納斯達克交易所 (NDAQ) 2004 Q2 法說會逐字稿

Good afternoon, and thank you for joining the NASDAQ stock market earnings teleconference.

All participants will be in listen-only mode until the question-and-answer session. (OPERATOR INSTRUCTIONS).

This conference is being recorded.

If you have any objections, please disconnect at this time.

Your host for this evening's conferences is Mr. Vince Palmiere, Vice President of Investor Relations.

Sir, you may begin.

Thank you, operator.

Good afternoon, and thank you for joining us today to discuss NASDAQ's second-quarter 2004 earnings results.

Joining me are Bob Greifeld, President and Chief Executive Officer;

David Warren, Chief Financial Officer; and Ed Knight, our General Counsel.

Following our prepared remarks, we will open up the line for Q&A.

If you have not done so already, you can access the results press release on the NASDAQ investor relations and NASDAQ newsroom websites at www.NASDAQ.com.

If you have any follow-up questions after the call, please contact me at 212-401-8742.

Before we begin, I'd like to remind you that certain statements in the prepared presentation and during subsequent Q&A period may relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

I urge you to read the full disclosure statement concerning such forward-looking statements in our press release and the other factors detailed in the Company's Form 10-Q and periodic reports filed with the SEC.

With that, I'll turn the call over to Bob.

Thank you, Vince.

Good afternoon, everyone, and thanks for joining us today to review our second-quarter results.

I will make some comments about the quarter, provide a strategic update and then turn the call over to David Warren, our CFO, for the financial review.

Afterwards, we will both be available to take your questions during the remaining time.

This afternoon, we reported a net profit from continuing operations for the second quarter of $4.8 million versus a loss of 32.4 million in the second quarter of last year and 4.6 million last quarter, a sequential improvement.

These results complete a solid first half for NASDAQ, during which we exceeded plan for both revenue and expenses.

Although revenues were helped in the first quarter by increased trading volumes, our focus on delivering continuing expense reductions was key to delivering profit growth in the second quarter, given the weak trading volumes marketwide.

In addition to capturing increased trading volumes and listings share, one of our central objectives is to bring NASDAQ's operating and asset base level to levels appropriate for our current revenue run rate and for future profitability growth.

David will further discuss these actions in a few minutes.

Despite weak volumes, there were signs in the second quarter that product innovations implemented on the NASDAQ platform are beginning to support revenue generation.

NASDAQ's percent of shares reported in the second quarter was 47.9, down from 50.6 in the previous quarter due to Instinet's completing their trade reporting transition to the National Stock Exchange and a decline in market maker internalization.

To review, we have completed several initiatives in our Market Services segment which will improve our performance.

We established price leadership in the first quarter, and we have maintained that price leadership.

We have established fixed connectivity and we have improved our functionality.

In the second quarter, we hit a record for fixed volume of over 109 million shares in one given trading day.

That is from the standing start a little more than six months ago.

We also introduced the NASDAQ Market Center in the first quarter, which consolidates intermarket trading for all equity securities and ETFs on a single electronic platform.

We then improved Market Center's functionality this past quarter, through enhancements to our premier data product for Level II trading, TotalView.

TotalView now displays all quotes and orders at every price level for each security traded in the Market Center, offering much greater transparency from its previous depth of the top five levels.

The importance of depth to market participants became clear on the first day TotalView's deeper book became available.

NASDAQ experienced a fifteenfold increase in displayed orders and a 700 percent increase in displayed depth.

Finally, the Closing Cross, NASDAQ's end-of-day conversion to an agency market that determines single closing prices, was fully launched in the second quarter, and it has gained significant traction.

The Closing Cross achieved an industry endorsement in June when the Russell family of indexes used it to calculate closing prices for over 1,600 stocks during the indexes' reconstitution.

A record 333 million shares was executed in the Closing Cross that day.

Looking into the second half of the year, we will move ahead with a rollout of the Opening Cross, NASDAQ's electronic single price opening mechanism.

Similar to the Closing Cross, the Opening Cross creates improved transparency and price discovery at the opening of trading for NASDAQ-listed stocks.

Taken together, these pricing and product initiatives further differentiate the NASDAQ platform, and are designed to recapture market share, and we are starting to see the benefits of these efforts.

We have also decided to move forward with plans to provide new, cost-efficient market access to participants.

