Another Day Another Glitch For Nasdaq

October 5th, 2012 by Trefis Team
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Nasdaq OMX (NASDAQ:NDAQ) appears to have caught a computer plague, suffering from a series of software glitches this year. The latest one, on Wednesday, 3rd October, forced the exchange to cancel several trades of Kraft Food’s (NASDAQ:KRFT) shares. [1] The company has cancelled all trades in Kraft Foods above $47.82 that were executed between 9:30 a.m. EDT and 9:31 a.m. EDT as the market price jumped more than 25% when the markets opened. Although the exact cause of the jump has not yet been determined, it is widely believed to be a software malfunction. The glitch comes just a few months after the Facebook (NASDAQ:FB) IPO fiasco in May this year, which cost several investors a lot of money and might have a deterring effect on investor confidence going forward.

We have a price estimate of $29 on Nasdaq OMX’s stock, about 20% above the current market price

See our full analysis of Nasdaq OMX

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The error might have occurred due to Kraft Foods split into two companies, Kraft Foods Group Inc, the North American grocery business with the symbol KRFT and Mondelez International, Inc., the company’s global snack division with the ticker MDLZ, on Monday, 1st October. Nasdaq revived the SEC’s approval to track and analyses stock trading and avoid an error such as this but the project is still in a developmental stage.

Nasdaq’s main competitor in the U.S. market, NYSE Euronext (NYSE:NYX), was fined last month for a software glitch that led to the flash crash of May 2010. (See NYSE Ponies Up On Fine Over Delivery Disparities For Market Data for more details) We believe that both incumbent giants will need to work hard to defend their reputation or risk losing market share to relatively newer stock exchanges like the BATS Global Markets and Direct Edge. Nasdaq’s August U.S. matched equity volume was 53% than the that during the same period last year. NYSE’s U.S. cash products average daily volume also fell by 54%. [2]

BATS Global, which also suffered a technical glitch during its listing in April, managed to gain market share during the month of August, reaching an all time high of 12.8% of U.S. equities monthly market. [3] This is a huge gain for the exchange which opened just six years ago. We expect increased competition to eat into NASDAQ’s market share over the next few years, as illustrated in the graph below. There is a potential 10% downside to our price estimate if the market share falls below 10% by the end of our forecast period. You can modify the interactive chart below to assess the impact a change in market share would have on our price estimate.

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Notes:
  1. UPDATE: Kraft Foods Group Trades Canceled in Latest Stock-Trading Glitch, Wall Street Journal, October 3rd, 2012 [↩]
  2. NYSE Euronext Announces Trading Volumes for August 2012, Press Release, 10th September, 2012 [↩]
  3. BATS Global Markets Achieves New U.S. Equities Market Share Record – 12.8%; Sets Numerous European Records, Press Release, 6th September, 2012 [↩]