Nasdaq Posts Loss, Sees Continuing Competition

A bit of bloom came back to the Nasdaq Stock Market's rose in the fourth quarter, when revenue ticked up versus the year ago. But the market, which hopes to hold an initial public offering at the end of 2002, expects increasing competition from other exchanges in the year ahead.

The Nasdaq on Thursday reported a loss for the fourth quarter of 12 cents a share, a far cry from the 9-cent profit it made in the year-ago quarter. Excluding one-time after-tax adjustments totaling $21.9 million, related to its office relocation and a recent separation from parent company the National Association of Securities Dealers, the stock market reported net income for the quarter of $8.6 million. That's 20% below the year-ago quarter's $10.7 million, but it's up from the third-quarter total of $7.9 million.

Fourth-quarter revenue rose 1.9% to $215.5 million, primarily due to increased demand for market information services.

Not least of Nasdaq's worries is the possibility that two of its long-time rivals, the New York Stock Exchange and the American Stock Exchange, controlled by the NASD, could hitch up. The Wall Street Journal reported Thursday that the two exchanges have been talking about a deal, though no merger is imminent.

NASD initially acquired the Amex in 1998 in hopes of combining it with the Nasdaq Stock Market. But some critics say that initiative failed, and there has been talk that NASD has wanted to sell the Amex for some time now. In the meantime, the NASD last month sold a big chunk of stock it owned in the Nasdaq Stock Market back to Nasdaq. It now holds only 38% of the company but retains voting rights.

"We anticipate increased competition in 2002," said Rick Ketchum, president of the Nasdaq Stock Market, on a conference call Thursday. " One initiative the company plans to pursue this year, according to CEO Wick Simmons, is the listing of exchange-traded funds, or ETFs. Simmons stressed that this move would be important because the Nasdaq 100 Unit Trust (QQQ Quote), an exchange-traded fund that tracks the Nasdaq's 100 largest nonfinancial companies, has become the world's most traded security.

The QQQ is currently the exclusive domain of the Amex, while the NYSE has announced plans to introduce a slew of new ETFs by the end of this year. Nasdaq also faces increasing competition from electronic trading systems, or ECNs, which have become increasingly popular with investors. Their increasing presence in the market has sparked a price war with Nasdaq.

"You will see this pricing competition continue for quite a while," said Bernie Madoff, chairman of Bernard L. Madoff Investment Securities and a Nasdaq shareholder.

Breaking It Down

Nasdaq derives the bulk of its revenue from three different sources: transaction fees, which the market gets from traders and investors; market information services, which Nasdaq charges for access to stock quotes and other trading data; and issuer services, which include the annual and initial listing fees charged to companies that trade on Nasdaq.

Market information services is the only area of Nasdaq's business in which revenue grew for the quarter. Transaction services revenues were flat compared with the fourth quarter of 2000 at $103 million and up 3.5% to $408.8 million for the full year. Issuer services revenue totaled $39.7 million, also unchanged from the fourth quarter of 2000. Revenue from market information services rose 10.7% to $63.6 million.

The company has been hard hit by the slump in stock market. Once key contributors to revenue, the online investing and the initial public offerings markets have slowed in recent months. Meanwhile, several new projects, including a new electronic trading venue to be launched this year, and an aggressive overseas expansion plan, have bulked up costs.