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How does NASDAQ make money?

How much of it is from selling market data, and how much of it is from commissions from trades?

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Companies with more than $10M in assets and a share class with more than 500 equity owners are required by the SEC to file an annual Form 10-K report.

You can reverse engineer how NASDAQ makes its revenues through their latest Form 10-K. After deducting expenses from transaction rebates, brokerage, clearance and exchange fees, this is the breakdown:

  • Market services, 41.0%. This includes:

    • Derivatives clearing (e.g. on OMX PHLX, BX options)
    • Cash equity trading and platform fees (e.g. on NASDAQ, BX, PSX)
    • Fixed income trading and platform fees (e.g. on eSpeed)
    • Access/broker services (e.g. colocation services, TradeGuard)
  • Listing services, 12.0%

  • Information services, 23.3%. This includes:

    • Market data (e.g. from distribution fees; from operating the SIP for the UTP plan, and from proprietary feeds)
    • Index licensing (e.g. NASDAQ 100 index)
  • Technology solutions: 23.7%

    • Corporate solutions (e.g. Thomson Reuters Corporate Solutions business, risk compliance software etc.)
    • Other trading and market data software (e.g. services for brokers, SMARTS; matching engine software, used on ASX, ICAP etc.; and enterprise compliance software, BWise)

I want to emphasize a related point: HFT firms that use proprietary feeds and colocation services have been receiving a lot of media flak for untrue reasons. The Nanex and Flash Boys rhetoric is colorful, but poorly researched.

As you can see for yourself, exchanges run a huge business and the proprietary feeds and colocation services are only a very small part of the pie. Moreover, even among the users of colocation services and proprietary feeds, the biggest clients are actually the software vendors (Interactive Data, Reuters, Bloomberg) and broker-dealers.

And besides, HFT firms are middlemen by design. That's like complaining that Arrow Electronics and Ingram Micro can buy millions of Intel processors at the lowest prices, and that retail consumers like you and me can't compete with them. Well yes, but you and I can buy an Intel processor from Amazon for a very low price, with excellent warranty and replacement services at only several dollars more than Arrow/Ingram are paying per piece.

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  • $\begingroup$ I find your line of reasoning re HFT quite flawed, at least as you presented it here. Some of the practices by some HFT players in equity space are not under scrutiny as a function of how exchanges generate revenues. The two are completely unrelated. And nobody denied HFT are middle men, well I would actually challenge that because a used car dealer is making markets in cars even during an economic crisis, hft firms are nowhere to be found during extreme market volatility, hence they hardly fulfill the classic definition of a financial market middle man. $\endgroup$ – Matt Oct 15 '14 at 13:31
  • $\begingroup$ Furthermore I think you may not fully appreciate why Reg NMS is in the spotlight. A financial market's most important property is the trust by investors and the knowledge that transactions are conducted in a fair, open, and orderly fashion. This can hardly be said of the current fragmented equity market in the US, or can it? I like how you extracted (yourself or from other source) how exchanges generate revenues, but your diversion into hft is misplaced and not entirely honest imho. $\endgroup$ – Matt Oct 15 '14 at 13:34
  • $\begingroup$ Moderators, why aren't you deleting the above comments? They're off-topic; it clearly derailed the topic; and the author obviously had no intention of contributing to this question because he has deleted most of his comments following this. It's rude and offensive for claiming that I'm dishonest - a personal attack that I've proven false, especially considering that I've debunked all of his allegations in the subsequent comments (that he deleted). $\endgroup$ – madilyn Oct 26 '14 at 19:27

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