Derivatives Trading is NYSE Euronext’s Growth Engine

Tom Callahan, the U.S. Chief of NYSE Liffe, promises that the NYSE Euronex Group (NYSE:NYX) will give derivatives trading leader CME Group (NASDAQ:CME) a run for its money. ^[1] The newly opened New York Portfolio Clearing (NYPC) is a joint venture between NYSE Euronext and the Depository Trust & Clearing Corporation (DTCC) and has already cleared four million interest-rate futures contracts and has half a million in open interest in the first three months of its operations. Tom Callahan claims that the NYPC is well on its way to capturing a million contracts over the next six-month period. NYSE Euronext is the world’s leading stock exchange in cash trading and also competes with Nasdaq (NASDAQ:NDAQ) in the U.S.

We have a price estimate of $35.51 on NYSE Euronext’s stock which is in-line with its current market price.

NYSE has been steadily losing its hold on the cash trading market

High competition and the entry of fully electronic exchanges like BATS Global and Direct Edge has eaten into NYSE Euronext’s market share of the U.S. cash trading business in the recent past. NYSE’s market share has dropped from about 39% in 2008 to under 30% in 2010. NYSE has also been slow in improving its existing trading tools and in deploying new trading techniques, which has only compounded this problem. Moreover, the popularity of floor trading in NYSE poses restrictions on the company’s adopting new trading techniques like Algorithmic Trading.

And derivatives trading really looks like the way forward

When compared to the 41 million interest-rate contracts that CME has at its clearinghouse, NYSE doesn’t seem to pose much of a threat to CME by targeting a million contracts in the next six months. ^[1] However, the tremendous growth potential in derivatives trading is evident from the fact that NYSE is set to clear a million contracts within the first nine months of operation.

Over the last two years, NYSE’s U.S. derivative trading volumes have grown over 40% a year from 460 million contracts in 2008 to 930 million contracts in 2010 and are estimated to cross 1.7 billion over the next 5 years. According to our analysis, derivatives trading accounts for about 42% of NYSE Euronext’s $35.51 value and we believe that it will remain the primary source of growth engine for company.

See our full analysis of NYSE Euronext

1. Exclusive: NYSE futures chief says next 6 months are key, Reuters [↩] [↩]