Wonderfully Bloated exchanges - continued...

I am not afraid to admit that so far my predictions of demise of all exchange stocks have been to put it mildly...inaccurate. My personal investment in NYX LEAP put options is down 40% as underlying shares rose from $55 to $78. Euronext and other exchanges are also continuing their blissful rise to unreasonable heights.

One of the reasons NYX shares are rising is upcoming introduction of full electronic trading for most of NYSE listed stocks. The popular thought is that this will lead to explosion of volumes as all quant strategy funds would finally be able to exploit minor variations in price since trade processing would take less than a second vs. the usual nine for floor specialists.

While there might be some truth to this theory i believe the market is not taking into account the following things:
- Quant funds had plenty of opportunity to trade NYSE traded stocks on Nasdaq which suggests that rise in volumes will not be as dramatic as people think
- By introducing wider electronic trading NYSE puts itself in direct competition with Nasdaq and the many regional exchanges that are popping up with full electronic trading capability
- A trade in essence is a commodity product and with introduction of RegNMS next year it is difficult to imagine an environment in which NYSE will be able to increase their fees as market currently assumes
- Majority of the volume in the market is driven by hedge funds the number of which cannot continue to increase indefinitely

For reasons above combined with a certain degree of stubbornness i am still extremely pessimistic about the stock. I've recently increased my negative exposure to NYX hoping that all the potential upside from upcoming launch of electronic trading is already priced in 34x FORWARD P/E ratio and its failure to materialize will serve as a catalyst.

On a related note, two of the executives related to launch of electronic trading unexpectedly left NYSE (see article here). This could mean absolutely nothing, or signal some kind of implementation difficulties.