Profits at the company that operates the market fall 42%… Is the problem the market or the revenue model?

When stock prices fall, investors are often focused on the losses in their portfolios.

But what about the company that operates the market itself?

Saudi Tadawul Group Holding announced that its net profit fell by approximately 41.8% in the third quarter of 2026, to 48.1 million riyals, compared with around 82.7 million riyals in the same quarter last year.

At first glance, this may seem like just another decline in the profits of a listed company, but it raises a different question:

How is the profitability of the company that operates the financial market affected when investor activity declines?

When market activity becomes a source of revenue

Saudi Tadawul Group differs from many companies listed on the Saudi market.

While an industrial company relies on selling products and a retailer on store sales, Saudi Tadawul Group relies on a range of services related to capital markets, such as trading, post-trade services, data, and technology.

This means that the group’s performance is partly tied to the level of activity taking place in the market.

The higher the trading values and number of transactions, the more revenue from these activities may rise—and vice versa.

But it is important to distinguish between a decline in the market index and a decline in trading volume.

Stock prices may fall while trading value rises as investors actively buy and sell.

So the direction of the index alone does not determine the group’s revenue. What matters is the level of activity in the market and the nature of the services from which the company earns income.

The market slows—but what about costs?

Market data shows that trading value in the first nine months of 2026 reached around 894.3 billion riyals, down approximately 12% from the same period in 2025.

This highlights the pressure that companies relying on trading activity for revenue may face.

But to me, the most important point is not revenue alone.

A company that operates financial infrastructure needs technology systems, cybersecurity, specialized employees, and ongoing maintenance and development.

Some of these costs may not fall by the same amount when market activity declines.

This is where a familiar financial problem comes into play: fixed or semi-fixed costs alongside revenue that varies with the level of activity.

If revenue declines without a comparable reduction in expenses, profit margins may come under pressure.

This explains why net profit may fall by more than revenue.

Can technology reduce reliance on trading?

One of the things that stood out to me in the group’s 2026 performance was the differing results across its operating segments.

According to its first-half results, revenue from the capital markets segment fell by 13.8%, while revenue from post-trade services declined by 5.1%.

By contrast, revenue from the data and technology services segment rose by 11.8% to around 133.3 million riyals.

This presents an important opportunity to diversify revenue sources.

The company does not have to rely solely on revenue from executing trades; it can also develop data and technology services used by financial institutions and investors.

Depending on the nature of its contracts and clients, these services may help build revenue streams that are less tied to fluctuations in daily trading activity.

However, growth in one segment does not necessarily mean it can fully offset declines in the others.

That makes the key question: Are new revenue streams growing fast enough to reduce the group’s reliance on market activity?

Investment in development may temporarily weigh on profits

It is natural for companies that operate financial infrastructure to invest in developing their systems and services.

But these investments do not necessarily translate into immediate profits.

A company may incur development and operating costs before new services begin generating enough revenue to cover them.

According to the first-half 2026 results, the group’s operating expenses rose by 10%, partly driven by higher depreciation and amortization expenses.

This presents management with an important challenge.

On the one hand, the company needs to invest in new technologies and services to maintain its competitiveness.

On the other, these investments may affect current-period profitability, particularly when market activity is weak.

In my view, not every increase in expenses should be considered negative, but we need to know whether these expenses will help create additional revenue and value in the future.

What does an accountant see?

When an accountant sees Saudi Tadawul Group’s profits fall by around 42%, they do not stop at the percentage decline.

They start asking other questions:

Did profits fall because trading revenue weakened, or because expenses rose? What proportion of costs is fixed? Are technology investments delivering a return that justifies their cost?

They also look at operating profit margins, each segment’s contribution to revenue, asset utilization, and cash flows.

Here, I believe the concept of operating leverage helps explain the situation.

Companies with high fixed costs may benefit significantly when revenue grows, but they may also see a steeper decline in profits when activity slows.

In my view, Saudi Tadawul Group’s results show that the company operating the market is not economically separate from the market’s own movements.

Its ability to grow in the future may depend on how successfully it develops diversified income sources, improves operating efficiency, and turns technology investments into sustainable revenue.

The goal is not simply to generate high profits during periods of strong activity, but to build a business model that can maintain its performance even when the market slows.

So perhaps the most important question is not:

Why did Saudi Tadawul Group’s profits fall?

But rather:

Can the group build revenue sources that make its profitability less dependent on daily trading volume?