芝加哥商業交易所 (CME) 2004 Q3 法說會逐字稿

Good day and welcome to the Chicago Mercantile Exchange Third Quarter Earnings Release. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. John Peschier. Please go ahead sir.

Good morning, thank you for joining us. Craig Donohue and James Parisi, our new CFO will spend a few minutes outlining the highlights of the third quarter and then we will open up the call for your questions. Terry Duffy, Phupinder Gill, and David Gomach are also here this morning and will participate in the Q&A session. Please note that all references we make during this call to trading volume and rate per contract exclude our low price TRAKRS products. Before they begin, I will read the Safe Harbor language. Statements made in this call that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detail information about factors that may affect our performance may be found in our filings with the SEC, including our most recent Quarterly Report on Form 10-Q, which is available on our website. Also we refer in this call to our cash earnings or non-GAAP number. The reconciliation to net income can be found on our website under Investor Relations quarterly financial information. In addition, we have posted slides associated with this earnings call on the IR portion of the site. Now I would like to turn the call over to Craig.

Thank you and good morning. We are pleased to report our third consecutive record quarter in 2004. My comments will be relatively brief as we covered a lot of ground during our recent analyst 4 weeks ago. I will start by providing the highlights of the third quarter and I will provide an update on several initiatives and finally I will discuss the CFO announcement we made yesterday. Let's begin with the key financial results for Q3.

During the quarter net revenue grew to $192 million, up 42 percent or 57 million from the same quarter a year ago. Income before taxes grew 89 percent to 99 million and operating margin improved from 39 percent in Q3 last year to 52 percent this quarter. Our diluted EPS increased 85 percent to $1.72 bringing us to $4.74 so far for the year. And last, we generated significant cash flow during the third quarter with approximately 57 million of cash earnings and we have generated more than 155 million of cash earnings so far this year. In terms of contracts traded, our overall volume was up 29 percent with more than 3.2 million contracts per day compared to the same quarter last year. Average daily volume was down about 2 percent from our record quarter during the second quarter of this year, primarily due to typical seasonality during July and August. Overall GLOBEX volume was up significantly, 87 percent higher than the same period a year ago. During the second quarter of this year, for the first time GLOBEX represented more than 50 percent of total volume at 52 percent. And in the third quarter the percentage of volume on GLOBEX jumped significantly to 61 percent. This had a positive impact on our revenue capture, which James Parisi will discuss later.

Taking a look at the product areas in Q3 compared to the same quarter a year ago, interest rate volume was up 47 percent driven by growth of Eurodollars on GLOBEX, which averaged more than 800,000 contracts per day. Foreign exchange volume was also up 42 percent driven by eFX growth of 109 percent. And E-mini volume was up 8 percent, despite continued low volatility in the equity market and commodity volume was also up 6 percent. We continue to see success with our efforts in Europe. During the quarter our European Incentive Plan, which targets proprietary trading firms averaged more than 40,000 contracts per day, up from approximately 20,000 per day during the second quarter. We have increased volume during each month of this program, which originated in March of this year. The positive trend has continued in October as we had our highest day ever on October 8 with more than 80,000 contract traders.

Turning now to an update on recent initiatives. First, last Monday we rolled out new implied butterfly spread functionality for electronic trading of CME Eurodollar futures. This spread strategy is popular in our trading pits, especially in the back part of the yield curve. We believe this will likely enhance the liquidity available on the screen. This particular functionality on GLOBEX is more sophisticated than anything currently available at other exchanges. Looking at September Eurodollar volume on GLOBEX, the first 4 quarterly contracts were 76 percent electronic on a base of about 1 million contracts per day. The second 4 quarterly contracts were 60 percent electronic on a base of 400,000 contracts. And the final 8 years of the Eurodollars, which total about 130,000 contracts per day, were 6 percent electronic. The back part of the yield curve is where some of the opportunity for growth and migration lies with this enhanced functionality and we are very pleased to report that during the first week since the launch we averaged approximately 19,000 contracts per day on GLOBEX associated with the new butterfly functionality.

