The NASDAQ OMX Group (Nasdaq: NDAQ) is a U.S. based financial services company which is best known for being the owner of the NASDAQ stock market. It is currently the largest and most actively traded electronic stock market in the U.S. with a daily share trading volume of over 2 billion for 3,200 listed companies. The company faces challenges due to the decline in new listings of traditional equities (i.e., company stocks), which is compounded by fierce competition from NYSE Euronext (NYX) in the mature U.S. equities market. Nasdaq currently makes about two-thirds of its revenue from the listing and transacting of equities. As such, the company is dependent on the overall health of the U.S. economy, in particular the information technology and financial services sectors.
The company is poised to leverage new opportunities in the increase of derivative finance instruments, as evidenced by its acquisition of the Philadelphia Stock Exchange—the third biggest derivatives player—in 2007. In addition, the company is staking much of its growth potential on its ability to continue expanding outside the mature U.S. markets, as key international markets are growing at a much faster rate.
In Europe, NASDAQ exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. In addition, it operates NASDAQ OMX Europe, a marketplace for pan-European blue chip trading based in the United Kingdom, NASDAQ OMX Commodities, an offering for trading and clearing commodities based in Norway, and NASDAQ OMX Armenia.
In March 2010, NASDAQ OMX announced the acquisition of Nord Pool ASA. In January 2009, it acquired a 22% interest in European Multilateral Clearing Facility N.V. In May 2009, the Company sold its 25% stake in Orc Software AB. In October 2009, it sold its interest in Carpenter Moore insurance agency business. In February 2010, the Company acquired Agora-X, an electronic communications network for institutional trading in over-the-counter (OTC) commodity contracts.
Second Quarter 2010 Results
NASDAQ OMX reported net income for the second quarter of 2010 of $96 million, or $0.46 per diluted share, compared with $61 million, or $0.28 per diluted share, in the first quarter of 2010, and $69 million, or $0.33 per diluted share, in the second quarter of 2009. Included in the second quarter of 2010 results are $16 million of charges related to the divestiture of businesses, expenses associated with severance, merger and strategic initiatives, and other non-recurring items. Non-GAAP EPS increased 21% over first quarter of 2010 results. Net revenues grew 8% over prior quarter to $390 million. Non-GAAP operating income improved to $183 million, up 15% from first quarter of 2010, while operating margins increased to 47%. During the quarter, NASDAQ completed $200 million of the original $300 million share repurchase program. NASDAQ's Board of Directors has authorized an additional $100 million for the program, bringing the total authorized amount to $400 million.
The Company’s Market Services segment includes United States and European Transaction Services businesses, as well as the Company’s Market data and Broker services businesses. The Company offers trading on multiple exchanges and facilities across several asset classes, including equities, derivatives, debt, commodities, structured products and exchange traded funds (ETFs). In the United States, it offers trading in equity securities, derivatives and ETFs on The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX BX and NASDAQ OMX Futures Exchange (NFX). The Company’s transaction-based platforms in the United States provide market participants with the ability to access, process, display and integrate orders and quotes for cash equities, derivatives and ETFs.
In January 2009, NASDAQ OMX launched a second United States cash equities market, called NASDAQ OMX BX. With NASDAQ OMX BX, it offers a second quote within the United States equities marketplace. The Company’s electronic United States transaction-based platform provides members with the ability to access, process, display and integrate orders and quotes in cash equities on The NASDAQ Stock Market and NASDAQ OMX BX. Market participants include market makers, broker-dealers, alternative trading systems (ATSs), and registered securities exchanges. These services are offered for NASDAQ-listed and non-NASDAQ-listed securities.
The Company’s platform provides a display of the interest by market participants at the highest price a participant is willing to buy a security (best bid) and also the lowest price a participant is willing to sell that security (best offer); provides subscribers quotes, orders and total anonymous interest at every price level for exchange-listed securities and critical data for the opening cross, closing cross, halt cross, initial public offer (IPO) cross and the intraday cross, and provides anonymity to market participants, that is participants do not know the identity of the firm displaying the order unless that firm chooses to reveal its identity, which can contribute to improved pricing for securities by reducing the potential market impact that transactions by investors whose trading activity, if known, may influence others.
Through The FINRA/NASDAQ Trade Reporting Facility (FINRA/NASDAQ TRF), it collects reports of trades executed by broker-dealers outside of its exchanges. The FINRA/NASDAQ TRF collects trade reports as a facility of FINRA. The FINRA/NASDAQ TRF also generates revenues by providing trade comparison to broker dealers by matching and locking-in the two parties to a trade that they have submitted to the FINRA/NASDAQ TRF for reporting and clearing. In addition to trade reporting and trade comparison services, it provides clearing firms with risk management services to assist them in monitoring their exposure to their correspondent brokers. In the United States, it also operates NFX which offers trading for currency futures and other financial futures. Most futures traded on NFX clear at The Options Clearing Corporation (OCC). In addition, NFX serves as the designated contract market for interest rate swap products that are cleared through International Derivatives Clearinghouse, LLC (IDCH).
