Companies that profit from market volatility, and the surge in volume that it brings, did well in the second quarter, beneficiaries of instability and uncertainty in U.S. and other markets.
Exchange operators and online brokers, starting with Charles Schwab Corp this week, are set to report surprisingly muscular results thanks to trading operations that mostly shot through the roof in the quarter.
Individual and institutional investors alike reacted swiftly to the flood of headlines, particularly in May, as fears of a double-dip recession took hold and markets swooned.
When all this news hit the tape many investors were not going to wait like they did in the prior crisis, when they took a hit, said Diego Perfumo, analyst at Connecticut-based advisory firm Equity Research Desk.
Market volatility spiked sharply last quarter, with Chicago Board Options Exchange Volatility Index <.VIX>, Wall Street's fear gauge, in May reaching its highest average reading in a year.
The result was record or near-record future, stock and option volumes across exchange operators CME Group Inc , IntercontinentalExchange Inc , NYSE Euronext , Nasdaq OMX Group Inc and CBOE Holdings Inc .
The flash crash on May 6 brought the highest-volume day since the financial crisis hammered markets in October 2008.
With investors on edge over Europe's growing debt crisis, the Dow Jones industrial average <.DJI> plunged some 700 points within minutes before sharply rebounding. It was a record day at broker TD Ameritrade Holding Corp , which runs the largest individual trader platform.
Like everyone else, that day was a big day for us, TD Ameritrade Chief Executive Fred Tomczyk said last month.
Too much volatility in a falling market can quickly sap investors' assets and crimp volumes. But the recent jump seemed to hit the sweet spot for exchanges and brokers.
Futures exchanges CME and ICE, which report July 29 and August 4 respectively, in particular benefited as see-sawing concerns over inflation and deflation drew traders to currency, commodity and interest rate products in the second quarter.
Trading at CME's exchanges rose 31 percent to an average of 13.5 million contracts each day, while trading at the smaller ICE rose 36 percent to a record daily average of 1.4 million.
Analysts who boosted their estimates for CME in the last 90 days outnumbered those trimming outlooks by four to one, data from Thomson Reuters StarMine shows. Analysts were even more bullish on ICE, with 18 raising estimates versus one who cut.
Analysts took the opposite tack on equities exchanges. Those trimming estimates for NYSE Euronext outnumbered those boosting estimates by four to one, and for Nasdaq OMX by five to one.
EYES ON EUROPE, WASHINGTON
Global markets churned in April and May as Greece failed to solve its sovereign debt crisis on its own and European Union leaders stepped in with a $1 trillion rescue package.
But the package failed to allay mounting concern about the potential for contagion, the specter of a banking crisis in Europe, and possible impact on the U.S. economic outlook.
In April, the U.S. Securities and Exchange Commission charged Goldman Sachs Group Inc with fraud, chilling financial stocks. Meanwhile nearly every day brought new tidbits on the regulatory front as lawmakers crafted the most sweeping Wall Street reform bill since the Great Depression.
In response, average daily stock trading volume was 10.4 billion shares, up 20 percent from the first quarter but down 3 percent from last year. May volume was just shy of the record set in March last year when markets touched a 12-year low.
Options volume hit a record in the second quarter, setting a favorable stage for CBOE's debut quarterly report as a publicly traded company.
Overall the volume numbers across every (asset class) category you look at are better than the first, and it ranges from small increases to pretty dramatic ones. That will bode well for the exchanges, said Edward Ditmire, exchanges and online brokers analyst at Macquarie.
Shares of exchanges -- which also rely on revenue from data and listings businesses -- will also likely react on earnings day to what management says on regulatory reform.
Of the online brokers, analysts said daily trading in the quarter was higher than expected earlier this year. E*Trade Financial Corp's May volume jump was less pronounced than that of its larger rivals, however, and the company is expected to report its twelfth straight quarterly loss.
TD Ameritrade and Schwab will likely report higher trading activity than last year. But near-zero interest rates mean the asset managers can't make money just by holding customer funds and they have seen their stocks drop steadily the last couple months.
A surge in volatility helps you for a month or a quarter. The Fed raising rates would bring benefits for years, Ditmire said of the online brokers.
Still, you should have one of the better quarters you've seen in quite some time, coming right on the heels of what was a very difficult first quarter.
(Reporting by Jonathan Spicer; Editing by Steve Orlofsky)