Market Overview

This Group of Stocks Could Benefit from a European Financial Transaction Tax

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Recent comments from European leaders, including German Chancellor Angela Merkel, Italian Prime Minister Mario Monti, and French Prime Minister François Hollande, seem to indicate that the eurozone is close to passing a financial transaction tax. This tax would likely be levied on all purchases and sales of financial securities, including stocks, bonds, and derivatives. However, there may be a silver lining in this news for U.S. exchanges.

As transaction costs in Europe would increase due to the potential new taxes, financial institutions may be inclined to shift trading activities to the U.S. This could be a positive event for U.S. focused exchanges such as the CME Group (NASDAQ: CME). Also, with its only European exposure in non-eurozone countries, the NASDAQ OMX Group (NASDAQ: NDAQ) might also benefit.

However, since NYSE's merger with Euronext, NYSE Euronext (NYSE: NYX) now has significant eurozone exposure and thus could suffer from such a tax. Even if trading volume would not shift from Europe to the U.S. or non-eurozone European markets, NYSE Euronext could still be hurt. Transaction cost increases could potentially hinder eurozone economies in general.

Traders who believe increased eurozone transaction costs would benefit US exchanges and hurt European exchanges might consider the following trade: long the CME Group and short the NYSE Euronext. This pair trade would allow investors to benefit both from increasing U.S. trading volume and declining eurozone trading volume.

Alternatively, traders who believe that eurozone trading volume would not shift as a result of the potential financial transaction tax might consider purchasing shares of NYSE Euronext. News surrounding the potential financial transaction tax might provide these traders an opportunity to purchase shares of NYSE Euronext at a discount.

Friday, the CME Group was trading higher by around 1.0 percent, NYSE Euronext was trading higher by close to 1.6 percent, and NASDAQ OMX Group was trading near 1.0 percent higher.

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