The companies that operate exchanges for securities, commodities and other financial instruments robust institutions. These companies are extremely profitable, with operating margins usually in the high teens.
Extreme market turbulence has been caused by the coronavirus. As a result, stock markets globally have taken big hits since the beginning of the year. That the damage will extend its reach deep into the real economy is now without doubt.
As I write this, the S&P500 Index is down 20.11% from its 52-week high. It is hard to tell how this will end. And therein lies the problem. When you find yourself in the eye of the storm, when is it the right time to buy? Can you really time the market?
At moments like this, instead of constantly refreshing market prices, it is not unhelpful to take a closer look at history. It might not repeat, but they say it tends to rhyme.
In this article, I want to look at the listed exchange companies and examine how these companies went through the Financial Crisis of 2008/09.
Publicly Listed Securities Exchanges
The following table shows a number of financial exchanges and their current market capitalization. Additionally, you can see the current trading price, the difference from the 52-week high, as well as its Price-to-Earnings ratio (according to Google Finance).
| Ticker | Market Cap | Price | Δ52 High | PE |
| ICE | $46,0 billion | $83.12 | -18.45% | 24.30 |
| LSE | $20,8 billion | £6,794 | -21.26% | 57.51 |
| NDAQ | $15,8 billion | $96.05 | -20.11% | 20.72 |
| ENX | $4,2 billion | €67.75 | -18.57% | 21.24 |
| CME | $65,2 billion | $182.01 | -19.24% | 30.81 |
| CBOE | $10,5 billion | $94.80 | -25.90% | 28.44 |
| DB1 | $19,9 billion | €125.45 | -18.01% | 22.93 |
| MKTX | $12,9 billion | $343.07 | -18.60% | 63.55 |
Most of these companies were publicly listed prior to the financial crisis of 2009/10. CBOE (CBOE) and Euronext (ENX) are the only exceptions. Euronext merged with NYSE Group in 2007, which in turn was acquired by the InterContinetal Exchange (ICE) in 2012. Euronext reentered the public markets in 2014. CBOE went public in 2012.
The Intercontinental Exchange (ICE) is the owner of the New York Stock Exchange. In addition to the exchange which it bears its name from, the London Stock Exchange Group owns the Italian stock exchange. Nasdaq, Inc. is the owner of a number of securities exchanges. Most notably, the Nasdaq and the Scandinavian OMX Exchanges.
CME Group owns a number of the largest commodity and derivatives exchanges in the world. CBOE is big in futures and owns the VIX volatility index. Deutsche Börse Group owns the Frankfurt Stock Exchange and MarketAxess is one of the biggest trading platforms for credit securities.
The Financial Crisis of 2007-08
The Global Financial Crisis of 2007-08 is by many experts considered the most severe market crash since the 1929 stock market crash. At the time, I was based in Iceland where the stock market lost 92% of its value and people worried at one point if the payment systems would continue to work.
For global capital markets, this was a stress test that tested the boundaries of the financial system. In real life. Yet, if you were to look at the financial performance of the stock and derivative exchanges, you could hardly tell.
Did their stock prices suffer? Most definitely. Did they experience hiccups? For sure. But steep losses and shareholder wipeouts. Not at all. Therefore, in light of current events, it’s worth taking a look at how the exchanges went through this period.
Note: Since the price is at the end of the reporting year, but the Earnings per Share weren’t filed until a few months after, the P/E Ratios should be seen as Forward P/E Ratios. The P/E Ratios in the current overview at the beginning of the article are, on the other hand, Trailing P/E Ratios.
Intercontinental Exchange (ICE)
| ICE | Price | EPS | P/E |
| End 2006 | $21.58 | $0.48 | 44.96 |
| End 2007 | $38.50 | $0.68 | 56.62 |
| End 2008 | $15.27 | $0.84 | 18.18 |
| End 2009 | $22.52 | $0.85 | 26.49 |
| End 2010 | $23.97 | $1.07 | 22.40 |
| End 2019 | $92.44 | $3.43 | 26.95 |
During the Financial Crisis, the Intercontinental Exchange played a big role in the clearing of Credit Default Swaps (CDS). By the end of 2010, ICE had cleared more than $10 trillion of CDSs through its subsidiaries.