Moving on to the CME FX on Reuters partnership in our FX product line, we've named 7 beta firms, which include ABN AMRO, Bank of America, Barclays, HSBC, Royal Bank of Scotland, SEB and Fimat for the seven slots, which were made available. Each of these beta firms are among the top 15 spot FX participants in the world. Beta testing will begin in the fourth quarter with the initial launch shortly following. In addition later in Q4, CME, Reuters, and the 7 beta banks will commence a 14-day road show in the Unites States and Europe to provide information about CME F X on Reuters. CME's clearing firms, which include the 7 beta banks, which will serve as a distribution channel for CME FX on Reuters as they plan to offer clearing services to the smaller banks who may not be existing users of CME products. As a reminder, there are 3500 nonCME member institutions who are Reuters Dealing 3000 customers.

Next, turning to our equity option initiative to trade E-mini S&P 500 options, we have announced a market maker program with 6 participants, who'll commence on November 8. We had very strong interest with more than 20 applicants for these slots. The firms selected include 3 of the largest equity options market makers, Timber Hill and Wolverine Trading and Chicago Trading Company, as well as 2 investment banks, Deutsche Banks and Goldman Sachs and one of the world's largest hedge funds Citadel. All of them are active participants in the option and equity market. We originally announced, we intended to switch from American to European style exercise for our equity options contracts. We've yet to receive regulatory approval on this change and until we receive that approval expiration will remain American style. We've discussed with each of our market makers, who will be starting on November 8 and they are indifferent regarding the style of exercise. E-mini S&P 500 options business continues to grow from a relatively small base. In Q2 we averaged 950 contracts per day and in Q3 that jumped to 1500 contracts per day and so far in October we are averaging approximately 2800 contracts per day. In addition, we had 5 consecutive days of open interest records for equity options products in September prior to the quarterly expiration reaching over 680,000 contracts on September 16.

Finally, we are confident in our opportunity as CME has the advantages of an electronic platform with speed and distribution reaching equity traders around the globe, capital efficiencies due to access to equity index futures and options on futures in the same clearing house, competitive pricing and dedicated market makers to provide a two-sided market. Finally, I would like to comment briefly on CME's appointment of Jamie Parisi as Managing Director and Chief Financial Officer of both Chicago Mercantile Exchange Holdings Inc., and its subsidiary CME. Jamie, as a 16-year veteran of the Company with a broad range of financial management experience and has played a key role in CME's financial management strategy as we worked through our deneutralization process, our initial public offering, and our subsequent growth as a public company. Jamie's knowledge of our industry and business model makes him the perfect candidate to fill this critical role and we are very confident that he will be an immediate and strong contributor to the execution of our growth strategy. Jamie is also very fortunate to have a talented group of employees within the finance department who will assist in enabling a smooth transition. Jamie will have some big shoes to fill as David Gomach has done a tremendous job as our CFO over the last 8 years. He helped shepherd the Company through deneutralization and our IPO, and he has been an instrumental contributor as we have transformed to become a public company. We all wish David and his family the very best, and with that let me turn it over to Jamie to go through the financials. Thank you.

Thank you, Craig. We had another strong quarter of record financial results across the board. It is a fact we had a higher percentage of our volume on GLOBEX, we saw an increase in the rate per contract with total revenue up approximately $5 million sequentially despite lower trading volume. In addition, we remain disciplined on our expenses.

During the third quarter, clearing and transaction fees were up 37 percent to $148 million versus $108 million in Q3 of last year and up from $143 million in Q2 of this year. Average daily volume was 3.22 million contracts in Q3, up 29 percent compared to the same period a year ago. Our aggregate rate per trade, rate per contract excluding TRAKRS was 71.7 cents, up from 68.8 cents in the second quarter of 2004, and 67.4 cents during the third quarter of '03. The rate per contract for interest rate products was 58.8 cents in the third quarter compared to 54.5 cents in Q2 of '04. The percentage of GLOBEX interest rate volume grew from 28 percent in Q2 to 44 percent in Q3. As we have said before, we generate more revenue from electronically traded contract than those traded via open outcry. The differential between electronic and open outcry was close to 40 percent this quarter down from approximately 60 percent in Q2 primarily due to a higher member percentage on GLOBEX and a lower member percentage for open outcry. The rate was also positively impacted by a higher percentage of privately negotiated interest rate volume. Transaction fees from interest rate products totaled nearly $70 million, up significantly more than 77 percent from $39 million during the third quarter of last year and up $5 million sequentially.

