Higher Algorithmic Trading Volumes Can Lift Nasdaq OMX Group’s Stock Value

by Trefis Team
Nasdaq OMX Group
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U.S. cash equity trading is the most important division for Nasdaq OMX Group (NASDAQ:NDAQ), constituting 21% of the company’s stock value based on our estimates. Nasdaq OMX Group competes with other exchanges like NYSE Euronext (NYSE:NYX) and Chicago Mercantile Exchange (NASDAQ:CME).

The average daily volume of equity securities traded in the U.S. stock markets has consistently climbed over the past few years.  We expect this trend to continue going forward led by newer and upgraded techniques in algorithmic trading. However, potential risks include controlling unexpected behavior by these high-tech programs as well as auditing the trading patterns of algorithmic techniques.

We expect daily equity trading volumes in the U.S. to reach $18.7 billion by the end of our forecast period, while Trefis community members predict the volumes to reach close to $22 billion, implying an upside of 5% to our price estimate for NDAQ stock.

We currently have a $26.59 price estimate for Nasdaq OMX Group’s stock, roughly 10% above market price.

Algorithmic Techniques Expected to Drive Trading Volumes…

Algorithm trading makes use of advanced mathematical models for making transaction decisions in financial markets. The model attempts to determine the optimal time for an order to be placed while causing the least amount of impact on a stock’s price. Many institutional investors and brokerage houses are now adopting algorithmic trading, which has continued to evolve during the downturn and is becoming more comprehensive over time. It is estimated that by 2010, over 50% of all the equity cash trades occurring in the US will be based on algorithmic trading. [1]

… But Lacks Control and Accountability

When algorithms work with large amounts of data, their behavior can be difficult to control. The flash crash experienced in May 2010 is an apt example. The Dow Jones Industrial Average dropped 573 points in less than five minutes on May 6, 2010. In late September, Apple shares dropped nearly 4% in just 30 seconds before recovering a few minutes later. [2]

At the same time, the SEC doesn’t have the proper technology to regulate and audit trading patterns using algorithmic techniques or to track down intentional malpractice through the use of such models.

Trefis Community Forecast

The Trefis community anticipates that U.S. average daily cash equity trading volume will increase from 9.6 billion in 2010 to 21.8 billion by the end of our forecast period, compared to the baseline Trefis estimate of an increase to 18.7 billion during the same period. The member estimates imply an upside of 5% to the Trefis price estimate for Nasdaq OMX Group’s stock, which already stands roughly 10% ahead of market price.

Drag the trend line in the modifiable chart above to see the affect of various equity trading volumes on Nasdaq OMX Group’s stock value.

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Our complete analysis for Nasdaq OMX Group’s stock is here

  1. Algorithmic Trading is the method of choice, atrader.com, April 2, 2010 []
  2. Algorithms Take Control of Wall Street, Reuters.com, Dec 27, 2010 []
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