Nasdaq Could Capitalize on Electronic Trading Expansion with Japan Re-Entry

by Trefis Team
Nasdaq OMX Group
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Nasdaq OMX Group (NASDAQ:NDAQ) is a leading global exchange group that delivers trading, exchange technology, securities listing, and public company services across six continents. It is the largest electronic screen-based market place for equity securities in the US and competes with other established exchanges such as NYSE Euronext (NYSE:NYX), CME Group (NASDAQ:CME) and BATS Global Markets.

Nasdaq is reportedly in discussion with Osaka Securities Exchange Co. (OSE) to re-enter the Japanese market. Nasdaq currently provides data for OSE-listed stocks and current discussions are centered around the idea of creating a new market that could trade stocks after-hours (including those listed on the Tokyo stock exchange). The new exchange could reportedly open in 2012. [1]

Nasdaq and OSE earlier had previously teamed up in 2000 to open Nasdaq Japan for emerging companies, but Nasdaq pulled out of the partnership in 2002 due to low trading volumes. Nasdaq is now looking to re-enter the Japanese market as the competition among exchanges in the US has increased. Newly opened exchanges have gained market share in the US, with BATS Global Markets, for example, becoming the third largest equity exchange at the expense of established players like Nasdaq.

We have a price estimate of $26.59 for Nasdaq OMX Group which is about 10% above the current market price.

We estimate that US cash and derivatives trading accounts for almost 42% of Nasdaq’s stock value, while another 15% comes from services that provide market data.

Rise in Electronic Trading to Boost Volumes

Advancements in information and communication technology has led to a global expansion of electronic trading, including automated order placement and trade execution. Although electronic trading has been around since the 1990s, its global application and acceptance has gained added momentum in recent years. Electronic trading has changed the market micro-structure of the financial world. Many algorithmic trading strategies slice bulk orders into small orders to avoid price changes often caused by bulk order execution, therefore reducing market impact. The orders are accordingly smaller but more numerous than before.

We estimate that rise in electronic trading will raise US average daily trading volume of equity securities to nearly 19 billion by the end of our forecast period, from its current level of below 10 billion.

Electronic trading makes up about 60%-70% of the currency and equity trading in the US, vs. an estimated 50% in Europe and 20-30% in Japan [2]. Electronic trading is growing rapidly in Japan, which has provoked Nasdaq to consider re-entry into the Japanese market. Rather than acquiring and integrating a Japanese exchange, partnering with OSE would provide a clean entry for Nasdaq to participate in the growth and evolution of trading markets in Japan.

To see the impact of US average daily cash equity trading volume trends on Nasdaq OMX’s stock value, drag the trend line in the modifiable chart above.

See our full analysis of Nasdaq OMX Group here

  1. Reuters: Nasdaq Looking Into New Foray into Japan: Reports []
  2. Electronic Trading and Financial Markets, Kiyohiko G Nishimura []
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