Out of courisity (to distract myself from my personal portfolio having lost a month’s worth of my net income these last few days) I have looked today at the share prices of some stock exchanges:
ICE - Intercontinental Exchange Inc (the parent company of the NYSE)
DB1 - Deutsche Börse AG (the parent company of main German stock exchanges)
ENX - Euronext N.V. (the parent company of the Paris Bourse)
All three shares have lost quite a bit in the last few days, along with the general stock market.
My question: Why? I’d have thought stock exchanges earn their money on trades independant of whether the market goes up or down.
Rallies and crashes are short term. When the volatility of a crash settles down to just being sluggish, there will be less players in the market to make trades.
So the stock of the stock exchanges are directly correlated to the expectation of how much activity it’s going to have? Makes sense, but it’s just rankling in my head for some reason. Maybe it’s too meta.
If the market goes down, each trade is effected at a lower price. If the stock market is, directly or indirectly, remunerated by a percentage commission on each trade, then its income will fall commensurately.
Suppose the stock market index falls from 1,000 to 800. All other things being equal — in particular, if the volume of trading is unchanged — the stock market’s own income will fall by 20%.
But in fact it’s unlikely that the volume of trading will be unchanged. Many players will withdraw funds from the market, waiting for happier times. So you would expect the income of the stock market to fall more steeply than the index, because of the combined effect of (a) trades effected at lower prices, plus (b) reduced volume of trades.
The stock exchange operator itself only operates the market place, that is, it brings buyers and sellers together and gets a commission from each trade. That is at least the business mode
Of the stock exchange operator in the narrow sense. Nowadays many of them try to integrate vertically, i.e. acquire also subsidiaries that conduct post-trade activities so as to generate profit further downstream as well. Deutsche Börse, for instance, owns Clearstream, and LSE owns LCH Clearnet. Those are clearing houses which conduct the settlement part of a transaction, in other words, the delivery of the traded securities from seller to buyer.
I imagine a Stock Exchange charges each member (trader) a fee to be part of the exchange. I would guess that the fees are based on the amount of volume and/or dollar value traded among other things; it makes less sense to charge small and big traders the same amount. So volume is down, prices are down, i assume the exchange’s revenues are down too.
Volume tends to go down when prices go down, so exchanges can expect less in trading fees.
Exchanges also make money charging companies to list their shares on the exchange, called “listing fees.” and new listings drop when stock prices drop, since the cost of capital is higher when stock prices are lower. For example, NYSE listing fees are described here: https://nyse.wolterskluwer.cloud/listed-company-manual/09013e2c8503fcda
Exchanges make much (maybe most these days, I’m not sure) of their revenue from selling data. Big drops in the stock market tend to reduce the number of brokers, advisers, and hedge funds who are the buyers of those data streams. For example, NYSE data fees: https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Pricing.pdf
There is also some correlation among essentially all listed stocks, so when most stocks are dropping, there is some tendency for every listed stock to drop. If you think about it, if one stock gets hammered by current economic conditions, like increasing tariffs, there are investors who will think the market has overestimated the negative impact on that company. So they will want to buy in. They may choose to fund their purchase by selling shares in a company they already own and which they believe is relatively overvalued - but if the market is efficient, the shares they are selling to fund the purchase of the newly cheap stock could be anything, whether that’s the stock of a stock exchange or any other listed security. So market moving economic events tend to hit all listed stocks to some degree. Although the correlation of stock price movements compared to broad stock market indices varies widely from stock to stock, they are overwhelmingly at least somewhat positive. That means when the broad stock market is dropping a lot, almost all of the stocks in the stock market are dropping at the same time, even if they are dropping by different amounts.
Exchanges themselves don’t do proprietary trading - that is, trading for their own accounts - and they are largely insulated from the risks of margin that broker-dealers take on. Broker-dealers will take on leverage in their own accounts and face some risk from the margin they extend to their customers.
Speaking very broadly here - exchange’s transaction fees tend to be charged per share, rather than as a percentage of the value of the security. Here, for example, is the trading fee schedule for the New York Stock Exchange: NYSE: NYSE Trading Information
The reduction in trading fees comes from the reduction in volume.
There are lots of exceptions to that generality. For instance, for stocks worth less than $1 per share, the NYSE does charge a fee based on the value of the securities, but this is a tiny percentage of their trading revenue. Generally, stocks with tiny per share prices get delisted after a time.
Another variation is exchanges that pay members to effect trades on the exchange (called payment for order flow), which the exchange makes up by charging the other side of the transaction more. Again though, in the end, the net transaction-based compensation for the exchange largely comes down to the volume of shares that are traded on the exchange rather than the value of those shares.
Probably not relevant, but I thought I’d mention that in Aus, the market goes down when people take money out of Aus. They take money out of Aus by selling Aus stocks. ASX goes down when the ASX goes down, because people are selling Australian stocks, ASX like all others.