Exchanges such as
CME Group Ltd
), NYSE Euronext (
) as well as Europe's LCH.Clearnet Group Ltd. and
) are jockeying for position as new regulations will require that
derivatives trading should go through exchanges and be cleared
through clearing houses. These exchanges have set up
derivatives clearing houses in anticipation of this development
while the banks, that currently control this market, have dragged
their feet to push this issue forward.
In particular Nasdaq stands to gain from this business. We
estimate that derivatives trading accounts for around 20% of its
stock value though it only sees a fraction of the total derivatives
market's trades. If regulation favored exchanges and forced banks
trade more derivatives through an exchange, Nasdaq would be a prime
We have a
Trefis price estimate of 26.59 for Nasdaq OMX
, which is around 11% ahead of the market price.
Banks Still in Control of Derivatives Market
The over-the-counter derivatives (OTC) market is valued at over
$580 trillion and five commercial banks hold almost 97% of all
over-the-counter derivatives (OTC) market. Both Nasdaq and CME have
very small share of this market and hope that new legislation might
help it gain a larger foothold in the derivatives business.
Nasdaq would undoubtedly gain from this, and in an embarrassing
discovery, a flier endorsing limits on clearinghouse ownership for
banks was tied to Nasdaq. Large Wall Street banks own many of the
seats on these exchanges and control much of the volume traded on
exchanges and so Nasdaq does not want publicly appear as though it
is trying to torpedo the banks' interests.
Under the preliminary proposal by the Commodity Futures Trading
Commission (CFTC), banks and major swaps dealers would be limited
to owning no more than 20% of derivatives clearinghouses, exchanges
and trading systems, which the banks are disputing. Congress passed
on making a decision on this earlier in the year and have deferred
to the CFTC and Securities and Exchange Commission (SEC).The banks
argue that having ownership would ensure the financial soundness of
the exchange and so there role should not be limited, especially as
they are the biggest users of these exchanges.
Nasdaq's Derivative Business Would Gain
In the US, Nasdaq offers trading in derivatives including
options such as equity options, index options and currency options.
Nasdaq charges a transaction fee of about 30 cents for
each contract that is executed on its stock exchange. We
estimate that Nasdaq's US derivative division accounts for almost
21% of our price estimate.
The daily volume of options contract traded across all exchanges
in the US has increased from 13 million in 2008 to nearly 15
million currently and we estimate that it will reach 18 million by
2017 largely because of the shift towards electronic trading. Also
the algorithmic trading by institutional investors will boost the
trading volume moving forward.
However, there could be about 10% upside to our price
estimate for Nasdaq if the daily volume of options contract
traded in US exchanges increased to 27 million by 2017 because of
the proposed bill.
Given the large volume of derivative contracts currently
traded OTC, this could be conservative. In a scenario where the
number of contracts traded via Nasdaq doubles our current
forecast to reach 36 million by 2017, this would result in 25%
upside to our price estimate for Nasdaq assuming similar
See our full estimates for Nasdaq OMX here.