The ASX Ltd (ASX: ASX) share price has increased 7.1% in 2020, but will the share market operator's value continue climbing higher this year?
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What does ASX Ltd actually do?
ASX Group, the organisation's holding company, was formed in July 2006. It was borne out of a merger between the Australian Stock Exchange and the Sydney Futures Exchange.
The ASX functions as 'a market operator, clearinghouse and payments system facilitator'. That basically means it manages capital flows, trading and securities settlements across cash, fixed income, derivatives and equities.
The ASX Ltd share price has been climbing higher in 2020 and is outperforming the S&P/ASX 200 Index (ASX: XJO) by some margin. So, what's driving the ASX share price in 2020?
Will the ASX share price continue climbing higher this year?
This one is really a 50-50 in my books. Market volatility like we've seen in the March bear market can be a good or bad thing for share market operators.
That's why the ASX Ltd's August earnings will be so critical to watch. If the company reports strong trading revenue, that could offset lower initial public offering (IPO) earnings.
ASX Ltd is currently a big outperformer, but I really think the level of market volatility, and how this is ultimately reflected in the company's bottom line, is the key here.
How does ASX Ltd make money?
The share market operator generates income in a few different ways. One major contributor is fees received for IPOs. The company's Listings and Issuer Services segment generated half-year revenue of $114.6 million. Other major contributors were Derivatives and OTC Markets ($160.0 million) and Trading Services ($126.1 million).
While IPOs are less likely to occur in a volatile market like we're experiencing right now, other areas of the business may pick up. That includes more exchange-traded product listings with ASX Ltd's revenue for this segment climbing 16.4% to $4.3 million in 1H20.
Higher earnings potential would obviously be good news for the ASX Ltd share price. On that note, we've seen a big increase in trading volumes this year. Increasing numbers of investors have been looking to buy and sell which means more transactions being processed by the ASX.
That's why I think the company's earnings result is a critical factor for the ASX share price going forward. I would expect IPO revenue to fall but who knows how good the result could be for the company's Trading Services and Derivatives businesses.
Are there any major competitors?
The ASX attracts some intense competition from offshore exchanges like the London Stock Exchange, NASDAQ, NYSE and Euronext.
Of course, ASX Ltd wants to keep more companies in Australia. That means losing top Aussie companies like Atlassian Corporation Plc (NASDAQ: TEAM) to offshore markets is bad for business.
In Australia, ASX Ltd basically enjoys a monopoly. Its major rival is NSX Ltd (ASX: NSX) which is trying to develop a blockchain-based market.
However, the NSX has a market capitalisation of just $23.3 million. With ASX Ltd boasting a share price of $83.98 and a $16.3 billion market cap, this puts it well ahead of its smaller rival.
