we see in the markets today.
With that, it’s time for some spreadsheets: