Few brands are more iconic in global finance than Nasdaq. As a trading venue, it plays host to many of the largest and most exciting companies in the world. Currently, over 3,600 companies boast listings on Nasdaq, including members of the trillion dollar club like Nvidia and Apple. Unlike London, it has no problem attracting new listings; in the first three months of the year it welcomed seven of the top 10 IPOs by proceeds onto its exchange. And its composite index, making fresh 52-week highs, is a globally recognised barometer of growth and innovation.

But for all that, Nasdaq doesn’t capture much value in its core business of stock exchanging. In the first quarter of this year, it booked just $77 million of revenue from US stock trading. To put that into perspective, Goldman Sachs made $1.74 billion intermediating equities for institutional clients over the same period, albeit that was across multiple venues and it includes derivatives. Virtu – a wholesaler that sits between exchanges like Nasdaq and retail brokers like Robinhood – made $373 million of net trading income. And Robinhood, where investors go when they want to buy or sell Nasdaq-listed stocks, made $27 million on equities transactions even though it is just one of the many places that offers a retail gateway to Nasdaq’s wares. 

The reason for Nasdaq’s low revenue is not volume – it moves close to 2 billion shares a day across its platform. Rather, its take-rate is wafer-thin. For every 1,000 shares that flow through its pipes, Nasdaq captures just 64 cents in revenue. The volumes are vast, but the crumbs are small. 

The problem is that stock trading is a very competitive business. While the market may tend towards monopoly due to its embedded network effects, regulators and customers have worked to subvert that. Alongside Nasdaq and the New York Stock Exchange (NYSE), there are multiple ‘dark’ trading venues where investors can buy and sell stocks. Nasdaq is forced to pay up to attract liquidity – in the first three months of the year, it shared three-quarters of its gross trading revenues with market participants in the form of rebates – and even then it only has a 17% market share.

Nor is the competitive dynamic helped by a legacy of giving away trading functionality for free. As exchanges began to appreciate the value they could extract from data and other complementary services – especially to the extent these were less regulated – they pushed down the price of trading in an effort to commoditize the complement. 

In 2019, Jeff Sprecher, Chairman and CEO of NYSE owner Intercontinental Exchange, Inc, told it to investors straight (emphasis mine):

“I believe that execution is not particularly valuable… I think over time finding a buyer and a seller in a world where we have the Internet is really the most simple thing in the world, and networks can form up overnight to find buyers and sellers… We don't break out execution, but I don't think there's any money – I mean, we may lose money on execution if we were to really allocate cost. And how do we make the money? Data, listings, connectivity, information, catering, we print banners, I mean, everything around the execution is where we make money. And so that helped inform us that execution is probably – in a digital world – is going to go to zero.”

It’s unlikely NYSE makes enough from catering and banners to justify zero on execution; the same at Nasdaq – which also offers advertising opportunities on its Times Square billboards. But data and information are natural complements to trading and can be very profitable. Nasdaq was early to turn to them. Its Chair and CEO Adena Friedman recalls that Nasdaq was the first exchange to separate data from trading; at the beginning of 2002, she became its head of “Data Products”, in charge of the exchange’s market information services. Today, she’s taking the group in a different direction, seeing data and information less as a complement to trading and more as a distinct segment to be mined for its own value. 

This week, the company announced the acquisition of Adenza, a risk management and software provider to the financial services industry. At a price of $10.5 billion, it is the largest deal Nasdaq has ever done. It is the latest salvo in a “strategic pivot” that Adena Friedman launched when she took the top job several years ago. “Our vision [is] to become the trusted fabric of the world’s financial system,” she says – a pivot indeed from the vision the company articulated 20 years ago simply to be “the predominant US equities market”...