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Nasdaq Could Thrive From Crisis, But Isn't Immune from Competition

Magnus Bocker, president of Nasdaq OMX Group, was touting the business model of exchanges at the Global Financial Forum organized late last month at J.P. Morgan Chase. While exchanges could thrive in the current financial climate, they aren't immune from its woes or increasing competition in the industry.

"The business of exchanges is a fantastic business model," he said at the end of April, adding that "never have we been dysfunctional. You might not always like the prices, but you can trade every day."
At the conference (His speech starts at 16 min in the video), Broker also praised the transparency of trading within exchanges, which, he said, contrasts with the opaqueness of over-the-counter markets such as those for derivatives. Here, most agree he's definitely on to something. Financial institutions, including many banks but also insurance companies like American International Group, underestimated the power of derivatives like credit default swaps (which can be used as insurance contracts on the credit of corporations or simply as tools allowing bets on the next bankruptcy), sometimes leading to their own demise. "There's nothing good that happens in the shadows," he added.

More recently, as my colleague Daniel Harrison pointed, Bocker said that Nasdaq could soon see more initial public offerings of financial services companies, which haven't typically been listed on Nasdaq, favoring instead the New York Stock Exchange. "As an effect of the breakup of many large banks, you will see spinoffs; you will see companies and teams starting their own business," Bocker said at the Reuters Exchanges and Trading Summit in New York this week.

It would certainly be good for business at Nasdaq. But for now, it seems that Nasdaq has actually lost market shares, and as a result, revenue. This is especially true in the U.S. equities market, where Nasdaq saw a drop from 29.2% in market share in the fourth quarter of 2008 to 25.2% in the first quarter of 2009. That impact may have been mitigated by strong market volumes of trading, but it may only become more obvious as volatility falls and volumes normalize.

As competition intensifies in the exchange business, Nasdaq is not the only one dealing with such challenges. NYSE Euronext was downgraded to A2 from A1 by Moody's Investors Services last week and still holds a negative outlook. The ratings agency attributed the move to reduced free cash flow generation in 2009 and an uncertain outlook for net transaction revenue in 2010 and beyond. The news comes after a first quarter when trading revenue was also down.

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