We have updated our analysis of Nasdaq OMX Group (NASDAQ:NDAQ) and revised our price estimate for the company’s stock to $28 from our previous estimate of $26. Nasdaq has done remarkably well in diversifying its sources of revenue which helped the company deliver growth in revenues and income in 2011 despite the challenging market environment. Nasdaq is the second largest exchange operator in the U.S. and competes with NYSE Euronext (NYSE:NYX) and CME Group (NASDAQ:CME).
Weak Cash Trading Volumes
The fourth quarter of 2011 was tough for exchanges in the U.S. as trading volumes declined sharply. Nasdaq’s average daily share trading volume in U.S.-listed securities declined from 8.76 billion in Q3 2011 to 7.45 billion in Q4. The third quarter benefited from heightened market activity resulting from the U.S. debt rating downgrade and uncertainty regarding the European debt situation, but the fourth quarter was a period of low growth and low market activity as investors refrained from trading in volatile market conditions. Additionally there was increased competition in the market, and as a result, Nasdaq’s market share declined from 22.1% in 2010 to 21.3% in 2011.
Strong Derivatives Trading Volume
U.S. derivatives trading accounts for about a third of the Trefis price estimate for Nasdaq’s stock. 2011 was the second consecutive year in which Nasdaq’s derivatives trading revenues exceeded those of cash equities as revenues grew 18% from 2010. Derivatives trading revenues have been growing at approximately 15% annually over the past four years and we expect the growth to continue throughout our forecast period driven by the investments and strategic initiatives that the company has taken to expand its derivatives product offering.
Nasdaq’s options trading platform appeals to algorithmic trading firms who prefer electronic trading to carry out their complex trading strategies. This has fueled growth in Nasdaq’s derivatives market share to 27.8% in 2011 from 27.4% in 2010.
Our revised $28 Trefis price estimate for Nasdaq OMX is nearly 10% above its current market price.