Nasdaq And NYSE Look To Revive Investor Confidence

September 6th, 2012 by Trefis Team
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Nasdaq OMX (NASDAQ:NDAQ) has been hit hard by the recent slump in investor confidence in the U.S. markets. U.S. equity shares volume dropped 15% from June to July, representing a year-on-year decline of 13%. [1] Options trading volume for July also suffered an 18% year-on-year decline amid growing concerns over rising national debt, which currently stands at a whopping $11 trillion and the budget deficit in the months leading up to the general election.

Nasdaq’s closest competitor, NYSE Euronext (NYSE:NYX), has also expressed concerns regarding the macroeconomic scenario and has joined the “Campaign to Fix the Debt” to raise public and political awareness regarding the debt issue. But neither of the two exchanges have to look too far to point fingers. Software glitches related to the Facebook (NASDAQ:FB) IPO and more recently the technological glitch in installing trading software by Knight Capital Group (NYSE:KCG) that resulted in huge losses for investors have raised doubts about the technology driving the markets, further eroding investor confidence.

See our full analysis of Nasdaq OMX

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Plans to Spark a Revival

Both NYSE and Nasdaq are trying to make the best of a bad situation. NYSE launched the Retail Liquidity Program on August 1 to a warm reception, executing 2.7 million shares on the first day alone with 6,624 retail trade executions in 281 securities. [2] The program covers retail equities trading for NYSE, NYSE MKT listed and NASDAQ UTP-traded equity securities, offering price improvements to retail investors.

The company has been heavily criticized of promoting dark-pool trading as the trades executed on the RLP platform will not be visible to the public. Nearly 35% of stock trades in the U.S. are currently executed outside traditional exchanges, a market that NYSE will look to capitalize on with its new offering. We expect a recovery in trade volumes in the near future. Our $26 valuation of NYSE Euronext’s stock is in-line with the current market price.

Nasdaq Offers an Alternative to ETFs

Nasdaq is currently awaiting the Securities and Exchange Commission’s (SEC) approval to launch option contracts on U.S. Treasury bonds. [3] These options will be traded in the same way as equities and will be linked to the most recently issued 10- or 30-year Treasury bonds. Investors will be able to use the options to wager on the movement in specific bonds rather than a bucket as they currently do using exchange trade funds (ETFs). Judging by the popularity of ETFs, we expect the options to be well received by the public, once released. U.S. Derivatives trading currently accounts for 18% of our $29 price estimate for Nasdaq OMX’s stock.

The NYSE and Chicago Board Option Exchange have approval for such options, but currently do not offer any such product.

You can gauge the effect of a change in our forecast by modifying the interactive charts above.

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Notes:
  1. NASDAQ OMX 2012/2011 Volumes and Revenue Capture, Press Release, Nasdaq [↩]
  2. Trader Update on Retail Liquidity Program, NYSE [↩]
  3. Nasdaq Proposes Options U.S. Treasury Bonds, FOX Business, 23rd August, 2012 [↩]