The E-mini rate per contract was 70 cents in Q3, the same rate as Q2 '04, but up from 67 cents in Q3 of last year. The main driver of this year-over-year increase was the shift in volume mix from member to customer. Some of this mix shift was due to migration from the Equity Standard contract, which has a higher customer percentage. Finally, the rate per contract for FX was $1.68, down from $1.74 during the second quarter. This drop from Q2 was due to fact that a majority of the FX growth came on GLOBEX, which has a lower rate than the privately negotiated volume, which was down slightly. Moving on to the additional revenue item. First, the clearing and transaction services line. The Chicago Board of Trade reported volume of almost of 2.37 million contracts per day or 303 million generating approximately $14 million of processing revenue for the quarter. Note, in addition, to the share pricing we have discussed in the past, part of our agreement with the CBOT included slightly lower fees for the early part of the agreement that expired at the end of July. As a result, the average rate we captured increased from 8.8 cents for CBOT reported contract in Q2 to 9.4 cents in Q3. Location data fees were $15.2 million for the quarter, up from $13.6 million during Q3 of '03. Our screen count at the end of September was 149,000 for professional subscribers, up from 148,000 which we reported last quarter, and we had 30,000 lower priced nonprofessional subscribers compared to 31,000 last quarter. Effective January 2005, CME will increase the price per professional screen from $30 to $35 per month. I will now take a few minutes to review expenses.

Total expenses for Q3 were $92.5 million versus approximately $82.1 million for Q3 last year, up from $90.7 million last quarter. Highlighting a few of the main expense categories. First, compensation and benefits totaled $40.9 million for the quarter, up slightly compared to Q2. Breaking down the 3 components of this expense, salaries and benefits totaled approximately $30.5 million, down $500,000 compared to the second quarter. Second, during the third quarter of this year, we recorded $7.9 million for the incentive bonus, down slightly from $8.0 million in the second quarter. The final component of the comp and benefits line increase is stock-based compensation, which totaled approximately $2.6 million during the third quarter, up approximately $1 million sequentially. The increase is primarily due to CME's annual stock option grant for employees, which occurred in June and had a full impact on the third quarter. At the end of September, headcount stood at 1230, a decrease of 16 from the end of Q2. We have stated in the last few quarters that we expect higher interest flow as we are well positioned to execute our strategy with existing resources. However, we are subject to the normal Advent closing staffing levels as people leave and we fill open position.

Non-comp expenses totaled $51.6 million during the third quarter compared to $50 million in Q2. This is due primarily to an increase in professional fees related to Sarbanes-Oxley, a lower reclassification to the capital due to the completion of some development projects in Q3 and executive recruiting. In addition, our marketing expense was up $400,000 sequentially. As we've said before, this item is back-end loaded in 2004.Moving on to income before taxes. Our pretax income was nearly $100,000 million in the third quarter, up 89 percent from $53 million in the third-quarter last year, and up 4 percent sequentially. Our pretax operating margin was 51.9 percent, the highest margin quarter in our history. Net income for the quarter was almost $59 million, and diluted EPS was $1.72. Both of these are up more than 85 percent compared to the same quarter a year ago.

