Flash Freeze Won’t Slow The Nasdaq Down

NDAQ remains a strong perfomer despite a trading glitch

   
Flash Freeze Won’t Slow The Nasdaq Down

Trading glitches are a fact of life in the market. If previous outages elsewhere are any guide, the Nasdaq and its parent company have what it takes to bounce back stronger than ever.

More than a few market commentators are stepping up to warn that Nasdaq OMX (NDAQ) has suffered “irreversible reputation damage” after shutting down trading for three hours last week. New listings may go toward the NYSE (NYX) instead, they say. Others fret that European rivals will now get the upper hand in the race to steal the real prize – the $633 trillion derivatives market – out of the Nasdaq’s grasp.

Indeed, the electronic exchange group BATS Global Markets announced it agreed to merge  Direct Edge Holdings, LLC, a move that places the combined entity ahead of the NDAQ in stock-exchange trading volume.

But it may be a bit premature to forecast the downfall of a $5 billion company after one trader’s bad connection pushed the market’s pricing engine off balance and forced human management to pull the plug. The error was identified and repaired within a half hour of the outage.  After that, the rest of the downtime was spent working with counter-parties to ensure that trading could actually come up again smoothly after the break.

With 252 trading days in a year, a half-hour interruption is probably not worth NDAQ losing 4% of its market value, so it’s no surprise shares of the exchange operator rebounded Friday.

Far from creating long-term reputation damage, yesterday will probably be forgotten by all but the market trivia buffs once the company finishes its postmortem investigation and describes the ways its platform will change to prevent recurrences. The “defensive driving” doctrine of recognizing abnormal market traffic patterns before it becomes impossible to correct course is promising, especially in a high-speed environment like the Nasdaq where decisions need to be made in shorter-than-human reaction times.

And in the meantime, traders have short memories. The NYSE stuttered in November when automated systems messed up the process of matching buy and sell orders, but the Big Board’s own stock barely missed a beat. Far from hurting the NYSE’s reputation as a safe place to route trade flow, the incident has already been forgotten and NYX has handily rallied 40% since.

While we remember the 2010 “Flash Crash,” early speculation that the market was coming apart at the seams proved similarly exaggerated.  Instead of melting down, NYX proved to be a great performer, surging about 30% in the 12 months after the unique technical failure.

If the Nasdaq has that kind of resilience, the panic selling only gives fans of NDAQ a better place to buy in. At these levels, shares look a tiny bit rich at a trailing P/E of 17, but the company’s rapid expansion into European and other global markets is unlocking new revenue opportunities at a fast pace. And at home, increased exposure in ETFs, non-listed private equity products and other hot asset classes should help boost overall flows.

Analysts expect NDAQ to grow its earnings by about 13% a year through 2016 – so on a growth-adjusted basis the stock is still attractive. Wall Street itself still thinks NDAQ will be worth around $34.65 a share in the near term. Instead of the end of the world, yesterday looks more like business as usual.

I have to admit I’m a longtime fan of this company since my hedge fund days. It knows how to innovate without sacrificing the elements of its business – liquidity, execution, connectivity and order flow – that really matter to its trading partners and ultimately its own financial results.

This time next year, if we’re still talking about that terrible Thursday when the Nasdaq shut down for three hours, NDAQ will probably look like a bad call. But if we aren’t, I think you’ll see the results in the chart.

 


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/flash-freeze-wont-slow-the-nasdaq-down-ndaq-nyx/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.