Overheating Financial Markets Reveal Data Center Capacity Strain

The Chicago Mercantile Exchange (CME) trading platforms were shut down for approximately 4 hours due to overheating after its cooling system at its Illinois data centre failed. The outage began around 10:00 p.m. ET on November 27, halting about 90% of global derivatives volume on the Globex platform across futures and options for equities, bonds, commodities, and currency markets.

The incident stemmed from a chiller plant failure that knocked multiple cooling units offline, leading to data center overheating. While no major market chaos ensued due to thin post-holiday trading volumes, the lack of price discovery froze markets and frustrated traders worldwide.

While this may appear to be a one-off technical problem, it should serve as a reminder of how vital data centers have become to the daily functioning of financial markets. With AI workloads growing by over 30% annually, the importance of data center cooling and the prevention of overheating is becoming increasingly critical.

We may have gotten lucky with the timing of last week’s outage, but the next time we may not be so fortunate. Without the ability to trade derivatives and hedge price movements, sudden volatility due to another overheating incident could temporarily cripple the financial markets.

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High Beta And High Dividends

There has been a strong negative correlation between the excess returns (vs. the S&P 500) of high-beta stocks and high-dividend stocks. During risk-on upward trends, high beta has been among the factors with the highest relative and absolute scores. Conversely, during these bullish episodes, the more conservative high dividend stocks have been among the bigger laggards.

Today, after a decent rally over the past few days and market weakness over the three preceding weeks, we find that both high beta and high dividend stocks are among the most overbought on a relative basis, as we highlight below.

However, the absolute analysis points to a key differentiator between the two. High dividend yield stocks are the most overbought on an absolute basis among all factors, while high beta is only slightly overbought. If the market can continue to rally, we suspect high-beta stocks will outperform high-dividend stocks. The second graphic shows the top ten stocks in the high beta ETF.

Alternatively, if a subset of investors wants to chase the market more conservatively, high dividend stocks could keep up with high beta stocks if the market trends higher through December.

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