Moving on to the balance sheet. At the end of the quarter, we had $585 million in cash, cash equivalents and marketable securities, and we have no debt. Working capital is about $610 million. Capital expenditures totaled approximately $17 million during the third quarter, which brought the year-to-date CapEx to $49 million. The majority of the quarter's capital expenditures were related to the build out of a third data center, which will enhance the capacity, and redundancy of our system. Those items were included in our original 60 to $70 million guidance for 2004. We expect to come in at the higher end of best of this range for the year. Cash earnings totaled approximately $57 million for the third quarter, bringing total cash earnings to approximately $156 million for the first 3 quarters of 2004, compared to $96 million in the first 9 months of 2003.

Now, let me summarize fourth-quarter volume to date. So far in October, we are averaging approximately 3.15 million contracts per day, which was impacted by Columbus Day, when many of our markets were shut down. Interest rate volume is averaging approximately 1.7 million contracts per day, E-mini equities are over 1.1 million contracts per day, equity standard contracts 91,000; foreign exchange is off to a strong start at 204,000, and commodity products 36,000 contracts per day. And at The Chicago Board of Trade, volume is averaging approximately 2.18 million contracts per day so far in October. We are often asked about seasonality in our business related to the fourth quarter. While it is extremely difficult to predict, we typically experienced lower volume levels bordering the Thanksgiving and Year-End holidays. That concludes our prepared remarks for the third quarter. First, I want to thank Terry, Craig, our Board of Directors and management team for providing me this opportunity. I also want to thank Dave for his many years of mentoring and support and I wish him well. I look forward to getting to know all of you and working with you in the years ahead.

Before we open the call for questions, I know Dave would like to say a few words. Dave?

Thank you, James. First, I would like to congratulate James on his promotion to the CFO role. The finance team remains strong and his selection ensures the organization will continue to move forward with an intense focus on generating free cash flow, minimizing risk, and making intelligent investments in growth opportunities. Also I would like to thank Craig, Terry, and my team for making this such a great place to work. Second, I've very much enjoyed getting to know many of you personally and I have a tremendous level of respect for the critical role you performed for the various investors that rely on your analysis and diligence. I will, without question, miss working with you. Lastly. the CME business model remains strong with many opportunities to further enhance shareholder value. I'm confident that under Terry and Craig's direction, the CME will continue to be the market leader in this space.

Best wishes to all of you and thank you. With that, we'll open it up to questions.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Daniel Goldberg, Bear Stearns.

James, you mentioned briefly the FX rate per contract decreased, I guess, this is a third or fourth consecutive quarter and it was really, I guess, result of a volume mix shift. Where can we see that number going forward if we were to kind of forecast out, as more volume goes to GLOBEX? How much lower do you see that FX rate going?

It's very hard to predict what the exact number would be going down, but as you indicated, it is due to the volume mix shift. As we migrate more and more to the electronic volume, we will see low electronic (can more of a portion than the EFP at 15 rather constant. So that will cause the average rates to go down, most likely going forward as it moves electronic.

Okay, so you -- I mean considering it's probably expected to be the largest growth area for you in 2005, you would definitely continue to see that going down from where it is today?

I believe so, yes.

Okay, that's helpful. In terms of the professional fees quarter over quarter and you mentioned some of the reasons, is that a good run rate going forward?

The professional fees, this is Dave Gomach, do fluctuate. We did have a couple of exceptions this quarter. We are heavily into Sarbanes-Oxley, so we've had a significant part of expense in the third quarter and then we also had some executive recruiting. So we might have been a little high this quarter but that will tend to fluctuate.

Okay. And then just a more general question in terms of the recent initiative to sign on more clearing member firms by lowering the minimum holding. Craig, can you just give us an update on what you've seen so far in, I guess, the first month of that program?

Sure. I'll be a little guarded in my comments only because until new candidates are actually recruited through the process, we don't make public disclosures about that. But we've had a very positive reception from users of the exchange in conjunction with that announcement in the lowering of areas to entry. So, we do expect that over time that will have a positive impact in terms of not only bringing new clearing members and corporate members to the exchange, but also increasing the amount of business that they're doing with us.

Okay. And then just finally any update on Eurex U.S. and Euronext.liffe?

