Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
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The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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| Stock/Futures
Exchanges -- One of the Most Profitable Industries on the Planet |
Published: January 19, 2007
Since its beginning in London almost 300 years ago, the securities exchange business has seen tremendous technological and regulatory improvement, but the basic concept remains unchanged. Modern-day exchanges often don't even have a physical location, but instead consist of a network of computers that connect millions of traders. Nonetheless, exchanges are still all about bringing together buyers and sellers and offering a transparent quotation system.
Of course, successive innovations have made it easier, cheaper, and faster to trade. Here are just a few of the main advancements and developments that have improved liquidity and volume on global exchanges:
Electronic Trading Networks -- Thanks to electronic trading networks, buyers and sellers don't have to be physically located close to their counterparties -- a buyer in the U.S. can now be instantly matched to a seller in Asia or Europe just as easily as to a seller in the same city.
This has vastly improved pricing and liquidity. With the ability to access a truly global pool of buyers and sellers, it's easier to get a favorable price when buying or selling a security. And with such a vast pool of participants, it's easier to buy or sell a large volume of stock without affecting trading prices.
Greater Array of Financial Products -- The array of financial products traded has burgeoned to include derivative products like options and futures as well as bonds and stocks of all descriptions. These new products have proven popular trading vehicles -- volumes for derivatives have grown at many times the rate of stock and bond trading in recent years.
Greater Number of Traders -- The pool of investors has widened considerably -- 300 years ago, stock trading was confined to a small class of the wealthy. Now most Americans have some sort of exposure to and familiarity with the stock market.
Helping the democratization of the stock market is the abolition of fixed commissions in most developed markets. For example, in the U.S. prior to 1975, a simple $5,000 U.S. stock transaction could cost several hundred dollars in commissions. Now the same trade could cost less than $10 -- cheaper commissions have opened up trading to legions of retail investors.
Better Regulation -- While there are certainly still instances of fraud, manipulation, and misconduct in modern financial markets, it's less common than it once was. Many stock exchanges impose requirements on companies that list on their systems -- listing requirements include measures of financial stability, liquidity, and accounting transparency. Such regulations help boost confidence among investors in the quality of stocks listed on a given exchange.
 As a result of all the refinements, deregulation, and innovations of the past few centuries, volume traded on global exchanges has exploded. Case in point: check out our chart of volume traded on the New York Stock Exchange (NYSE). In just the past 19 years, volume has exploded from a daily average of 113 million shares per day to more than 1.8 billion -- a sixteen-fold increase.
And exchanges are no longer just informal arrangements used to make trading easier -- exchanges are highly profitable businesses in their own right. For most of their history, exchanges were owned by the brokers that traded on the exchange -- an organizational structure known as a "mutual company." Most were also organized as non-profit companies. But that's all changing. In just the past decade, many of the world's largest exchanges have converted to for-profit entities and have made their stocks available to the general public.
Modern exchanges collect a fee for every stock, bond, option, or futures trade processed on their floor or over their network. Established exchanges like the NYSE that offer superior liquidity and transparency have seen trading volumes explode in recent years -- steadily rising volumes have led to higher profits for the exchange.
Today's modern exchanges enjoy one of the most lucrative and scalable business models on the planet. Specifically, the main costs associated with setting up an exchange involve up-front investments, such as the purchase of an exchange building and the computers, networking equipment and software to connect electronic traders. Once those investments are made, there are few marginal costs associated with handling trades. In other words, the cost of processing one additional trade is negligible. Thus, rising volume does not spell rising costs for an exchange -- additional fees collected from rising volume drop straight to the bottom line.
Even better, exchanges benefit from the so-called "network effect." Simply put, the more volume a particular exchange handles over its network, the more valuable the exchange becomes. The reason is simply that higher volume spells higher liquidity and more efficient pricing.
With these points in mind, the table below offers a list of the world's publicly traded exchanges. And in the text that follows, my staff and I profile three of our favorite exchanges.
Important Note: Throughout the remainder of this article, editor Paul Tracy and our research staff provide a list of publicly traded exchanges along with analysis of their three favorites. However, in order to view the remainder of this article, you'll need to subscribe to our premium newsletter --
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Good investing!
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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