Welcome to another issue of Front Month, a newsletter covering the biggest stories in exchanges 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:
I’m not exaggerating when I say this - we just lived through a historic week for the markets. In prepping this newsletter, I had a couple stories written earlier in the week that became stale a few hours after I had written them. The markets are moving that fast.
To list just a few of the historic events that happened this week:
GameStop stock went from $17 at the beginning of January to over $450 (a +2,500% return in one month) as an army of retail traders led by r/wallstreetbets ignited a GME short squeeze tantamount to a financial populist uprising. For a moment, GameStop became the largest stock on the Russell 2000.
Point72 and Citadel gave emergency capital to a hedge fund damaged by the GameStop chaos, Melvin Capital, only for the stock to surge another +500% afterwards.
Elon Musk, Chamath Palihapitiya, Dave Portnoy and other high-profile celebrities tweeted about & even bought shares & options to participate in GameStop’s surge.
Robinhood saw a record 120,000 app downloads in one day as the chaos attracted more traders into the fray.
Discount brokers including TD Ameritrade, Schwab, Interactive Brokers and even Robinhood itself restricted purchases of GamseStop & other squeezed stocks, causing widespread retail outrage. Nasdaq joined in the rhetoric - CEO Adena Friedman said the exchange would look into halting trades if they link “social media chatter” to unusual market activity.
Robinhood is now drawing down bank credit lines and facing the threat of class action lawsuits, Congressional hearings, and its most valuable retail customers leaving the app in protest. All this amid plans to IPO later this year… needless to say sentiment has changed quite a bit on prospects for going public now:
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January 27th saw all-time record volumes in cash equities and options. More than the tech bubble. More than the ‘08 financial crisis. More than the March 2020 COVID crash. By a wide margin.
For me the takeaway from a week like this is clear - the combination of excessive fiscal & monetary stimulus, deep social unrest, and friction-less access to the markets means that abnormal volatility is here to stay. We’re becoming de-sensitized to chaos in stock prices. 20%+ daily swings in certain parts of the market don’t bother us as much as they used to, if at all. The VIX has been above its long-term historical average for close to a year now. When do we accept that market structure has permanently changed & higher volatility is the likely outcome?
Regardless, I have more confidence than ever in the value of owning exchanges in this environment. Exchanges effectively mine volatility - the more chaotic markets become, the more money exchanges & adjacent businesses generally extract from their products. For example - take Virtu, a top US equity market maker. The stock jumped +17% earlier this week as markets realized Virtu accounts for a large share of GameStop market-making and had made a sizable % of their normal quarterly revenue trading this one stock during the few days it squeezed higher:
This week felt like a year & this month has felt even longer. And it’s still only January.
Exchange Earnings
As if there wasn’t already enough going on this week, three exchange & market data companies also reported earnings - Nasdaq, MarketAxess, and MSCI. I wanted to write more on each earnings piece than what could fit in one newsletter, so I published separate posts with my thoughts on each stock’s earnings. You can find those posts below:
NASDAQ Q4 2020 EARNINGS REVIEW
MARKETAXESS Q4 2020 EARNINGS REVIEW
Honorable Mentions
D and Z Media Acquisition Corp priced a $250 million IPO on January 26 to go public on the NYSE under ticker symbol DNZ. The SPAC is focused on the media & education tech sectors but is connected to exchanges and ICE in particular through its leadership. Betty Liu is Chairman of DNZ and is the former Vice Chairman of the NYSE, as well as a former journalist & Bloomberg anchor. ICE is also part of the SPAC’s sponsor, helping the fund find an eligible company to buy and receiving part of the promote fees. This SPAC is a separate fund entirely from Bakkt’s SPAC deal announced earlier this month.
CME plans to launch a global emissions offset futures contract to help energy companies buy carbon credits & comply with new rules to combat climate change.
CBOE announced more tweaks to its ETF market maker programs to help increase liquidity in under-traded names & take market share from NYSE and Nasdaq.
Chart of the Week
You thought 2020 was good for IPOs? Welcome to 2021.
The Financial Times shared a chart this week showing that money raised through IPOs and follow on offerings in the first 22 days of this year has exploded past record highs to $64 billion. That’s nearly twice as much as the first 22 days of any year on record.
The SPAC bubble is a big driver of this record, as dozens of SPACs have announced and completed capital raises in the first few weeks of the year. Follow-on offerings - when a company sells or releases more shares into the secondary market - are another big driver. From an exchange perspective, the NYSE and Nasdaq have a duopoly on the US listings market and directly benefit from charts like this. IPOs, follow-on offerings and other corporate actions incur both 1x fees & recurring fees to stay listed on the exchange. The rush of companies to go public this year & last are adding both short term revenue & long term growth to the subscription base, meaning we’ll be seeing the impact of today’s IPO boom in listing results for years to come.
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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, CBOE, NDAQ and VIRT. I am also long Bitcoin.