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Goldman Sachs

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analyst Joshua Carter started a food fight last week with

NYSE Euronext


when he issued a sell rating on the exchange. Chairman John Thain responded to the downgrade, insisting the newly minted international operation will respond proactively to the challenge of upcoming regulations.

Regulation National Market System goes into full effect this summer. The new rule requires that trades be executed at the best price available at the time, regardless of exchange. Considering the NYSE's historic resistance to electronic execution, major questions have been raised about its ability to hold onto market share.

Carter raised his rating on



at the same time as the NYSE downgrade, predicting the highly automated exchange would take business away from its key rival when the rule goes into effect. This combined call raised eyebrows because Goldman Sachs is hardly a casual observer in the shifting sands of worldwide trade execution.

In fact, Goldman trades more volume on the NYSE than anyone else, paying a king's ransom in commissions each year. In a move designed to lower costs, it has been shifting large segments of this liquidity to other market centers through rival platforms and "dark pools," internal networks that match client orders.

Goldman has also joined with other investment banks in Europe to build a rival platform to trade European stocks, in response to an upcoming European Union rule that mimics Reg. NMS. This combined entity eventually will compete directly with Euronext and the London Stock Exchange.

Goldman's ventures, as well as similar efforts by its rivals, will pose a massive threat to worldwide bourses in upcoming years. Consider that just last year

Lehman Brothers



Credit Suisse

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Morgan Stanley

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started a third-party exchange called Better Alternative Trading System that now handles 13% of all Nasdaq volume.

How will this all play out for NYSE Euronext and Nasdaq shareholders in the months ahead? Unfortunately we can't look at long-term price charts because the exchanges just went public a few years ago. But we can get under the hood and examine stock performance since the most recent competitive forces came into play.

NYSE Euronext completed its well-publicized trans-Atlantic merger in early April. Active speculation ahead of the event peaked in November, with share price hitting an all-time high at $112. Notably, accumulation peaked two months later, even though price couldn't rally above the earlier high.

Before the Euronext venture, the stock benefited from Thain's proactive leadership after the Dick Grasso fiasco and planning for the new NYSE Hybrid Market. But troubling price action since January points to a growing paranoia that the exchange waited too long to transform itself while its rivals moved into position for the kill.

Strong selling pressure erupted in mid-January, triggering a 30-point decline over the next two months. The stock bounced at the 200-day moving average in March and started a slow recovery that topped out at exactly the same time the merger concluded. The ensuing sell-the-news reaction accelerated last week after the Goldman downgrade.

On-balance volume shows active distribution over this period that's far more severe than the underlying price decline. In fact, the indicator is now sitting at the lowest relative levels in the stock's history. It certainly looks like retail and institutional shareholders have been jumping ship, concerned about growing competition.

But it's premature to forecast a larger-scale decline until price breaks the 200-day moving average decisively. Note how it settled back at this support level last week, after the March bounce ran out of steam. Underlying distribution suggests a breakdown is imminent, but it makes sense to just wait and watch until that happens.

What would a breakdown look like? I'd expect to see a wide-range selloff day that cut through the 200-day moving average on volume between 10 million and 20 million shares. This would signal an active downtrend that could drop price to $70 by midsummer.

Nasdaq has always been on the cutting edge when it comes to electronic trade execution, but it also faces considerable competition from innovative third-party market centers. Ironically, the exchange tried to eliminate its key rival when it bought Instinet in 2005. It's no coincidence that BATS was founded just two months later to fill the void.

The stock topped out 10 months ahead of NYSE Euronext and dropped more than 40% by the middle of 2006. It's been looking for a bid since that time, stuck in a holding pattern that shows few signs of resolution. It's hard to imagine that the competitive environment will get any easier for the exchange as it tries to take back market share and share price.

Note the mid-February volume peak and decline. The exchange had just reported earnings after its failed attempt to buy the London Stock Exchange. Shareholders voted with their feet that day, believing a major growth opportunity had been lost. Even though the stock has bounced strongly in recent weeks, it continues to show a lack of key sponsorship.

Bottom line: The opportunity cost of an investment in Nasdaq just isn't worth it right now. Realistically, there's an equal chance that price will be trading 10 points higher or 10 points lower when we get to the end of 2007. That makes it an unwise choice for risk-conscious



At the time of publication, Farley had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;

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