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The NASDAQ Stock Market: Here For The Long Haul?

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2003/10/21

Abstract

Celent Communications predicts that claims of Nasdaq’s dissolution are premature. Nasdaq market share will double from 17% in 2003 to 35% in 2005, or will become a different market entity.

When Nasdaq launched its SuperMontage trading platform in late 2002, the common prediction was that the system would cause the death of ECN competitors. When the trading system failed to meet wildly optimistic market share forecasts in 2003, the common prediction became the death of Nasdaq. Nasdaq’s depressing market share, the departure of several important ECN customers, the delay of exchange registration, and the fight to share tape revenue have worked to form a serious threat to Nasdaq’s business.

In a new report, "The Nasdaq Stock Market: Here for the Long Haul?," Celent examines recent changes to Nasdaq’s market structure and its competitive position within the U.S. equities market. The report reviews the existing Nasdaq business model and examines the underlying causes of the company’s recent troubles. Historical background provides context to the strategic choices Nasdaq has made. It evaluates Nasdaq’s recent actions to increase market share and improve its financials. The final conclusion is that Nasdaq will survive its current crisis.

Celent predicts that Nasdaq will achieve 35% market share in 2005. This forecast assumes that Instinet and Island will consolidate trading activity into one ECN and will return to Nasdaq’s fold; that ArcaEx market share will level off as its new business matures; and that some (but not all) of Nasdaq’s attempts to attract more order flow, such as post-trade anonymity and bi-lateral linkages, will succeed in reversing the current market share decline. Should these assumptions fail to hold, Nasdaq market share will drop below 10% and the market will be forced to re-evaluate its transactions business.

According to Jodi Burns, the report’s author, "The public has overeacted to the negative news coming from Nasdaq recently. Its 2Q03 loss of US$49 million is not that dramatic when compared with recent results from the NYSE and Instinet. Nasdaq is actively working to remove certain obstacles that prevent it from pursuing different strategic models. In addition, the company retains many options for improving its market share, and could pursue several new business opportunities that are based on entirely different success factors."