Nasdaq OMX Group (NASDAQ:NDAQ) is one of the biggest exchanges in the world and competes with CME Group (NASDAQ:CME), NYSE Euronext (NYSE:NYX), IntercontinentalExchange (NYSE:ICE) and CBOE Holdings (NASDAQ:CBOE). We look below at some of the key trends that affect our $26.54 valuation of its stock price.
1. U.S. Derivatives Market Continues to Grow
Derivatives tend to yield more than cash equity in a volatile market environment. Options trading volumes have increased over the last few years, as the U.S. economy continues to recover from recession. This has helped offset a decline in cash trade volumes as the company reported record low volumes in cash equity trades during the last quarter. Innovations such as the INET platform have helped it establish a strong market share and pole position to gain from increasing options trade volumes. U.S. Derivatives Trading accounts for 5% of our price estimate.
2. Diverse Portfolio Helps With Strong Performance
- NASDAQ Earnings Preview: Market Services Revenue Likely To Fall Due To Stiff Competition And Macroeconomic Uncertainty
- NASDAQ Sees Impressive Growth in Equity Options Trading Volumes In September
- NASDAQ’s Fixed Income Volumes Remain Suppressed In September
- NASDAQ’s Cash Equity Volumes Continue To Deteriorate In September
- NASDAQ’s Fixed Income Volumes Continue Downward Trend In August
- NASDAQ’s Cash Equity Volumes Continue To Decline In August
Apart from trading services, Nasdaq has also invested in non-transaction based businesses such as Issuer Services, Broker Services, Market Data, Access Services and Market Technology. The company reported revenues of $284 million from non-trading business (See Nasdaq’s Defends $27.50 Fair Value With More Diverse Business) and we expect each of these sectors to perform strongly going forward, as the company continues to innovate with developments such as the Directors Desk, an Ipad application and an INET-based index calculator. Market Technology accounts for 33% of our price estimate for Nasdaq’s stock.
3. Dark Pool Trading to Decline
With anonymous deals by financial institutions coming under the authorities scanner (See see U.S. Exchanges Benefit As Regulators Focus on Dark Pool Trading), we expect trade volumes through traditional exchanges like Nasdaq to rise through the next few months. By the end of 2010, dark pool trading accounted for nearly a third of total stock trades in the U.S., however, with questions being raised about the transparency of this platform, a decline is expected in this sector. Innovations in algorithmic trading are also expected to increase trade volumes.
We have a price estimate of $26.54 on Nasdaq OMX’s stock, about 10% above the current market price