NASDAQ (NDAQ)

But what is it about the exchange that makes it immune to the tempests of the market?

* Think of the exchange as a ‘contra-index equity class’. If the index goes up, the constituent stocks thrive. If the index sinks, there’s market carnage. But the exchange is agnostic to these movements. It’s monetizing ‘activity’ instead of market optimism. Whether participants want to buy or sell stocks, the exchange pockets spreads and fees and also benefits from rising volatility and transaction volume during periods of market chaos.

* Another advantage of exchanges is their inherent adaptability. Despite market carnage or disruptors in an industry, the exchange still stands to win because it’s not betting on any outcome. Indices continue to rotate, and markets continue to go through bear-and-bull cycles. But whatever happens, everyone is paying rent at the exchange — short sellers, hedgers, speculators, passive investors.

* Exchanges can scale unencumbered once the infrastructure is in place. They do not require proportionally more capital to support larger trading volume.

* In addition, exchanges are positioned to capture new assets, financial instruments, or vehicles as markets evolve. Whether it’s obscure asset classes like Bitcoin or orange juice futures, the exchange has everything to offer as long as you’re willing to trade on the asset. If a new financial product comes into existence tomorrow, the exchange will list it and retain the fees, irrespective of whether the product succeeds or becomes a credit default swap case study for the books.

This leads to the more interesting question.

If exchanges profit from activity rather than market direction, should we expect them to outperform the very markets they host?

To test this hypothesis, we construct a global portfolio of exchanges and compare its performance to a portfolio of the indices they host.

NASDAQ and Intercontinental Exchange operate the two largest stock exchanges in the US: the NASDAQ and the NYSE, respectively. Euronext operates the major stock exchanges in 8 European countries. Japan Exchange Group owns the Tokyo Stock Exchange. Likewise, each exchange in the portfolio operates the primary exchange in its respective country.