World Business

Shares of Nasdaq and the NYSE have been pummeled as the current frightful environment puts the brakes on trading. Are the worries overblown?

by Ben Steverman

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Is this bear market different? That’s the key question for Nasdaq OMX (NDAQ) and NYSE Euronext (NYX), the operators of the pair greater U.S. equity exchanges.

Nasdaq and the New York Stock Exchange don’t due facilitate trading in other stocks; they also list their own shares. And it has been a cruel year. The value of both exchanges’ equities have been cut roughly in half since the start of the year.

The main worry is that the relentless gloom hanging transversely the pillar market is making the Nasdaq and NYSE’s U.S. equity platforms smaller quantity busy, and thus less profitable. With major indexes 20% off their peaks (the official definition of a "bear market"), investors justifiably move suddenly the summer with little enthusiasm for shares.

True, "an exchange can profit regardless of which way the markets are moving," says Bill Cline of the Cline Group, a first in importance markets training and consulting firm. However, in bear markets—particularly when the mart funk lingers—"investors do attend to to trade less."

At first, in late 2007 and especially early in 2008, commercial volume was strong jointly the turmoil of the pecuniary crisis. A bear market with a fate of volatility can benefit exchanges, says Raymond James (RJF) analyst Patrick O’Shaughnessy. The big danger for Nasdaq and the NYSE is that the frivolity is subsiding, and the stock market is facing many months in the doldrums.

Among the worries dampening investors’ willingness to make trades: inflation and expensive fuel, the housing slowdown, continuing credit troubles, and falling incorporated earnings (BusinessWeek.com, 7/2/08).

In this year’s second divide in four equal parts, trading power was compose recondite compared through a year earlier, but average daily trading in the U.S. ruthless 11% from the tumultuous first quarter. Keefe, Bruyette & Woods (KBW) analyst Niamh Alexander says she expects light trading volume in the third quarter, which will hurt profits. "The relentless bear market crushing…appears to be slowing equity trading volume at last," she wrote adhering July 2.

In an interview, David Warren, Nasdaq’s chief financial officer, says volume onward his bourse remains "quite robust."

But he argues that investors are putting too abundant significance adhering the exchanges’ trading business. For Nasdaq, only about 16% of revenue comes from U.S. equity trading. Nasdaq also makes currency onward the sale of market data, fees to connect to its trading systems, services for companies that desire on the exchanges, and technology sold to other exchanges about the world.

"To think about us as a trading company really misses the cape," Warren says.

Executives at NYSE Euronext weren’t available for interviews. But since the NYSE’s merger be unexhausted year with the European exchange Euronext, the company relies less on stock trading than Nasdaq, analysts say. Nasdaq completed its own European merger earlier this year, to Swedish-Finnish exchange OMX.

Industry experts insist, however, that trading volume is a key determinant of the great exchanges’ profits—from this time forth their diversification into new trading products, such considered in the state of futures contracts or exchange-traded funds. "Trading is mute very influential for these companies," O’Shaughnessy says.

Exchanges spend heavily on commercial technology and, in the NYSE’s case, maintaining a trading knock down. But once those fixed costs are covered, reaped ground additional trade can subsist extremely profitable. Still, another gainful commerce as antidote to exchanges—initial public offerings, or IPOs—has slowed to a trickle as a result of weak mart conditions.