CME CME Group Inc

Yesterday, the shares of stock exchange giants such as NYSE Euronext Inc. (NYX), NASDAQ OMX Group Inc. (NDAQ) IntercontinentalExchange Inc. (ICE) and more witnessed sharp declines as the leaders of France and Germany announced to propose a financial-transaction tax in September this year.

As the name suggests, the financial-transaction tax will primarily target the securities trade, such as equities, bonds and derivatives, carried out by the exchanges in the Europe. Besides, the sale of euro bonds has been brought to a standstill by the European leaders, who also rejected the expansion of €440 billion ($633 billion) rescue fund. The decision has been taken to tackle the looming debt crisis and restore growth.

It appears that the European leaders are likely to adopt this tax scheme to address the ongoing economic volatility and streamline the overall debt-trodden financial structure.

The decision may also have been taken to showcase that the European leaders are taking steps to reduce its deficits in order to guard itself from another debt rating downgrade like that of the US. Ealier this month, S&P ratings had demoted its debt rating for the US debt to “AA+” from “AAA” given that the financial regulators failed to cut spending and made formidable deficits unavoidable. 

However, it raises the probability of axing the volumes of the exchange operators, who generally operate in a cost-sensitive and high-frequency trading scenario. A tax like this would directly hurt the sales growth of the stock exchanges since lowering the trading frequency would mean lower volumes that translate to lower revenues.

Conversely, such a financial-transaction tax has been proposed many times in the past. Last year, it was floated in the US’ Dodd-Frank legislation but was scrapped out later given the adverse impact it would have on the trading volumes and liquidity.

Nevertheless, the London Stock Exchange (LSE) bears the brunt of tax on equity trades, which has sliced off its volumes, thereby leaving other operators worried about such tax plan being adopted in France and Germany as well.

As a result, the US trading sessions witnessed extraordinary declines in the financial stocks that operated intensively on European exchanges yesterday. NYSE Euronext, which operates some of its stock and derivative exchanges in Paris, Amsterdam, Brussels, Lisbon and London, plummeted 8.4% to $26.54.

Even NASDAQ, the operator of Nordic and Baltic bourses, slipped 2.8% to $22.97. IntercontinentalExchange, which runs a big oil futures exchange in London, also dipped 4.5% to $111.22. CME Group Inc. (CME), which has a vast exposure in Europe, shed by almost 3% yesterday.

Additionally, non-exchange stocks such as Bank of America Corp. (BAC) and Citigroup Inc. (C) were down about 4% at the trading-close. Other benchmark indexes like S&P 500 and Dow Jones also saw moderate declines.           

While we believe a realistic and proactive approach is required to get Europe out of the debt-trap, it is too early to consider financial-transaction tax as an apt tool to tackle the big problem in Europe. Hence, we remain on the periphery at the moment to view the developments on the issue.

 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
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INTERCONTINENTL (ICE): Free Stock Analysis Report
 
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