By Jacob Bunge Nasdaq OMX Group Inc.'s (NDAQ) core U.S. stock-trading business has retained market share despite some of its largest customers suffering heavy losses in last month's high-profile market debut of Facebook Inc. (FB). While some firms have considered shifting business to other exchanges, business has held steady at Nasdaq OMX in the weeks following the botched IPO on May 18. The exchange operator has been protected by competitive trading fees and U.S. regulations around the routing of stock trades as it finalizes an offer to compensate brokers and traders hit by the Facebook fallout. Wall Street firms are estimated to have lost some $500 million on trades made during Facebook's problematic offering, thanks to Nasdaq OMX's difficulties opening the stock and some transactions left unconfirmed for hours by the exchange's systems. "It will be difficult for them to pull away [from Nasdaq]," said Michael Wong, analyst with Morningstar Inc. A spokesman for Nasdaq OMX declined comment. Banks and trading firms that handle orders sent in by retail traders and institutions, including Knight Capital Group Inc. (KCG) and UBS AG (UBS), also rank among the biggest traders on Nasdaq OMX's stock markets, according to data from the exchange company. Those firms are weighing legal action against Nasdaq OMX while exchange officials finalize a plan that would pay back about $40 million in losses through a combination of cash and discounts on transaction fees. Brokerage officials and rival exchanges condemned the plan as insufficient and unfair to competitors. Outcry over Nasdaq OMX's handling of the Facebook IPO has added to an undercurrent of frustration with the exchange group, which some brokers say has gone further than rivals in its efforts to capture business that ordinarily belongs to brokerage and trading firms. The three U.S. stock markets run by Nasdaq OMX in June have still retained approximately 22% of all domestic equity trading, generally in line with the past three months' performance, according to data from BATS Global Markets Inc. Nasdaq OMX's share of all U.S. stock trading has rebounded in recent months from about 20% in January, compared with a 23% market share in June 2011, according to research from Raymond James Financial (RJF). Brokers and traders have a financial incentive to maintain their ties with Nasdaq OMX. The firms driving the largest trading volumes typically receive the best rates on their transactions, with discounts and rebates provided to regular customers. Firms that route orders electronically on behalf of individual and institutional investors inevitably must do some business on Nasdaq OMX markets. Federal rules governing the execution of stock trades require that orders be sent to the exchange quoting the most competitive price for that trade, and as the operator of the biggest U.S. stock exchange by volume, Nasdaq OMX's liquidity is a sizable magnet for stock orders. "People may be upset with a given market, but if [Nasdaq] is offering the best trade, they'll have to go there," said James Angel, a finance professor at Georgetown University. Officials with some firms saddled with losses have said privately that there are steps that could be taken to send trades elsewhere. Market-making desks have some discretion over where they place proprietary stock orders. There may be other incentives to trading away from Nasdaq OMX. Many of the biggest stock-trading banks and firms own stakes in smaller exchange companies, such as BATS and Direct Edge Holdings LLC, launched to compete with incumbent exchanges like Nasdaq OMX and NYSE Euronext (NYX). Brokers have grumbled at recent moves by Nasdaq OMX that are seen encroaching on their turf. The exchange company last month unveiled plans to compete for more business from retail traders, alongside a plan to sell algorithms that slice up stock orders to achieve more competitive prices. Both businesses typically are the domain of brokerage firms. Nasdaq OMX, with NYSE Euronext, has also sought in recent months to raise scrutiny of private stock-trading venues known as dark pools, after off-exchange stock trading hit a record level earlier this year. "Relations [with Nasdaq] are chilly, but they've been chilly for a while," said a senior brokerage official. "The question is, can you avoid trading with them?" -Write to Jacob Bunge at jacob.bunge@dowjones.com
