Welcome to another issue of Front Month, a newsletter covering the biggest stories in exchanges & market structure every Friday. If you have questions or feedback, please reply to this email or find me on Twitter. If you like this newsletter and want to follow the exchange industry with me, please hit the Subscribe button below & be sure to share with friends & colleagues:
News
BlackRock Q2 revenue +32% YoY and EPS +28% YoY, beating analyst expectations: It seems as if, like death and taxes, a BlackRock earnings beat can be counted on as a near-certainty quarter after quarter. The asset management behemoth reported $9.5 trillion of AUM at the end of June as rising asset prices offset underwhelming net inflows. For years analysts & researchers have highlighted the ballooning scale advantage BlackRock has over most competing managers. This advantage remained in Q2 - investors piled into institutional & ETF products that BlackRock can offer at low expense ratios because it spreads fixed costs over a massive customer base. BlackRock also gave an update on recent investments, including Aperio and SpiderRock Advisors. Both companies give BlackRock a head-start in an emerging part of asset management - direct indexing. Think of direct indexing like a personalized active ETF - clients can use direct indexing to buy the underlying components of a particular benchmark rather than a passive tracking fund. As direct indexing costs come down & investor interest grows, BlackRock already has the tools in place to build the same size advantage in new products & beat out competitors.
Death. Taxes. BlackRock dominance.
Cryptocurrency firm Bullish to go public in $9 bln SPAC deal: On July 9 Far Peak Acquisition Corp, a SPAC backed by Peter Thiel, announced plans to take crypto exchange Bullish public later in 2021. Bullish is preparing to launch a semi-decentralized exchange (DEX) that lets traders interact with liquidity pools to buy & sell various cryptocurrency pairs. Bullish plans to take a 25% cut of all LP trading fees and commit company funds to its own liquidity pools, generating extra yield but also exposing itself to volatility & price risk of its underlying markets - known as “impermanent loss”.
Bullish will be lead by Tom Farley, an exchange veteran with over a decade of industry experience. Farley was tapped to lead the New York Board of Trade after ICE bought it in 2007 for ~$1 billion, overseeing the closing of its physical trading floor & growth as an electronic futures hub. In 2012 Farley became one of the New York Stock Exchange’s youngest Presidents at 38, again taking over a recent ICE acquisition. Under Farley’s leadership the NYSE cut hundreds of millions in annual costs & renewed its competition with Nasdaq for tech IPOs. Farley left the NYSE in 2018 to enter the SPAC craze, ultimately ending up at Far Peak near the end of 2020.
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Miami International Holdings Reports June 2021 Trading Results, MIAX Exchange Group Sets New Market Share and Volume Records: What Miami Exchange has been able to achieve in the US options market is a huge story I believe isn’t getting enough attention. In just under a decade the exchange has been able to go from 0% to over 15% market share in US options, coming close to surpassing the NYSE in size with a serious footing in the cash equities market to boot. Based on revenue capture among public competitors, I estimate MIAX’s options business to be generating between $15-$20 million in revenue per quarter and growing - a sizable amount of cash flow the exchange can use to make investments & build even more momentum. Options volumes have been hitting records industry-wide since COVID, but we could start to see competitors like ICE, Nasdaq & CBOE mention pressure in their options business because they have to lower fees to push back MIAX’s advance. The slowly building war for the US options market could get very interesting in the second half of 2021.
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Other Stories I’m Reading
LA Times Exposé of Robinhood Issues: I found this piece helpful because it collects all of Robinhood’s recent mishaps & fines into one place, and digs into FINRA’s findings in particular, to paint a pretty precarious picture of the company’s regulatory situation pre-IPO. This quote was especially eye-opening:
“Instead of having a firm officer examine customers’ applications for options trading, it relegated that task to an algorithm known as an “option account approval bot,” which was easily fooled. The bot approved options trading based on obviously inaccurate or fabricated information, Finra said.”
The more I read about Robinhood’s internal practices, the more I think about its “move fast & break things” Silicon Valley culture that doesn’t mix well with the slow, costly, compliance-heavy world of Wall Street brokerage firms. The SEC has allowed Robinhood’s meager risk management practices to go thus far on un-challenged - when will that change?
Ty Gellasch Interview on IEX’s Boxes & Lines Podcast: Speaking of the SEC, former securities lawyer Ty Gellasch did a good job on this podcast of summarizing the stacked political and regulatory agenda facing Gary Gensler and his team over the next three years, including memefication of markets, broker incentives, and a host of other important market structure topics. I recommend giving it a listen (it’s only ~30 mins long).
The Quest For The Investment Holy Grail - An Index Of Everything: This FT piece pulls back the curtain on product development efforts at MSCI, one of the largest & most powerful global index providers. the FT interviewed Peter Shepard, head of MSCI analytics research & product development, about a decades long project to create what they call the “ultimate index” - a benchmark to track the entire market, including stocks, bonds, real estate, and even illiquid assets like private equity. Indices like this could be very valuable for pension & endowment funds looking to diversify beyond stocks & bonds along with the broader passive retail community.
The New York Stock Exchange In The Crisis of 1914: From July 31 to December 15, 1914 the NYSE was shut down for trading, the longest period in its 200+ year history. The combination of World War I, a run on banks around the world, and severe shocks to the debt market forced the NYSE to remain closed to “prevent utter disaster” in the US economy.
Henry George Stebbins Noble was President of the NYSE during the crisis, overseeing the exchange’s closure & reopening four months later. He wrote a book chronicling the entire saga - why & how the exchange decided to close, impacts to global financial markets, and the tense conversations that happened behind the scenes. I highly recommend giving it a read.
Chart of the Week
The blow-off top in crypto hype seems to have passed for now.
We’ve all felt it. Prices are down. Media hype is subsiding. Even Elon Musk crypto tweets are becoming fewer & farther between.
The stark fade in crypto interest has already translated into modest volume declines on the major exchanges. Coinbase blew past record trading activity in May with over $200 billion in monthly traded notional, only to see volumes shrink -60% month over month in June. July looks to be even slower still.
On one hand, the industry is still seeing a level of trading that is multiples greater than any point in 2020, indicating a larger user base & floor of activity exchanges can count on moving forward. Conversely, a sustained period of lower volumes would spell trouble for future profitability of exchanges like Coinbase, where 90%+ of revenue is derived from transaction fees.
I’m personally long Coinbase and believe crypto volatility will return sometime later this year, bringing another sustained pop in prices & volumes that will help the exchange beat expectations. For now, we wait and see what surprises the crypto market has in store this summer.
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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, COIN, BLK and VIRT. I am also long Bitcoin, Ethereum, and UNI.