U.S. cash equity trading is the most important division for
Nasdaq OMX Group (
NDAQ
), constituting 21% of the company's stock value based on our
estimates. Nasdaq OMX Group competes with other exchanges like NYSE
Euronext (
NYX
) and Chicago Mercantile Exchange (
CME
).
The average daily volume of equity securities traded in the U.S.
stock markets has consistently climbed over the past few
years. We expect this trend to continue going forward led by
newer and upgraded techniques in algorithmic trading. However,
potential risks include controlling unexpected behavior by these
high-tech programs as well as auditing the trading patterns of
algorithmic techniques.
We expect daily equity trading volumes in the U.S. to reach
$18.7 billion by the end of our forecast period, while Trefis
community members predict the volumes to reach close to $22
billion, implying an upside of 5% to our price estimate for NDAQ
stock.
We currently have a
$26.59
price estimate for Nasdaq OMX Group's stock, roughly 10% above
market price.
Algorithmic Techniques Expected to Drive Trading
Volumes…
Algorithm trading makes use of advanced mathematical models for
making transaction decisions in financial markets. The
model attempts to determine the optimal time for an order to
be placed while causing the least amount of impact on a stock's
price. Many institutional investors and brokerage houses are now
adopting algorithmic trading, which has continued to evolve during
the downturn and is becoming more comprehensive over time. It is
estimated that by 2010, over 50% of all the equity cash trades
occurring in the US will be based on algorithmic trading.
… But Lacks Control and Accountability
When algorithms work with large amounts of data, their behavior
can be difficult to control. The flash crash experienced in May
2010 is an apt example. The Dow Jones Industrial Average dropped
573 points in less than five minutes on May 6, 2010. In late
September, Apple shares dropped nearly 4% in just 30 seconds before
recovering a few minutes later.
At the same time, the SEC doesn't have the proper technology to
regulate and audit trading patterns using algorithmic techniques or
to track down intentional malpractice through the use of such
models.
Trefis Community Forecast
The Trefis community anticipates that U.S. average daily cash
equity trading volume will increase from 9.6 billion in 2010 to
21.8 billion by the end of our forecast period, compared to the
baseline Trefis estimate of an increase to 18.7 billion during the
same period. The member estimates imply an upside of 5% to the
Trefis price estimate for Nasdaq OMX Group's stock, which already
stands roughly 10% ahead of market price.
Drag the trend line in the modifiable chart above to see the
affect of various equity trading volumes on Nasdaq OMX Group's
stock value.
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Our
complete analysis for Nasdaq OMX Group's stock
is here