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Investment Overview for Nasdaq OMX Group (NASDAQ:NDAQ)
Below are some key drivers of NASDAQ's value with potential upside or downside to our price estimate for the company's stock.
- Daily Volume of U.S. Listed Options Contracts The daily volume of options contracts traded across all exchanges in the U.S. has increased from 13 million in 2008 to over 15 million in 2014, and we estimate that it will reach 20 million by the end of our forecast period, largely because of the shift toward electronic trading. Also, growth in algorithmic (high-volume) trading will boost volumes moving forward. However, there could be about 5% upside to our price estimate for Nasdaq if the daily volume of options contracts increases to 25 million by 2020.
- Market Share of U.S. Listed Shares Since 2006, NASDAQ has been successful in gaining market share in U.S. cash equities due to continuous technological innovation and improvements in order executions. Despite increasing competition from electronic exchanges like BATS Global Markets and Direct Edge NASDAQ has gained share in the U.S. market. NASDAQ's share in the U.S. market increased from 25.8% in 2011 to 27.5% in 2014. We expect NASDAQ's market share to remain stable at about 27% throughout our forecast period. If NASDAQ is loses market share to pre-2006 levels of under 20% by the end of our forecast period this would present an upside of about 5% to our price estimate.
Nasdaq OMX Group ("NASDAQ") is a global exchange group that provides trading, exchange technology, securities listing, and public company services globally. The company's financial services include equity and derivatives trading, market data products, index services, financial services and market technology products.
NASDAQ Stock Market
As of December 31, 2014, the NASDAQ Stock Market had 2,782 listed companies with a total market capitalization of over $4 trillion. The company also operates a second equity market in addition to options and futures markets and a derivative clearinghouse. The NASDAQ market is the company's most well-known brand, and U.S. listing and cash-equity trading (which we present as two separate divisions) account for over 17% of the company's value, according to Trefis estimates.
In Europe, NASDAQ operates the NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Europe, in addition to NASDAQ OMX Commodities and NASDAQ OMX Armenia. According to Trefis estimates, European Cash & Options trading and European Listings account for over 4% of the company's value. However this doesn't include the market data, market technology and access services provided to European customers.
Economic recovery to drive volumes
Years 2008 and 2009 witnessed turmoil in the global economy and upheaval in the credit markets. Market volatility and uncertainty regarding the capital markets dampened investor confidence and led to lower trading volumes and a deterioration in the financial condition of listed companies. It also impacted the number of new listings on the exchange. As economic conditions gradually improve, we expect that these trends will reverse, and listings and volumes will increase going forward.
Intense competition among exchanges
There is intense competition among exchange operators such as IntercontinentalExchange Group (which owns NYSE), NASDAQ OMX Group and CME Group, for trading volumes, listings and technology services customers. Newer entrants have tried to offer discounted fees in order to attract volumes, which could force NASDAQ to follow suit. This could impact revenues and in turn margins.
Trefis Forecast Rationale for U.S. Average Daily Cash Equity Trading Volume
This refers to the average daily volume of equity securities trading in the U.S. stock markets.
Trade volumes declined from 9.8 billion in 2009 to 7.8 billion in 2011 and further to 6.2 billion in 2013 as a result of economic uncertainty. The figure rose to 6.4 billion in 2014.
We expect a slight recovery in trading volume in the near-term followed by a gradual recovery to about 7.8 billion by the end of the Trefis forecast period.
Trefis considered the following factors in its forecast:
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- Improved market conditions will improve volumes
- While market volatility can lead to greater volumes, we also expect that a market recovery will lead to greater trading activity and more assets being put to work, and as such it should add to volumes.
- Algorithmic trading techniques
- Approximately 35% of institutional investors in the U.S. actively use options as a part of their trading strategies. Firms are aggressively developing trading algorithms whereby trades are executed based on algorithms and little manual action is required. Many of these strategies are extremely high volume. Should these techniques become more widely adopted we expect that it would lead to greater volumes.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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