Trading Places in Trump’s World

After years of relatively calm and essentially range bound markets, the conventional wisdom regarding a Trump Presidency is it would augur in a new era of heightened volatility. This was going to be a welcome development as volatility, better known as price movement, presents opportunities. It would allow for professional money managers and retail investors alike to demonstrate their superior skill set and finally beat those passive indexers.

For active traders, especially those who employ options, the markets over the past few years have felt like panning for gold in very picked over stream; occasionally a big nugget such as Brexit comes along, but if you weren’t at the right place at the right time you were left to gather dust. Now with the expectations for more price swings, increased volatility and pumped up premiums we’d all be wading into untouched waters gleaming with opportunity.

Indeed in the weeks immediately following the election the market exploded higher, but more notable than simply the upward direction was the rotation or differentiation among sectors. Financials and cyclicals led the way, while tech and healthcare lagged. And yes, generally speaking, volatility increased.

This change in investing environment of more diversification and rotation with higher volatility was expected to lead to a measurable increase in trading volume across a broader spectrum of asset classes. People would be looking beyond the passive ETFs and specific stocks, commodity futures, currencies and options. The big beneficiary would be the trading exchanges themselves. Shares of largest exchanges such as Chicago Mercantile Exchange (CME) Chicago Board of Options Exchange (CBOE) did jump in the weeks following the election and the Intercontinental Exchange (ICE) all jumped some 15% in the first two weeks following the election.

But then the market went sideways on low volume for five weeks and volatility as measured by the VIX dropped to new 52-week lows.

In turn shares of CME, ICE, CBOE all pulled back sharply. It seemed once again conventional wisdom had been proved wrong.

But now in the days following the inauguration, stocks and the major indices have burst to new highs. I guess another piece of conventional wisdom “sell the inauguration” was proved wrong. And while the VIX has not jumped, we have seen a solid increase in trading volume in both stocks and options.

I think this bodes well for the exchanges. Their share prices held important support levels and now look like they present good entry points ahead of their earnings reports.

The CME, the leading futures exchange reports on 2/8. The chart held important support at the $115 level. I think a good earnings report propels it to new highs.

The ICE reports on 2/8 and the chart held important support at the $55 level and now looks to be popping out of the base it built at that level.

Regulatory Issues

While the financial industry looks to be a beneficiary of lower regulation, in Trumps world all businesses need to be on the look out for his tweets to wreak havoc on plans. This is especially rue for mergers possibly resulting in job losses. Exchanges have had a lot at stake lately with the Securities & Exchange Commission – including acquisitions, mergers and divestiture sales which could lead to to major structural changes.

Last month the CBOE sought, and last month received, SEC approval for its merger with Lenexa, Kan.-based Bats Global Markets. But the two other propositions—the smaller Chicago Stock Exchange’s effort to sell itself and a Box Options Exchange plan to open a new Chicago trading floor—still await agency action.

Now those two SEC decisions will pass from the Obama administration to one led by President-elect Donald Trump as of tomorrow. While there’s not much reason to think an SEC run by Trump’s new chairman, New York mergers-and-acquisitions attorney Jay Clayton, will have any particular opinion about Box’s proposal to launch a trading floor, the purchase of the Chicago Stock Exchange by buyers that include Chinese citizens may be viewed more skeptically by a president who is circumspect about China.

Box Holdings Group CEO Ed Boyle is pressing ahead with the plan to open a 21st-century Box open outcry pit, even though now it will be delayed until at least March. While he had hoped to open the floor this month, the SEC extended a comment period on the proposal through at least early March.

The Chicago Stock Exchange may have more worries. The firm’s proposal has faced resistance from at least one Republican Congress member who is angling for the new administration to take a tougher tack on the deal. He leads a coalition of legislators critical of the purchasers’ ties to China, though the company has said only 49.5% of the exchange would be owned by Chinese citizens after the deal and not connected to that country’s government. The remaining controlling stake would be held by a group of Americans.

While it may not be the top of his list Trump has shown he’s ready to tear up regulatory red tape and we’ll see a final round of consolidation which will make the exchanges more profitable.

— Steve Smith

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About the Author: Steve Smith