These introductions will offer enhanced trading capabilities, and are projected to reduce customers' overall monthly connectivity charges.

The NASDAQ Market Center will be available through a variety of extranets via our industry-standard protocol.

In order to achieve these efficiencies, NASDAQ will discontinue support of the NASDAQ workstation II and API connectivity via an FTP by the fourth quarter of 2005.

As we move forward with these plans, we will continue to communicate additional details on products and the transition.

In our issuer services segment, NASDAQ listed 41 companies public in the second quarter, up from 28 last quarter, and a marked increase from the 2 in the second quarter of 2003.

This represents 72 percent of the IPO market in the quarter, an increase over first quarter and far above last year's 40 (ph) percent level.

Based upon IPO applications in the pipeline, we expect the pace of new offerings in the second half of the year to remain strong.

NASDAQ's market model continues to attract high-profile new issues, and our efforts to promote NASDAQ's status as the listing marketplace of choice is not going unrecognized.

In particular, we look forward to welcoming Google to NASDAQ.

During the second quarter, we also expanded our efforts to improve issuer services.

We enhanced the suite of services we offer issuers through a strategic alliance with Georgeson Shareholder.

This alliance will provide NASDAQ-listed companies access to Georgeson's integrated shareholder identification targeting and relationship management solution, to help better administer their investor-focused activities.

We also expanded our sales activity to attract international listings to NASDAQ by making investments in new heads of sales in Russia, Asia-Pacific and Israel.

Israel, we are very well-recognized already.

These markets are developing economies with companies needing access to the US capital markets.

These investments are a cost-effective way to build our international roster.

Year to date, we have completed 10 listings, beating our largest competitor and leveraging NASDAQ's track record of being the ideal partner for foreign-based emerging companies.

Finally, in our financial products division, NASDAQ 100 index tracking stock, the QQQ, became the first foreign-listed ETF to trade in Mexico, and also began selling as a security through brokers in Japan.

The Q's is not only the most actively traded listed equity security in the US, but it's also the world's most actively traded ETF.

Further, the Q's and NASDAQ's baskets of listed depository receipts, commonly known as the builders (ph), received an exemptive order from the SEC allowing investment companies managing mutual funds to increase their investments in these ETFs.

These developments not only offer NASDAQ further revenue offer opportunities, but also communicate NASDAQ's strength as a branded marketplace in international markets.

We will continue to find ways to differentiate our unmatched combination of a superior trading environment with a high-quality issuer service, offering to cultivate new issuers and reinforce our global market share position.

I would like to take a moment to give you an update on the BRUT ECN acquisition.

As you know, in May, we entered into a definitive agreement to require BRUT, which will add revenue, improve the cost efficiency and functionality of our trading system, and help deepen NASDAQ's liquidity pool by strengthening our routing capability through BRUT'S internal broker/dealer.

Last week, we were notified that the Department of Justice completed its review without raising any objections to the transaction.

Certain regulatory actions by the SEC are still required, but we fully expect that this acquisition will close in the third quarter.

With respect to the regulatory environment and the SEC's proposed market structure rules, we continue to be active during the SEC's commentary on Regulation NMS, and recently testified before the Senate Banking Committee.

NASDAQ continues to strongly favor market-based solutions over rule-based solutions to make markets fair for all investors.

There is a wealth of experience indicating that rules can be gained, and that allowing competitive forces to prevail within well-regulated markets results in a far better outcome for all participants.

NASDAQ's Market Center is a well-regulated and fair marketplace that works well for all investors and market participants.

We do not want to fix what is not broken.

We have been and will continue to provide the SEC with clear analysis of the real-world impact of its proposals on both the capital markets and upon investors, and will offer workable suggestions to improve trading dynamics and smooth investor decisionmaking, without creating undue burdens on brokers and customers.

We continue to believe that the outcome of Regulation NMS will be neutral at worst for NASDAQ, and has a strong possibility of being positive.

In closing, we believe NASDAQ made continued and substantial progress in the second quarter towards our strategic objectives.

These include a multi-pronged strategy to increase our share of trading, to raise the number of NASDAQ-listed companies, and to reinforce NASDAQ's status as the premier equity market that better serves investors and market participants.

Supporting these topline efforts is a program to fit our asset base and our operating costs to our revenue base so that we can create sustained profitability and leverage our model for future growth.

