A Decline in Program Trading is a Concern for NYSE

According to the latest data released by NYSE Euronext (NYSE:NYX), the average daily program trading volume during the week ended Feb 24, 2012 declined to 411.3 million shares, about 28% of the average daily total volume (ADV), from 500.8 million shares, about 31% of average daily volume, a week earlier and from 588.6 million shares, or about 32% of the average daily total volume a month earlier. ^[1] NYSE derives most of its revenues from transaction fees on trades and declining program trading volume is a cause of concern for the company and also for its competitors such as Nasdaq OMX (NASDAQ:NDAQ) and CME Group (NASDAQ:CME).

See our full analysis for NYSE Euronext

Program trading uses a wide range of data-driven portfolio trading strategies involving a basket of more than 15 securities. In the wake of the global economic meltdown of 2008-09, regulatory bodies have taken steps to better regulate the financial industry and program trading. Some of the initiatives taken by the SEC include the creation of a large trader reporting system, a ban on anonymous market access and the elimination of flash orders. The SEC is also probing into some of the tools used by high frequency traders. ((Recent Regulatory Initiatives Affecting High Frequency Trading, Automated Trader)) The recent decline in program trading volumes can be largely attributed to this increased regulatory oversight.

NYSE’s U.S. derivatives trading volume has more than doubled in the past three years and we expect the growth to continue during our forecast period. However, regulatory changes and increased oversight could stall the growth in trading volumes, resulting in a downside of about 7% to our price estimate for NYSE’s stock.

We have a price estimate of $34 for NYSE Euronext’s stock, nearly 20% above its current market price.

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1. NYSE Program Trading Volume Dn Last Week; Overall Activity Off, March 1, 2012, WSJ [↩]