For many investors looking at their portfolios right now, it's pretty clear that 2022 hasn't gotten off to a great start. For instance, the S&P 500 index is down 10.76% to start the year. And with inflationary pressures and interest rates rising, along with geopolitical tensions in Europe, investors expect volatility to persist.
Volatility is a natural part of investing. When it happens, the best bet for long-term investors usually is to stay the course. One way to temper the volatility is to include stocks in your portfolio that can do well in a volatile market. Three companies you can buy today that benefit from increased volatility in markets are Virtu Financial (VIRT 3.07%), Tradeweb Markets (TW 1.11%), and Intercontinental Exchange (ICE 0.18%).
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1. Virtu Financial
Virtu Financial is a market maker that provides liquidity to global markets. Simply put, this means Virtu Financial is a middleman that makes it easier to buy and sell stocks or other financial instruments.
Market makers like Virtu stand ready to take those orders when investors want to buy or sell stock quickly. Market makers are a major reason why many trading platforms have gone to zero-commission trades. So how do market makers make money?
Instead of collecting fees, market makers make money from the difference between the bid-ask spread. The bid-ask spread is the difference between how much a buyer is willing to pay (bid) for a stock, bond, or other product and how much the seller is willing to accept (ask) for the same stock, bond, or other product. When markets are calm, the price difference between the bid and the ask (called the spread) tends to be very tight, squeezing the profits that market-making firms can make in facilitating the transaction. When markets become more volatile, the spread widens, providing market makers more profit from each transaction.
A secondary benefit of volatile markets is that there is much more trading volume from day to day as uncertain investors move their money around. The more trading, the more opportunities to benefit from each transaction.
With the market's volatility in 2022, Virtu is set up to perform quite well. In 2020, when markets face turmoil amid the global pandemic, Virtu put up record numbers for the firm -- earning $2.5 billion in trading income after earning $912 million in 2019. Volatility calmed down somewhat in 2021, but Virtu still generated $2.1 billion in trading income.
Increased volatility will benefit the firm, but the company is also growing as it invests in technology and increases the breadth of stocks and options that it covers. It has also expanded its crypto coverage and trades across 30 products in this space. While volatile markets aren't great for many companies, Virtu Financial is one firm that welcomes the volatility, making it a solid stock to own as long as volatility stays elevated.
2. Tradeweb Markets
Tradeweb Markets is a trading platform used by the big boys on Wall Street. The company offers trading in various instruments, including Treasuries, corporate debt, stocks, and ETFs.
Trading platforms can benefit from increased volatility in markets. That's because volatility can increase trading activity, meaning larger commissions for those with a trading platform. CEO Lee Olesky has said that Tradeweb "welcome(s) additional volatility in the markets, especially [volatility] that's come with the rate rises."
Tradeweb isn't just an excellent company to own during volatile markets. The company has had a history of stellar growth for years now. Since 2004, Tradeweb has grown its average daily volume at a 14% compound annual growth rate (CAGR). Revenues have grown at a 13% CAGR during that same time.
The company is seeing growth from all angles. Over the past six years, it has grown its international revenues at a 21% CAGR. It is also taking an increasing share of the markets that it operates in. Over the last seven years, interest rates trading has seen the average daily volume increase 7%, while Tradeweb has seen its average daily volume in these products increase 21% -- showing just how Tradeweb is gaining market share. This is true in other markets it serves as well, which you can see in the chart below.
Image source: Tradeweb Markets.
Tradeweb is a great business that is growing quickly, gaining market share, and should also enjoy tailwinds from volatility across assets.
3. Intercontinental Exchange
Intercontinental Exchange is a company that provides different services around markets. It has segments from exchanges, fixed income and data services, and its newest segment, mortgage technology.
Most of its income comes from its exchanges segment, which produced 73% of its total operating income in 2021. Its exchanges segment makes money through trade execution and clearing through its global futures network and its New York Stock Exchange (NYSE) business.
Clearing happens from the time a commitment on a transaction is made until the transaction is settled. It is just another process needed to ensure the smooth functioning of markets. Transaction and clearing revenues are generally assessed on a per-contract basis, so revenue can fluctuate depending on what products are traded and the volume traded.
Intercontinental Exchange has already benefited from volatility. The company serves energy markets that saw volatility last year, driven by inflationary pressures and market speculation about what central banks would do next.
Last year it saw volume on energy products increase 1% while revenue increased 10% from the year before. Its European interest rate business benefited from volatility in interest rates, propelling a 15% year-over-year increase in revenue. With volatility persisting in January, the company grew revenue by another 34% year over year during the month.
Jeffrey Craig Sprecher, CEO of Intercontinental Exchange, says that the company has pursued "a strategy that has made ICE an all-weather name, a business model that provides upside to volatility with less downside risk." Its position as a trusted exchange already makes it a stellar company to invest in, and tailwinds from volatility can propel this stock even higher.