As I stated last quarter, 2004 is NASDAQ's year to solidify our market model advantages by continuing to improve our current offering and to innovate ahead of our competitors.

For the remainder of the year, we will be focused on this mission and on the steady improvement of all our operating metrics.

Let me now turn the call over to David, who will discuss the numbers and our operational initiatives.

David?

Thanks, Bob, and thanks again, everyone, for joining us today.

As you know, earlier this year we reclassified the businesses we sold in 2003 as discontinued.

While this reclassification does not affect second-quarter 2004 results, it does impact last year's second quarter.

So in my remarks, where I make comparisons to do the prior year, they will involve continuing operations unless I specify otherwise.

Beginning with our P&L, second-quarter 2004 revenue was $120 million, decreasing 18.7 percent year over year, but down a lesser (ph) 6.5 percent sequentially.

We look at our businesses in two segments, Market Services and Issuer Services, and I will comment on the revenues from each.

Market Services segment second-quarter revenue was 68.9 million, down 28.3 percent year over year and down 9.5 percent sequentially.

Market Center revenue, which represents quoting, execution and trade reporting services, was 45.1 million, down 28.4 percent year over year, as a result of lower market share and fee reductions for certain services.

Sequentially, Market Center revenue was down 10.5 percent, resulting primarily from lower trading volumes.

First-quarter volumes averaged 2.03 billion shares per day, but decreased by almost 15 percent to 1.74 billion shares per day in the second quarter.

Market Services subscription net revenue, which represents data services, was 21.5 million, down 31.5 percent year over year and down 6.5 percent sequentially.

The year-ago comparison results from an increase in UTP Plan revenue sharing and the introduction of NASDAQ's general revenue sharing program.

The sequential comparison results primarily from higher UTP Plan revenue sharing versus the first quarter.

Turning now to the Issuer Services segment, second-quarter revenue was 51.1 million, down slightly, 0.6 percent year over year, and down 2.3 percent sequentially.

Of this, the corporate client group revenue was 41.2 million, down 2.1 percent year over year, but up 1.7 percent from the prior quarter.

The year-ago comparison results from a decrease in the annual renewal fees, with fewer listed companies at the beginning of 2004.

At quarter end, there were 3,298 companies listed on NASDAQ versus 3,440 the year before.

The sequential comparison results from an increase in IPO activity and fewer annual fee waivers in the second quarter.

In NASDAQ's financial products, revenue in the second quarter was 9.9 million, up 6.5 percent year over year, and down 16.1 percent sequentially.

The sequential decline is due to a one-time revenue increase of approximately $2 million in the first quarter.

On the expense side, second-quarter total expenses of $111.4 million decreased 41.2 percent year over year, and were down 7 percent sequentially.

Last year's second-quarter total expenses included $45.7 million from our strategic review, and $5 million associated with the release of a reserve related to the impairment cost associated with NASDAQ Japan.

Excluding these two items, total expenses decreased $37 million or 25.1 percent year over year.

NASDAQ's second-quarter results include $6 million pretax of one-time expenses related to our ongoing expense reduction initiatives. 1.2 million of the 6 million covers severance expense associated with headcount reduction.

At quarter end, our headcount was 870, compared to 1,108 a year ago and 917 last quarter.

The remaining amount, 4.8 million, was incremental depreciation and amortization associated with our changing the estimated useful life of certain assets and operating leases associated with our quoting, reporting and telecommunications platforms, as we migrate to a lower-cost operating environment and processes.

We recorded 7.1 million of incremental depreciation and amortization expense in the first quarter, and expect to record approximately 4 million in the balance of the year.

Additionally, we made the decision in July to move ahead with opportunities to consolidate space in our leased real estate facilities, and expect to record charges associated with this review of approximately $22 to $24 million in 2004.

These real estate options will reduce annual expense by approximately 2 million, and avoid an additional 2 million of annual costs projected to begin in the fourth quarter of this year.

As Bob mentioned, one of our strategic imperatives is to create a sustainable, profitable business model that matches our operating and asset bases to revenue run rates, regardless of the competitive environment, and prepare us for continuing profitable expansion.

Therefore, we plan to continue to reduce operating expenses to raise the efficiency of our administrative processes and increase the profitability of our asset base.