We are continuing to see more or less very consistent performance, as we've been experiencing over the last couple of months. Eurex and Euronext.liffe both continue to subsidize very heavily trading activity among market makers. We've seen a recent spike in Euronext.liffe activity in the last couple of days, which we do attribute to payments to market makers who are meeting quarters for trading as well as various other aggressive incentive schemes that are being offered, but we do believe that there is very little actual real customer participation in those markets. So we continue to look at it very closely and I wouldn't believe that the situation has fundamentally changed from the previous situations.

Scott Patrick, Morgan Stanley.

Craig in your prepared remarks you mentioned delay in the conversion of equity options for European expiration, can you provide any color on how you feel that will be resolved if you detail that it will impact your results favorably for you guys, and also if not what the impact on your equity option growth initiatives would be?

I don't know in what way it will be resolved, let me first describe the nature of the issue, as you know we trade options that are based upon futures contracts that in turn are based upon the cash index, say for example the S&P 500 cash index values. And as you might also know there are equity index options, which are options that trade directly upon the S&P 500 index. In our case for many years our futures contracts have been cash-settled, and so with the exercise of the option you actually exercise into a futures contract, which is immediately cash-settled if it's a European file exercise. And so the CFTC and the SEC are discussing the jurisdictional issues associated with the trading and option on a future, which is settled in that manner versus American style and we are in discussions with both agencies on that topic, it hasn't been resolved to date and I wouldn't want to comment here on how we expect that to be resolved. I think the most important aspect is that the market makers who will be dedicated to performing market making services in our electronically traded options, which as we mentioned would be American style until or otherwise notified are indifferent to that change and we've had a mixed response from customers in terms of whether they really care about European versus American style, and we think that our value proposition in the market place will continue to be very strong because of the electronic interface, because of the market making and because of the pricing incentives that we put in place. So the net of that is that we are very confident that we will continue to execute the strategy that we have outlined successfully and we'll wait to see what happens with our discussions with the regulators.

And I guess the next question is just in terms of the Implied Butterfly Functionality that was just introduced and then kind of looking at next steps, could you just talk about plans for, when the next upgrades will be rolled out and what you would anticipate being included in those?

Sure, well obviously we've had good success with the rollout, it was a very seamless rollout or fairly complex technology, and more importantly was embarrassed almost immediately by the end user community, as I mentioned we've had about 19,000 contracts per day that have been executed since the rollout during the last week, which we think is very favorable, especially when you consider the relatively small number of contracts that trade per day in the back month area of the Eurodollar curve. We are working to continue to enhance our capabilities for trading all manner of Eurodollar contract combinations electronically. Our next focus will be looking at ways in which we can greater facilitate trading of packs and bundles and we'll have more to say about that in the coming quarter.

Okay, and one final detailed question. Was there anything onetime in the communications, computer and software maintenance line in this quarter, I know you had some vendor adjustments there in the past?

No nothing, nothing at all Scott.

Okay, great. Thank you very much.

Thanks Scott.

Colin Clark, Merrill Lynch.

Can we get for October -- can we get the electronic volumes as well -- specifically in the interest rate products and foreign currency?

Colin, this is John Pescheir, it's actually for interest rates, about 838,000 per day electronic and FX is approximately 149,000 contracts per day electronic.

And any update on OneChicago?

Sure, Colin. Let me address that. We have just undergone a fairly significant restructuring of the operations of OneChicago. I believe during our last earnings call I indicated that we were scrutinizing very carefully the performance of OneChicago relative to the ongoing expenses associated with operating that business. We have done a number of things including made some fairly significant management changes. We have streamlined the expenses of the Company, reducing headcount, and more narrowly focusing our marketing efforts on the floor trading community at the Chicago Board Options Exchange. Essentially what we are looking to do is to give single stock futures access to options traders who currently use cash securities to lay off their options risk. And that strategy seems to be working quite well. In the third quarter, the loss from OneChicago for CME is $200,000, which is the same as Q2. We do hope that over the coming months that we will continue to see an increase in average daily volumes. September was a very good month for OneChicago and we are also seeing the transfer of open interest from our only competitor in that product area, which was NQLX. to OneChicago with 25,000 contracts of open interest moving into OneChicago. So we are going to continue to look at this very, very closely and we hope that within the several months it will begin to produce positive results.

