Exchanges, under profit pressure, mounting defense

Two market operators, Nasdaq OMX and Deutsche Boerse, reported profit drops on Thursday, partly reflecting the price war between traditional players and younger challengers for market share and increasingly narrow margins.

Nasdaq OMX, which runs the U.S.-based Nasdaq Stock Market and venues in Nordic countries, said diluted earnings dropped 18%, while Deutsche Boerse, which runs the Frankfurt exchange and the Eurex derivatives exchange, said operating profits tumbled 36%.

Most of North America's exchanges logged similar profit drops in the last couple of weeks, stung by sagging trading volumes. Those toiling in the cash equities business -- where alternative venues and dark pools have made deep inroads on both sides of the Atlantic -- also bled market share.

"The traditional venues now are forced to go on the offensive because they are losing share in their own domestic markets," said Diego Perfumo, analyst at Equity Research Desk, a Connecticut-based advisory firm specializing in exchanges.

Nasdaq OMX's U.S. equities share fell from 30% to 22% in the latest quarter. But it has bounced back in the last two months, and management expects recent fee changes will preserve that momentum, adding to revenue this quarter.

The company will launch a third US trading platform next year, giving it yet another way to attract order flow from increasingly electronic investors and market makers known as high-frequency traders, which have driven up volumes.

Deutsche Boerse, which relies far less than Nasdaq OMX on cash equities, had 68% of German equities market share in October, down from 74% in January, according to Thomson Reuters data. Its main competitor, Nomura Holdings Inc's Chi-X, jumped from 10% to 14%.

Deutsche Boerse this month launched a new pan-European trading segment meant to undercut prices on the smaller multilateral trading facilities (MTF) that have pressured prices and eaten into its core business. The aggressively priced segment will be fully operational in January.

Continued on next page...