NYSE Euronext’s (NYSE:NYX) recently released trading volumes for November showed some signs of recovery for the exchange, which has had a tough year so far. Most trading streams both in the U.S. and Europe showed improvement from the prior month’s level, but are still some way off the historical volume levels. Derivative volumes improved the most with the global average daily volume (ADV) for derivatives up 12% from October but still down 2.5% compared with November 2011.
We have an optimistic view on NYSE, expecting a gradual recovery in trading volumes as global macro economic conditions improve. Our $25 valuation of NYSE Euronext’s stock is in-line with the current market price. Below we take a look at some of the important revenue streams for NYSE.
Cash Is King
Looking at NYSE’s revenue breakdown, we see that almost two-thirds of its $4.5 billion revenue is derived from cash trading and listings, a quarter from derivative trading and the rest, around 10%, from information services and technology solutions. EBITDA margin for derivative trading is much higher than that for cash trading (45% compared with 25%), which means that EBITDA contribution from both streams is more even. Cash trading and listing accounts for half of the company’s EBITDA whereas derivatives trading accounts for 40%.
In its last quarterly earnings report, NYSE reported a 37% decline in U.S. cash products ADV, leading to a 37% decline in revenue. Although the slump in trading can be attributed to uncertainty in global economic conditions, it must be noted that the NYSE is also facing stiff competition from alternate exchanges like BATS (Better Alternate Trading System), which started operations in 2005. The BATS BZX Exchange and BATS BYX Exchange account for more than 12% of cash products trading volume in the U.S. [Market Volume Summary, BATS Trading].
Another factor contributing to the decline in equity volumes is increased off-exchange trading. The Trade Reporting Facility (TRF) has reported that the share of off-exchange trading has increased from 28% of all trades in the U.S. last year to 32% at the end of September. NYSE has launched the Retail Liquidity Provider program (RLP), offering price improvement to retail investors to counter this trend. The RLP initiative is still in a nascent phase; we will closely monitor operations and update our models accordingly.
November brought some relief for U.S. cash trading volume; the monthly volume increased 3.2% from the October level. Year-to-date volume is still about 27% below the level for 2011. We have accounted for this decline in our forecast but still expect a long-term recovery, possibly after 2014 as global conditions improve.
Derivatives The Biggest Mover
As stated earlier, derivatives trading volumes showed a big improvement over the prior month. Most of this improvement was in Europe, where derivatives ADV improved by 27% over the October level to match the ADV for 2011. This increase can be attributed to the strong performance of the LIFFE CONNECT trading platform, which accounted for 2.4 million of the 4 million contracts ADV. Year-to-date ADV is still about 18% below the 2011 level.
NYSE LIFFE has so far enjoyed a duopoly in the European market with Deutsche Boerse. But with Nasdaq (NASDAQ:NDAQ) launching a derivatives platform in London next year, its position might be threatened. Nasdaq is targeting 10% market share next year [Nasdaq’s U.K. Derivatives Platform Seeks 10% Market Share, Bloomberg Businessweek, October 11th, 2012 ]. For a detailed analysis of the prospects for Nasdaq’s new exchange, read our article: A Closer Look At Nasdaq OMX’s Business And $29 Fair Value.
Disclosure: No positions