The Company’s Issuer Services segment includes its Global Listing Services and Global Index Group businesses. It offers capital raising solutions to companies worldwide. The Company operates a range of listing platforms to provide multiple global capital raising solutions for private and public companies. Its main listing markets are The NASDAQ Stock Market and the exchanges that consist of NASDAQ OMX Nordic and NASDAQ OMX Baltic. It offers a consolidated global listing application to companies on The NASDAQ Stock Market and the exchanges that consist of NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ Dubai. Its Global Listing Services business includes its United States Listings, European Listings and Corporate Services businesses. Companies listed on The NASDAQ Stock Market represent an array of industries, including healthcare, consumer products, telecommunication services, information technology, financial services, industrials and energy.
The NASDAQ Stock Market has three listing tiers: The NASDAQ Global Select Market, The NASDAQ Global Market and The NASDAQ Capital Market. As of December 31, 2009, a total of 2,852 companies listed securities on The NASDAQ Stock Market, with 1,310 listings on The NASDAQ Global Select Market, 1,062 on The NASDAQ Global Market and 480 on The NASDAQ Capital Market. The Company also offers listings on the exchanges that consist of NASDAQ OMX Nordic and NASDAQ OMX Baltic. As of December 31, 2009, a total of 797 companies listed securities on its Nordic and Baltic exchanges. The Company’s Corporate Services business provides customer support services, products and programs to companies, including companies listed on its exchanges. The Company develops and licenses NASDAQ OMX branded indexes, associated derivatives and financial products as part of its Global Index Group. It also licenses cash-settled options, futures and options on futures on its indexes. During the year ended December 31, 2009, it launched eight new ETFs based on NASDAQ OMX indexes.
The Company is a technology solutions provider and partner to exchanges, clearing organizations and central securities depositories. Its technology business is also the sales channel for its complete global offering to other marketplaces. The global offering includes trading, clearing, listings, corporate, market data and index services. The systems solutions, it offers support trading, clearing and settlement and information dissemination for many types of instruments, ranging from equities to complex derivative products. The solutions it offers can handle all classes of assets, including currencies, different types of interest-bearing securities, commodities and energy products. In Systems Integration, Operation and Support, it offers integration services. It also offers operation and support for the applications, systems platforms, networks and other components included in a turn-key information technology solution. It also offers advisory services.
In order to better compete with the Chicago Mercantile Exchange, the Nasdaq offers trading products such as options and futures, which are collectively known as derivative instruments. Nasdaq has agreed to purchase the Philadelphia Stock Exchange in November 2007 for $625 million. That exchange currently ranks third in the options market. Hedge funds drive a significant demand for these types of products.
Investment banks and other financial institutions are creating their own private-label equity markets to trade privately owned companies; for example, Goldman Sachs Group (GS) has an offering called Tradeable Unregistered Equity (TRuE). An increase in such a trend could severely hurt Nasdaq's business for public stock offerings (unless the company decides to expand into this are as well).
Nasdaq is heavily dependent on the financial services and information technology industries. In the short term, negative forces such as the subprime lending crisis may drive transactions revenue for financial services as investors shed their holdings, in the longer term, fundamental economic downturns in either or both industries could negatively affect the company's listings and transactions business.
The American stock exchange market is highly competitive, while many international markets are much less developed. After its failed attempt to purchase the London Stock Exchange, the Nasdaq Stock Market bought OMX and sold 20% of itself to Borse Dubai. This comes at a time when its main competitor, the then-New York Stock Exchange merged with Euronext to form NYSE Euronext (NYX). This establishes a trend of major exchanges forming international alliances to increase the number of companies that they list as well as diversify the list of products and services that they offer to their customers. As the rate of increase in new company listings in United States stock markets slow down due to unfavorable corporate regulations (such as the Sarbanes-Oxley Act) in favor of international markets, creating partnerships with international firms is essential to future growth.
The Company competes with NYSE Euronext (NYX), BATS Exchange, Electronic Communications Network (ECNs), Deutsche Borse, the London Stock Exchange Group plc (LSE), the Spanish Exchanges, SIX Swiss Exchange, the Tokyo Commodity Exchange, Direct Edge ATS, Chicago Board Options Exchange, International Securities Exchange, NYSE ARCA, NYSE Amex, the Boston Options Exchange, Alternative Investment Market, Alternext, Entry Standard, Expandi Market, PLUS Markets plc, the Pink Sheets LLC and the Over-the-Counter Bulletin Board.
Both NYSE Euronext (NYX) and the Nasdaq are engaged in competition to expand their presence overseas as new listings in its core US market decrease. In addition, Nasdaq faces fierce competition from the Chicago Mercantile Exchange Holdings (CME) as Nasdaq expands into its traditional market of options and futures.