Finally, turning briefly to our cash position, cash investments at quarter end were 445.3 million, up from 406.4 million last quarter and 362.9 million at year end.

This increase results largely from the collection of our annual listing fees, lower spending and a tax refund.

As we have said in a prior call, we will fund the acquisition of BRUT $190 million from this available cash.

This concludes my prepared remarks and our prepared remarks for today, and Bob and I are now ready to take questions.

Operator, if you would please now give instructions for the Q&A?

(OPERATOR INSTRUCTIONS).

Charlotte Chamberlain, Jefferies & Co.

Yes.

I was wondering if you could help us with the details of your debt -- or, rather, I'm sorry, the convertible subordinated notes that are due in May of '06.

And I was wondering, with respect to those, it looks like for the last year you have been declaring those preferred dividends.

I was wondering, are those actually being paid out to NANC, or are they being accrued?

Yes.

No.

Well, Charlotte, it's David.

Let me answer this.

I think there are two things you referenced.

The first is the $240 million of 4 percent convertible subordinated debentures, that carried a due-mature in May of 2006 and have a strike of $20.

The second is the Series A preferred stock, and the dividends on the preferred stock have been paid quarterly.

Okay.

They actually went out in cash.

Yes.

The second and third questions are also related.

The debt, the 25 million senior note --

Yes.

-- it seems to have coverage ratios, but even though you don't start payments until 2007, it seems to have coverage ratios that start to bite this year.

And I was wondering, at this point, is there any reason to think that those coverage ratios are not being met?

Because it sounds as if, especially for the next six months, that you're going to have what I assume are additional cash charges, because it's real estate that you're closing.

Maybe you can clarify for us how much of these additional 22 to 24 million is cash and how much is non-cash, and also whether or not these coverage ratios are going to be met, are likely to be met?

Yes.

Charlotte, we follow those carefully.

We are in compliance with our covenants, and expect that we will be in compliance with our covenants as we go forward.

Well, it's not the covenants; it's the coverage ratios.

I am referencing the covenants that do cover our coverage ratios.

I'm sorry I didn't be more clear, but we are meeting and will continue to meet the coverage ratios associated with that debt.

And then, finally, the 22 to 24 million -- can you give us an idea of how much of that is going to be cash, in terms of those charges, and how much is going to be non-cash?

It's virtually all non-cash.

Oh, really?

Yes.

These are charges that we expect to take in two broad categories.

There will be some write-offs of assets, and accelerated depreciation of those.

And then we would expect -- there is also the loss on sublease.

So for this year, those are non-cash items.

What was confusing me was it seems that -- okay, in July, option to consolidate (ph) space and leased rental facilities.

So if they are leased, it sounds as if there's still a rent -- there's still a payment due to a landlord.

Right. (multiple speakers).

Which would presumably be cash?

Part of the charge sets up the reserve to cover the projected loss on the sublease income over the remaining period of the lease.

Okay, the cash impact on that over the period of those leases is 18.5 million.

I'm hitting your question in a couple of different ways.

With respect to the charge this year, it is non-cash.

Okay. (multiple speakers).

But there is a cash impact to cover the cash -- that sublease loss on a cash basis, in each year going forward over the remaining years of the lease.

Okay.

So it's 18 million over the term of the lease?

Right.

And how --?

There are several -- there are many -- there's more than one lease here.

And about that 18 million cash expense, starting in '05 -- how many years does that go over?

The longest lease goes out for another 17 years.

Okay.

In terms of -- you're going to take the charge this year, but the cash goes out over -- presumably, the biggest amount in '05 and then kind of tapering off through '07?

No.

It goes out fairly evenly over that period, because it's addressing the difference between the rental obligation we have on our lease and the rental income we are getting on the sublease.

So we are still obligated on the lease, but we are subleasing it.

And the reserve is set up because we reasonably expect a loss, and then the cash is paid out evenly over the period of the lease, because that's what's addressing the gap between our lease obligation and the sublease income.

Okay.

And the 240 million that is due in May of '06 -- that's about 18 months from now -- you're going to pay 190 million in cash from BRUT, from the 446 that you said you had -- 445 that you had this quarter.

Where is the additional source of cash?

Where do you expect these to come from, to bring your cash balances up for that 240 million?

That cash will come -- to be generated from operations up to the point of May 2006.

Then help me with how much were cash earnings this quarter?

