April 6 Concern over fallout from Michael Lewis' new book "Flash Boys: A Wall Street Revolt" led investors to slam shares in exchange-related companies last week, but fears about Nasdaq OMX Group look overdone, according to an article in the April 7 edition of Barron's.
In "Flash Boys," released Monday, Lewis argues that the markets are rigged in favor of high-frequency traders, who use their speed advantages to "legally front-run" other investors.
The U.S. Attorney General said on Friday that the Justice Department is investigating high-speed trading for possible insider trading. Other regulators, and the FBI, have also confirmed they are looking into potential wrongdoing by high-frequency stock traders as well as other market issues.
Shares of exchange operators CBOE Holdings and CME Group, as well as online brokers TD Ameritrade and E*Trade Financial, were hit on concerns that revenue and profits could be clipped if certain practices were curtailed or banned, Barron's said.
Nasdaq's stock ended the week down 1 percent, though intraday moves were fairly volatile.
The company estimates that just $12 million of its around $2 billion in annual sales could be at risk if high-frequency trading (HFT) were eliminated. But Nasdaq uses a narrow definition of HFT, and one analyst put the potential hit at around $150 million, Barron's said.
Still, any potential pain is arguably already reflected in Nasdaq's share price, the financial newspaper said. The exchange operator's shares trade at 12.2 times this year's estimated earnings, which is a steep discount compared to CME, at 19.8 times prospective earnings, and NYSE-owner IntercontinentalExchange, at 17.8 times, it said.
Just 27 percent of Nasdaq's sales came from order execution during the fourth quarter, down from 29 percent a year earlier, while other, more consistent businesses such as technology services, market data, listings and licensing of indexes for use in exchange-treaded products have been growing, Barron's said.
"Sure, concerns about high-speed trading aren't likely to fade. But instead of wringing their hands, Nasdaq investors ought to consider the good news, too," it said. (Reporting by John McCrank in New York; Editing by Bernard Orr)