Nasdaq, Inc (NDAQ)
| Nasdaq | Price | EPS | P/E |
| End 2006 | $30.79 | $0.94 | 32.76 |
| End 2007 | $49.49 | $3.46 | 14.30 |
| End 2008 | $22.44 | $1.62 | 13.85 |
| End 2009 | $20.41 | $1.25 | 16.33 |
| End 2010 | $23.97 | $1.09 | 21.99 |
| End 2019 | $107.02 | $4.63 | 23.11 |
It should be noted that in 2007, Nasdaq, Inc sold its 31% stake in the London Stock Exchange, which resulted in a (one-time) gain of $431.4 million for the company. As a result, Earnings per Share are abnormally high in 2007.
London Stock Exchange Group
| LSE | Price | EPS | P/E |
| 31 Mar 2006 | £961.73 | £27.40 | 35.10 |
| 31 Mar 2007 | £1,162.18 | £49.40 | 23.53 |
| 31 Mar 2008 | £1,113.33 | £71.90 | 15.48 |
| 31 Mar 2009 | £498.60 | -£126.10 | -3.95 |
| 31 Mar 2010 | £672.79 | £33.50 | 20.08 |
| End 2019 (EST) | £7,716.00 | £203.70 | 37.88 |
The London Stock Exchange Group used to report their financial statements according to a fiscal year that ended on March 31 each year. Currently, they report their financials according to the calendar year. LSE has not yet published its 2019 full-year financial report. The 2019 Earnings per Share is the mid-range of analyst estimates. The price and EPS numbers are in Pence, not Pounds.
CME Group
| CME | Price | EPS | P/E |
| End 2006 | $101.95 | $2.32 | 43.94 |
| End 2007 | $137.20 | $2.98 | 46.04 |
| End 2008 | $36.75 | $2.53 | 14.53 |
| End 2009 | $67.68 | $2.48 | 27.29 |
| End 2010 | $64.93 | $2.86 | 22.70 |
| End 2019 | $199.18 | $5.91 | 33.70 |
CME Group was very active throughout the period. In, 2006, the Chicago Mercantile Exchange announced the purchase of the Chicago Board of Trade for $8 billion in stock, becoming the CME Group. The CME Group would further enhance its leadership as an operator of commodities and derivative exchanges. In 2018, the New York Merchantile Exchange (NYMEX) accepted a takeover offer from CME Group.
Deutsche Börse Group (DB1)
| DBG | Price | EPS | P/E |
| End 2006 | €69.71 | €3.36 | 20.75 |
| End 2007 | €135.75 | €4.70 | 28.88 |
| End 2008 | €50.81 | €5.42 | 9.37 |
| End 2009 | €57.72 | €2.64 | 21.86 |
| End 2010 | €52.41 | €3.88 | 13.51 |
| End 2019 | €374.50 | €5.47 | 68.46 |
Deutsche Börse AG operates the Frankfurt Stock Exchange, the largest German stock exchange. In 2006, Deutsche Börse attempted to acquire Euronext. Eventually, DBG lost out to NYSE Group. From 2008 to 2009, there were attempts to combine Deutsche Börse and NYSE Group, which did not materialize.
MarketAxess (MKTX)
| MKTX | Price | EPS | P/E |
| End 2006 | $13.57 | $0.15 | 90.47 |
| End 2007 | $12.83 | $0.30 | 42.77 |
| End 2008 | $7.57 | $0.23 | 32.91 |
| End 2009 | $13.70 | $0.42 | 32.62 |
| End 2010 | $20.93 | $0.80 | 26.16 |
| End 2019 | $374.50 | $5.40 | 69.35 |
MarketAxess is not a securities exchange in the strictest form. The company operates an electronic trading platform for the institutional credit markets. Although the debt market is much bigger than the market for equities, debt mostly traded over the counter.
Conclusion
Although all of the exchange operators covered above saw significant falls in their share prices during the Global Financial Crisis of 2008, none of them suffered long term damage. Aside from the London Stock Exchange Group in their 2009 fiscal year, all of the companies remained profitable throughout the Crisis.
In fact, even if you would have invested in any of them just before the Crash unravelled, you would have had a decent return, had you held until today. It’s impossible to time the market, but you don’t have to. Just average into it.
More Fundamental Finance
- The Cost of Capital Twilight Zone | Exor Case Study
- Embedded Optionality | FRMO Case Study
- Stock Exchanges | Beautiful Business Models
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