BATS Should Be A Great Hedge For Choppy Markets, According To Morgan Stanley

Morgan Stanley’s Betsy L. Graseck believes BATS Global Markets, Inc. (BATS: BATS) was “a great hedge for choppy markets,” since “exchanges outperform when volatility is high or rising, even if markets are falling.”

Graseck maintains an Equal-Weight rating on the company, with a price target of $26.

Growth Expectations

The analyst mentioned that BATS Global Markets is expected to grow at a revenue CAGR of 11 percent, with EPS growth expected at 18 percent, during 2015-2018.

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“BATS is branching out into trade execution for new products in FX and US Equities Options, in addition to changing its pricing structure to boost ETP listings,” Graseck stated.

Graseck expects new product trading revenue to account for 28 percent of revenue CAGR expected for 2015–2018.

In addition, the analyst pointed out that the company prices its market data at a 90 percent discount to peers, although this was expected to narrow to 87 percent by 2018.

Why Own Volatility?

Graseck explained that the exchange could offer a significant hedge during periods of declining market value, especially if volatility were high or rising.

“Higher volatility typically drives higher volumes, which drive net transaction rev. Divergent central bank actions & a US election year imply continued high equity market volatility,” the analyst noted.

In comparison to other exchanges, Graseck believes that BATS Global Markets offer exposure to volatility, as well as faster growth via new products and higher fees.