(multiple speakers).

Cash increased about $80 million this quarter.

Okay.

And the cash earnings?

Charlotte, that's not a number that we've calculated right now.

Let us do that and get back to you.

Perfect.

Just one other thing.

And I apologize, because we are obviously not debt analysts; we are equity analysts.

In reading the long-term debt and the convertible subnotes, am I correct in reading that any of the coverage ratios or covenants of the May 1997 debt -- if any of those ratios are breached, that the 240 million is then due?

It seems to say that any default under any outstanding financial agreement results in acceleration of any debt?.

Yes.

The holders of the 240 million have a cross-default provision in their agreement into the $25 million senior note.

So, if there is any covenant breached on the $25 million note, then the holders of the 240 million can accelerate?

They have the right to accelerate.

Okay, that's it for me.

Van Helmer (ph), Carlo Securities (ph).

Charlotte pretty much asked the question I wanted to ask, but let me just put it another way.

Does this $240 million debt looming up in about 18 months concern you, especially in relation to the decision to buy BRUT?

No, it does not concern us.

Obviously, it's on our books, but it does not concern us in terms of where we see ourselves now, and as we currently see ourselves moving forward into 2006.

We obviously have been aware of it, and ourselves as management and the Board took due care and deliberation when we made the offer for BRUT.

And in any scenario that we could paint, we see that we have the ability to pay that 240 out of our own internal cash flow.

Colin Clark, Merrill Lynch.

Looking at your website, and the monthly volume and market share data, it looks like your June market share has picked up a bit.

I was wondering if you could provide any insight as to what is going on there.

I'm assuming that it's in Super Montage, and it's related to the recent price reductions?

We see traction month on month.

And I would say in June, the one item that stands out is the absolute success that we had with our closing auction process during the Russell 2000 day.

So we had a very high market share day, and it just points out that our strategy to focus on innovation -- where we are introducing an auction process that's electronic, that's open, that's transparent to all investors -- will serve us investors well.

And it really increases the excitement we have around the opening cost that is coming out in the third quarter going to the fourth quarter.

The closing Cross is an episodic event based upon things like the Russell or other indexes rebalancing.

The opening auction that we will run should be something that would be of interest to all investors every single day.

So it was primarily the closing auction.

And are you seeing any traction in terms of the price reductions?

We are seeing improvement in all the different areas that we measure our business.

We commented on the market share, that we had felt the full brunt of Instinet leaving completely the NASDAQ market and reporting trades to Cincinnati in the second quarter, and there was some decline in market maker internalization.

The rest of our transaction businesses are gaining share in all their endeavors.

And can you elaborate a little bit more just on the declining market maker internalization trend, in terms of what is driving that and what you see going forward, in terms of that trend?

I think the best people to opine on this topic are the market makers themselves.

And, calling, I am sure you know who they are, and one of them's housed within your own firm.

But I think, as a general statement, market makers have had to reinvent their business model as we got into a world post limit order display and post decimalization.

And we have certain market makers who are doing quite well with that reinventing of the model, and others who are trying to figure it out, still.

And my last question was -- there's two parts to it, and I'm sure the first one is not -- well, I'll give it a shot.

I don't know if you can provide any information in terms of the financial impact of BRUT, on a go-forward basis.

And the second part to that question is, now that you have been working with the SEC on the BRUT acquisition, hypothetically, do you think that the SEC would have objections to potentially bigger acquisitions in the space between the remaining players?

The first part of your question is we -- as you know, we have not closed on the BRUT transaction.

Prior to closing, we had very restricted interchange with a competitor.

So it would be basically impossible for us to understand exactly what the financials will look like, post-acquisition.

So we look forward to closing that in the third quarter.

The second part of your question is probably even that much more difficult, in that I would have to defer to the Commission, to speak for the Commission.

And I'm sure they will be happy to take your call.

Charlotte Chamberlain, Jefferies & Co.

Archipelago having an (indiscernible) running around and talking about doing an IPO, if their IPO is successful, to what extent would you expect additional competitive pressures from them?

Well, understand the NASDAQ business model is a fully evolved business model in scale and scope, when you compare it to Archipelago.

Archipelago has had little success in attracting listings so far, and I am certainly pleased to say NASDAQ is having an outstanding year in listing new companies, the most noteworthy being Google.

