Treasury Secretary Timothy Geithner is proposing requirements that will improve the transparency of over the counter derivatives trading on instruments such as interest rate and credit default swaps. Geithner calls for electronic execution of trades to replace the current system, which mostly involves telephone orders. The goal is to make price information on these derivatives continuously available to investors via electronic means, much like stock and options price data. The increased transparency will level the proverbial playing field by preventing price manipulation and will reduce risk to “less sophisticated investors”.
Whether these changes will benefit swaps traders remains to be seen, but stock traders are already making plays related to the proposed regulations. Here are a few companies that could see an increase in their stock prices as a result of the new derivatives rules:
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1. CME Group, Inc. (CME)
CME Group Inc. operates the CME and CBOT futures exchanges as well as its own clearing house, CME Clearing. CME Globex is an electronic trading platform owned by CME Group Inc.. This electronic trading platform could easily be upgraded to accommodate the new derivatives rules proposed by Geithner.
2. IntercontinentalExchange, Inc. (ICE)
This company owns and operates a worldwide electronic marketplace that facilitates trading of commodities, futures, credit default swaps, foreign exchange, and equity index products. Already a leader in the electronic trading industry, IntercontinentalExchange is not only ready to adapt to the new regulations, but stands to gain from them. Electronic trading of swaps will mean that more traders will choose to use these instruments, and each time a swap trades electronically via the IntercontinentalExchange platform, the company will earn a commission.
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3. Nasdaq OMX Group Inc., (NDAQ)
Nasdaq OMX Group, Inc. offers services such as exchange technology and securities listing on a worldwide basis. Trading services offered include derivatives, commodities, debt, exchange traded funds, and structured products. This company is considered a competitor of CME Group, Inc. and stands to benefit from the new derivatives regulations for the same reasons.
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4. MarketAxess Holdings Inc., (MKTX)
MarketAxess Holdings Inc. operates a trading platform and data service. The data service, Corporate BondTicker provides continuous price information on bonds. This is exactly the sort of readily available data that Geithner is hoping will be provided to traders regarding derivatives such as credit default swaps. Could MarketAxess Holdings Inc. modify its BondTicker and create a “SwapTicker”? If so, then this company stands to cash in on the proposed derivatives regulations.
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Companies involved with derivatives can be very risky as illustrated by the credit crisis, so a protective strategy might be in order for an investment in these companies. Stock options can provide portfolio insurance. A put option protects a stock in the event the stock takes a disastrous plunge in price. Many investors consider options trading to be very risky, but options trading can also reduce risk. Many trading systems exist, but few can limit risk as in the case of the married put strategy, a stock combined with a long put option. A married put strategy can also be combined with an income generating strategy, covered call investing, for example to generate income while being protected.
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[tags] Treasury Secretary, Timothy Geithner, derivatives, credit default swaps, commodities, futures, foreign exchange, equity index, electronic trading, exchange traded funds, CME, Chicago Merc. Exch. Hldgs. Inc., ICE, Intercontinental Exchange Inc., NDAQ, Nasdaq Stock Market Inc. [/tags]