NYSE Euronext (NYSE:NYX) has had a tough time in 2012 as increased competition and dampened investor confidence have adversely affected the exchange’s earnings. Year-to-date revenues at the end of September were down 19% over the prior year led by a decline in trading volume across almost all product lines. We have revised our price estimate following the last earnings announcement.
Our $24 valuation of NYSE Euronext’s stock is in-line with the current market price. We believe that the company set for long term growth as global macro-economic conditions improve.
Increased Competition And Suppressed Trading Volume
NYSE reported a 37% decline in U.S. cash products average daily volume in its last earnings report, leading to a 37% year-on-year decline in transaction and clearing fees revenue. The decline is partially due to a market wide slump in trading. Competitors, Nasdaq (NASDAQ:NDAQ) also reported a decline of 24% in transaction volumes. Increased competition in the U.S. market has also contributed to the decline in volumes, BATS (Better Alternate Trading System) stock exchange opened in 2005 and has provided just what the name suggests, a trading alternative to the two incumbent giants. The two exchanges operated by BATS, BATS BZX Exchange and BATS BYX Exchange have been siphoning away market share from NYSE and Nasdaq, accounting for almost 14% of the cash products trading volume in the U.S.  NYSE’s tape A matched market share has fallen from 36% in 2011 to 32% but it is still the biggest player in the U.S. market.
Another factor contributing to the decline in equity volumes is increased off-exchange trading. The Trade Reporting Facility (TRF) has reported that the share of off-exchange trading has increased from 28% of all trades in the U.S. last year to 32% at the end of September. Observing this trend, NYSE has launched the Retail Liquidity Provider program (RLP), offering price improvement to retail investors. The platform has gotten off to a good start and currently trades about 6 million shares a day.
We have revised our forecast and believe that uncertainty over macro-economic conditions will lead to suppressed trading volume over the next two years, the effect will in part be mitigated by the RLP initiative. A long-term global economic recovery will provide a much needed boost to cash products trading volumes.
In its last earnings report, NYSE noted that European cash products volume this year was 31% below the figure for last year whereas year-to-date European derivatives products volume was down 20%. NYSE Liffe has so far enjoyed a duopoly in the European derivatives market with Deutsche Boerse. But with Nasdaq launching a derivatives platform in London next year, its position might be threatened.
Nasdaq is targeting 10% of the market share in the next year,  even if it is not able to meet this mark, it will have a negative effect on NYSE’s volumes which are already suppressed due to the prolonged debt crisis. BATS is also looking to open a trading platform for retail traders in London. 
As with the U.S., we expect a short term slump in European trading volumes with a long-term recovery coinciding with improving economic conditions in the continent.Notes: