We often hear about the travails of the stock market, the economy, individual companies, foreign debt, U.S. government debt ... the list is seemingly endless.
But trading in stocks and bonds continues. Whether prices move up or down or gyrate wildly between the extremes, people are buying and selling. And to do so requires a place to trade, and that is why there are exchanges.
Trading exchanges have changed dramatically the last few years, as trading moved from auction-oriented, face-to-face human interaction to electronic trading. The trading floor is usually no longer an actual floor but a place in cyberspace where investors and traders can gather and do their business.
Another change in exchanges is their transformation from nonprofit, member-owned, old boys' clubs to publicly traded, for-profit corporations. The most famous exchange in the country, the New York Stock Exchange, went public in 2006.
Trading remains a desirable, can't-do-without activity, and this suggests that exchanges can make desirable stock buys for many investors. Three exchanges have strong market positions and earn very high grades from a strategy I based on the investment approach of Peter Lynch. I encourage you to look carefully at these investment opportunities.
The Lynch strategy's best-known variable is the P/E/G ratio, which is the price-to-earnings ratio relative to growth. It's a measure of how much an investor is paying for a company's growth. A P/E/G of 1.0, which is the maximum the strategy allows, means the investor is paying $1 for every percentage point of growth.
MarketAxess Holdings (MKTX) operates a platform for the electronic trading of fixed-income securities. The company calls itself the leading electronic trading platform for corporate bonds and credit default swaps. MarketAxess has a P/E/G of 0.73, which means that at the stock's current price, the investor pays $0.73 for every percentage point of growth. Other variables the Lynch strategy likes about MarketAxess are its excellent equity-to-assets ratio of 91% vs. the 5% minimum required, and return on assets of 13.28%, way above the 1% minimum.
Another exchange worth considering is Nasdaq OMX Group (NDAQ). Though best known for its Nasdaq exchange, which was established in 1971 as the first computerized exchange in the country, the company has since expanded globally and operates on six continents. It provides markets for equities, debt, commodities and other trading products. Nasdaq's yield-adjusted P/E/G is 0.89, its equity-to-assets ratio is a healthy 36%, and its return on assets is a perfectly respectable 3.56%.
The last of the exchanges I will recommend is CBOE Holdings (CBOE), which was the first U.S. options exchange when it started in business in 1973. Originally called the Chicago Board Options Exchange, it is today the largest U.S. options exchange. CBOE's P/E/G is 0.91, its equity-to-assets is a very strong 71%, and its return on assets is considerably above the strategy's 1% minimum at 28.02%.
These three exchanges are technologically savvy, innovative in both their approaches to trading and in creating new products, and earn high grades from the Lynch strategy. You don't have to be a day-trader to appreciate the value of an exchange. These companies play vital roles in the financial system, and that is one more reason to consider adding them to your portfolio.