NYX Nyse Euronext

On Friday, NASDAQ OMX Group Inc. (NDAQ) announced its plan to launch its third retail equity stock options trading platform – BX Options – in the US in June this year. The launch is subject to the receipt of approval from the Securities and Exchange Commission (SEC).

This new trading venue will aim for retail investors in an attempt to enhance liquidity, reduce risk and improve pricing amid low-latency protocols.

Additionally, customers on this options market will be able to receive benefit not only from BX Options, but also from its NASDAQ OMX PHLX (PHLX) and the NASDAQ Options Market (NOM), all of which operate efficiently on the company’s core INET technology. Thus, it will offer a cheap, transparent and user-friendly options platform for retail order flow.

However, the US options market is marred by intense competition given that nine exchanges, including NYSE Euronext Inc. (NYX), BATS Global Markets and Boston Options Exchange, are already combating against each other for a fair share.

Moreover, two more exchanges along with NASDAQ are expected to take a dive into this trading venue. Although the ongoing market volatility places a favourable environment for options markets that hedges risk, the waning volumes in the cash equities over the past few months showcase a contraction in the US options industry.

According to Options Industry Council, the average daily trading volume on all the US options exchanges fell 4.71% year over year to 15.98 million in April this year. Even NASDAQ faced substantial volume declines during the first quarter of 2012, thereby validating the suppression. Hence, it is too early to ascertain the value-addition and earnings accretion for NASDAQ from the launch of BX Options.

Upswing in Delivering Technology Services

Nevertheless, last week was a high-activity period for NASDAQ, whereby the company publicized more business developments to boost long-term growth through technological services.

Concurrently, the company won a technology contract from the New Zealand stock exchange, whereby NASDAQ will offer its X-stream technology for trading of equities and derivatives securities. The company is likely to start offering its technology services to the New Zealand stock exchange by end of 2012. X-stream is a multi-asset trading system, which is deployed in 22 global markets.

The deal was backed by a separate agreement with Egyptian Exchange (EGX), whereby NASDAQ extended its alliance to offer X-stream technology to the latter for another five years. The company has also upgraded its technological alliances with other exchanges such as SIX Group, the Swiss exchange and the Nigeria stock exchange.

In addition, NASDAQ also announced the acquisition of BWise, which is a global leader in enterprise governance, risk management and compliance (GRC) software. BWise's GRC solutions will be available through NASDAQ Corporate Solutions’ software technology business.

Additionally, the acquisition also complements and boosts NASDAQ’s SMART technology that is also a surveillance and compliance monitoring platform for brokers, exchanges and regulators. However, the terms and financials of the deal remain undisclosed.

Overall, NASDAQ’s outstanding technical performance along with the recent alliances and acquisitions have enabled the company to enter new markets on a low cost and highly flexible platform, offering value addition to its clients and creating additional sales opportunities.

While the equity markets cast a lackluster outlook, we believe enhancing its technological services will help NASDAQ sustain a stable growth until markets rebound. Moreover, the heightened regulations across globe have also pepped up the demand for the company’s information and technology services.

However, the company still needs to tackle grave issues concerning the ongoing competitive M&A activity and headwinds related to expenses, volume and pricing continue to limit the desired upside. These limitations reflect the pressing need to respond to the changing industry dynamics and dig in opportunities for gaining scale. 

Based on the pros and cons, currently we have maintained a Neutral stance on NASDAQ, carrying a Zacks Rank #3, implying a short-term Hold recommendation.

 
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