And my final question was -- this with regard to your comment on, kind of fourth quarter seasonality, specifically a fall off in trading in December in the Eurodollar area. Any feeling, I know this is a -- it's kind of difficult to assess, but any feeling for whether that fall off could be a little muted now that you have more electronic trading and less pit trading. And also any sense of trading activity post election? Any insight on how that could have an impact?

Sure. Let me address both of those. On the first part of the question, it's not clear to me anyway that seasonality effects would be different based on the primary delivery system for the products. So, I am not sure that seasonality will differ in an electronic market from an open outcry market, if that was your question. On the second part of your question, we try to never predict the future of the market and I would be loath to comment on what I think the election outcome will do to interest rate or other products that we trade.

And then just want to add to that, that in 2003 we saw average daily volume on a day after Thanksgiving and the week after Christmas fall to around 900,000 a day. So just keep that in mind as you are modeling up fourth quarter.

(OPERATOR INSTRUCTIONS) Lauren Smith, KBW.

Could you -- the average rate per contract on interest rates -- it obviously swung a lot quarter to quarter. Could you -- I know you touched on the fact that the increase owing in part to privately negotiated but could you kind of looking at the delta give us a feel for how much was owing to the GLOBEX transition and how much was attributed to the privately negotiated, and why such an increase in privately negotiated for the quarter?

The change in the rate went from 54 cents to 59 cents for the interest rate contracts, quarter to quarter. That 5 cents swing was primarily due to the higher electronic trading -- electronic trading and the interest rates went from 28 percent to 44 percent quarter to quarter. That was the primary driver.

Okay. And -- I mean on the still primary -- but on the privately negotiated, anything trend-wise there anything the matter or is it just kind of--?

Yes. Lauren, on that -- we have seen an increase in block trading of our Eurodollar options product and that has been increasing over the course of the last quarter.

And then,-- shifting gears, will -- the approval for the Clearing Corp. to clear Eurex, any comments there on how you think that changes the competitive landscape?

I am going to make a brief comment and since Gill is with us, I am going to ask him to actually add to it. I think our view is still very consistent. We're highly skeptical that the establishment and recent approval of the Global Clearing Link is going to have any fundamental sort of positive impact on Eurex US's prospects in competing not only with the Board of Trade in the treasury notes and bonds but potentially in other products. But I am going to ask Gill to maybe amplify on that.

This approval was not unexpected. It was exactly as they had planned. I think, as you might know, the link itself was split into 2 parts, part 1 and part 2. This is phase 1 that has just been approved and phase 2 has not even applied for as far as we know. And just to add to what Craig said, the expectation I think with respect to Phase 1 is that demand for the services of this link does not seem to be there among any of our firms. So it remains to be seen and I think only time will tell whether this link is successful or not.

And then, just on -- going back for a second to the CME FX on Reuters. I think I heard you say -- I thought it but then didn't have us for a second but that in the fourth quarter, I guess, represented as in both CME and Reuters will be going on a 14 day road show. Is that what you said?

Yes.

And is that going like -- how many people will be part of the management from each and then the databanks -- or what sort of the -- I mean it just seems like a pretty hype, long-live road show and you will be touching on -- touching a lot of customers and the like -- so I was just curious how aggressive that is and who will be participating in that?

Yes. The participants will be CME management in our FX product line, Reuters' senior management that has been working very closely with us as well as representatives of the 7 databanks. So it will be a full court press. We have been actively marketing this initiative over the course of the last several of months already, but as we approach the launch we will be intensifying those efforts.

Charlotte Chamberlain, Jefferies and Company.

