Nasdaq eyes upside from free e-trades as profit tops expectations

Nasdaq Inc may see its market share of retail stock executions increase as a result of online brokers moving to free trades, the transatlantic exchange operator said on Wednesday after releasing better-than-expected quarterly financial results. In recent weeks, online brokers, including Charles Schwab Corp, TD Ameritrade Holding Corp and Interactive Brokers Group Inc, have slashed trading commissions to zero for stocks and exchange traded funds.

"We actually see some opportunity that could come on the back of that," Nasdaq Chief Executive Officer Adena Friedman said on a call with analysts following the company's third-quarter earnings announcement. Retail trades make up around 20% of US equities volume, but very little of that goes directly to exchanges. Instead, it is sent to so-called wholesale brokerages, such as Citadel Securities and Virtu Financial, which often pay for the right to execute the orders and try to profit off of the bid-ask spread.

"The payment for order flow regimes I'm sure will be examined," as a result of the lost trading revenue, Friedman said. At the same time, she added, brokers have new disclosure obligations aimed at ensuring they are getting the best possible executions for their customers.

"So they hopefully will also see opportunities to bring more flow directly into the market under that and as well as make sure that they continue to spread their flow to make sure they're achieving best execution," she said. Nasdaq's net income fell in the third quarter to $150 million, or 90 cents per share, from $163 million, or 97 cents per share, a year earlier.

Nasdaq said the decline was due in part to a pre-tax restructuring charge of $30 million in the quarter ended September 30. It expects another $35 million to $45 million in such charges over the next two years. Stripping out charges and other one-time items, like merger and acquisition costs, Nasdaq earned $1.27 per share, topping the mean per-share estimate of analysts by 6 cents, according to IBES data from Refinitiv.

Exchange operators have been trying to expand beyond their core trading business into high-growth segments such as information services, which help traders make investment decisions, and trade in stocks and other exchange-traded products. Revenue from information services, its biggest non-trading business, jumped 10.6% to $198 million, while market technology revenue surged 23.5% to $84 million. Overall revenue, excluding transaction-based expenses, rose 5.3% to $632 million.