Nasdaq OMX (NASDAQ:NDAQ) has come under a lot of heat after it mishandled Facebook’s (NASDAQ:FB) IPO earlier this year. Software glitches, malfunctions and delays during the much-anticipated IPO cost market makers over $200 million in losses, prompting several lawsuits against the exchange. Even though Nasdaq recently unveiled a $62 million compensation plan to assuage investors, it will have many tough questions to answer when it reports its Q2 earnings on Wednesday, July 25. 
Nasdaq is still awaiting the SEC’s permission to increase the current cap of $3 million on its provision for liabilities in order to start the compensation plan. The company’s biggest rival in the U.S. market, NYSE Euronext (NYSE:NYX), has protested strongly against this move as it would set a dangerous precedent and give Nasdaq undue advantage to lure customers seeking refunds.  On the other hand, traders who lost money during the IPO believe that $62 million is not enough to compensate for their loss.
Below are a few key parameters to keep an eye on when the company announces its earnings.
A Strong Core
Despite the pressures, Nasdaq’s fundamental operations continue to perform strongly. The company recently launched its third stock-options market in the U.S., the Nasdaq OMX BX Options, to complement the pre-existing NASDAQ Options Market (NOM) and NASDAQ OMX PHLX. (See Nasdaq Launches Another Options Exchange in The U.S.) Nasdaq’s innovative platforms account for 22% of all equity trades in the U.S., according to BATS Global Markets Inc.
This market share is mostly driven by big firms such as Citigroup (NYSE:C) which are drawn by the exchange’s liquidity and discounts and rebates offered to regular customers.  Federal rules require trades to be executed through the exchange which quotes the most competitive price for the stock in question, allowing Nasdaq to retain customers despite the damage to its brand.
The company is set to compete for retail trades that are traditionally handled by brokerages, and it has unveiled plans for an algorithm to slice up stock orders to derive competitive prices. We expect Nasdaq to maintain its market share over the next few years.
The IPO market in the U.S. has experienced a tough run since the Facebook fiasco with companies such as Corsair Component, Tria BeautyOnline, Palo Alto Networks and ServiceNow backing out of going public. This trend, however, might be short-lived as new businesses continue to grow in the U.S. Nasdaq has long maintained a reputation as the preferred exchange for software companies in America and is likely to continue to attract more companies such as online travel site Kayak (NASDAQ:KYAK) which successfully went public on July 20.  We expect U.S. Listing, which accounts for 38% of the company’s stock price, to regain momentum once the dust surrounding the Facebook saga settles down.
Adventures In Europe
Nasdaq recently unveiled plans to launch a new interest-rate derivatives trading platform in London  and it also acquired Norwegian clearing house NOS Clearing ASA. As the European Securities and Markets Authority (ESMA) is ready to make clearing through central counterparties (CCPs) mandatory for over-the-counter (OTC) swaps, we expect Nasdaq along with other exchanges such as CME Group (NASDAQ:CME) to queue up for a slice of the pie, which presents more than $3 billion in revenue opportunities. (See Nasdaq Expands Its Global Footprint By Acquiring Norwegian Clearing House)
With Europe going through a testing period, the region’s markets will remain volatile and conducive to derivative trading, which offers higher returns than equity trading. We currently have an optimistic forecast for Nasdaq’s European cash and options trading.
Our price estimate of $27 on Nasdaq OMX’s stock is about 20% above the current market price. You can gauge the effect of a change in the forecast on the company’s stock price by modifying the interactive chart above.Notes:
- Nasdaq compensation plan may not be enough, Reuters, 22nd July, 2012 [↩]
- NYSE Criticizes Nasdaq’s Facebook Compensation Plan, Bloomberg, June 6th, 2012 [↩]
- Nasdaq’s core U.S. business retains market share, Market Watch, 29th June, 2012 [↩]
- NASDAQ OMX Group, Inc. : NASDAQ Welcomes Travel Site KAYAK (NASDAQ:KYAK) to The NASDAQ Stock Market, 4-trades, 20th July, 2012 [↩]
- Nasdaq unveils European derivatives ambition, Market Watch, 21st June, 2012 [↩]