I am a little confused about what you had to say about your regulators since the CFTC, as I understood it -- basically you just notify them when you change things. So -- and I know that the SEC -- you had a flexible option contract that they didn't have any problem with. So, that is the first question. The second, you mentioned that, I guess Euronext.liffe and Eurex is paying market makers. And I was wondering on your Reuters foreign exchange where you are going to have market makers, are you going to make any payments to them and are you planning to -- and also on these options -- the E-mini options -- are you going to be making any payments? And finally, is this the number we saw for comp including the options expense? Is that a good run rate for the fourth quarter because it -- I mean, I think the place where all of that came in -- came in too high was on that -- at least our expenses was on that line since you said there was going to be an additional $2.6 million of expense that we all profited in Q -- the June quarter and came out, I guess 43 to $45 million on that line and it comes in significantly lower.

Yes. Charlotte, thank you for those different questions. I am going to ask Jamie to address your compensation related question. But let me start with your question about regulatory approval of the change to European style exercise. It's true that we have the ability to self certify rule changes and we did that in this case, but it is also equally true that the CFTC reserves the right to review matters that we have submitted to them on a self-certified basis.

But did the CBOE file with the CFTC to protest?

They did file a letter of protest indicating that they felt that options on futures, which are American style and which, as I described it earlier, exercise into a future, which is not tradable, and therefore immediately cash settled is economically equivalent to an equity index option based directly upon the cash index. And so therefore both the CFTC and FEC are discussing that. You correctly pointed out that we have been trading various, what we call flux options, with European style exercise for a number of years and the FEC is not only aware of that but had earlier approved that. But as you can appreciate, this is a very technical kind of issue and one in which both agencies are currently in the process of discussing. So, I don't want to comment any further and increase the what the outcome of that will be based on the discussions with the regulators. But, I would just reiterate that we are very confident that our value proposition in terms of what we are trying to do is quite strong regardless of the exercise convention.

Let me move on to your other question which related to payments to market makers. Unlike our European competitors, we have not at least to date established any kind of payments for trading activity. We philosophically have not believed in that. We have normally reserved incentives to be either price discounts based on the volume of trading activity or as we are doing in our S&P 500 options initiative and allocation of a certain amount of bandwidth to facilitate coding of options contract. So we do not intend to make actual payments to market makers either for our FX initiative with Reuters or for our S&P 500 E-mini options initiative.

Can you in more simple layperson terms explain allocation of bandwidth for floating?

Sure. Options trading is extremely bandwidth intensive because of the number of strikes and expirations that exist, and the bandwidth can be quite expensive as well as very demanding from a scarcity standpoint for market makers. And so we have allocated a certain amount of bandwidth to the designated market makers. So that we can ensure their ability to post timely quotes in our products and help us achieve liquidity.

And this is bandwidth on your screens or--?

Network bandwidth.

Network bandwidth, okay.

Telecommunications pipe.

Okay. And then the run rate on comp?

Let me touch on that for you. There is -- let's us break it down into the 3 components, that is, comp and benefit claim that came in at $30.5 million for the quarter, that can fluctuate from quarter to quarter. Headcount was down, 16 heads versus the prior quarter. We have added a total of 9 heads since the beginning of the year. Additionally, on that line, we did see decrease in our expense as people naturally hit the limit as the year progresses. In terms of the bonus, that came in at $7.9 million for the quarter, again this can fluctuate and we are, as we've said before, the absolute maximum bonus we will pay for the year is $32 million. We have paid $23 million to date through the third quarter, and that we'll determine what the final bonus is in the fourth quarter. Then on the stock-based compensation line, it did come in at $2.6 million for Q3 and we have indicated that will be $2.6 million for the fourth quarter.

And one final question. By our computation, it looks like GLOBEX, or trading on GLOBEX is about 67.3 percent of volume, is that what you are seeing? Is that up from 61 percent in the third quarter?

In October?

Yes.

It's 57 percent. The overall 49 percent for interest rates in October.

(OPERATOR COMMENTS) At this time, I would like to turn the call over to Mr. Peschier for any additional comments and closing remarks.

We like to thank you for joining us today and we look forward to talking to you again next quarter. Thank you.

And now we will conclude today's conference. Thank you for your participation and you may now disconnect.