But as I said before, we are winning about 7 out of 10 IPOs that come to market.

The other thing -- when you think about NASDAQ and our model, the QQQ's will come to NASDAQ from the American Stock Exchange in June of next year.

This will benefit NASDAQ in that we expect our share of the trading of the Q's to be very similar to the rest of the equity instruments on our markets.

That's a positive for us, but it will substantially reduce the amount of data (ph) revenue to markets like ARCA and Instinet, because the revenue now will be computed on the NASDAQ tape, which is known as Tape C as opposed to Tape B. And we are certainly competing intensely with ARCA and also Instinet in the transaction space, and we know our market share will improve with the integration of the BRUT transaction, which we are assuming that we can close, and at this point it doesn't seem to be a problem.

But what we also know is that we have taken price leadership in this space, and this transaction space is driven by price.

And right now, ARCA's price for transactions is high compared to competitors such as ourselves, Instinet and/or BRUT.

And we expect, in time, the price-driven aspect of our world, post the ARCA IPO, will have a direct impact on ARCA's performance.

So we would like to think that we have taken the best that our competitors have to offer, and we are responding.

And we are seeing dramatic progress in our listings business, our tradings business, our market data business and our ETF business.

Just one follow-on with that.

Hypothetically, assuming ARCA goes public and it's successful, would there be any objections that you could posit as to the ability of you to merge with ARCA?

You know, it's a pure hypothetical, and it ties back to somewhat Colin's question or the DOJ's.

And I don't know how those folks would feel about it, and you're certainly free to ask.

But we would just be guessing at this point in time.

What we are about right now, Charlotte, is focusing on our business model.

I understand, but --

We kind of like the house that we live in right now.

We have got a lot of opportunities in front of us, and we are going to execute this game plan.

No, I understand that.

But as analysts, these are questions that we have to ask, in order to kind of come up with investment recommendations.

Specifically, what I was wondering about is the big difference between an exchange and a market is internalization.

And specifically, what I was wondering about was, with your acquisition of BRUT, could the NASDAQ internalization be continued, sustained, even if there were a merger between NASDAQ's market and the ARCA exchange?

With respect to internalization, Charlotte, our market makers who trade on the NASDAQ market are the people doing the internalization, and they have strict rules of when they can internalize, and those rules are governed around the principal best execution for investors.

So those market makers who are internalized have to provide a value-added service to investors in this country, or they cannot internalize.

So we feel very strongly that internalization is a good thing for investors.

It's a core part of the NASDAQ market, and we believe that in time, the Commission and others will recognize that in light of our exchange application.

Right.

No, I am not challenging the benefit to the investing community of internalization.

What I am asking is if ARCA, for example, were to merge with the NASDAQ market, they are an exchange, you are a market.

You can't internalize on an exchange.

The SEC won't allow it.

But with the acquisition of BRUT, would that still allow your market makers to do internalization?

Yes.

I think you separate the concept of mergers with ARCA, BRUT or anybody else.

It is a practice in our market that we have internalization, and if that internalization in fact is there, independent of what the business unit or combination is, that would have to get resolved with respect to the definition of an exchange.

So the fact that we merge with BRUT does not address the internalization question.

The fact that we merge with ARCA does not address the internalization question.

What will address it is the commission working with NASDAQ, coming up with a plan where they are, where the SEC is comfortable with internalization within a technical definition of an exchange.

Richard Herr, KBW.

A few months back, it was announced that Instinet was contemplating floating (ph) once again to NASDAQ, and it's kind of been -- I haven't really heard anything since.

Has that been any progress on that that you can share with us?

Yes, and we discussed it fully during the announcement on the BRUT acquisition.

One of the things we are buying with BRUT is its ability to have, one, routing software and, 2, routing capability through the broker/dealer.

In light of Regulation NMS, we saw this routing capability as a fundamental and strategic requirement of the NASDAQ stock market.

When we were speaking to Instinet and entering plans for them to come back into the market and for us to utilize their routing technology, it was seen as tactical move to help us get their market back in NASDAQ.

Looked at Regulation NMS and said this is truly strategic; we have to have it.

The Commission in Regulation NMS sets out for markets and exchanges to use broker/dealers for access to other market centers.

So with BRUT, we will get to Instinet through, one, our routing capability and, two, Instinet as a broker/dealer.

Does that make sense? (multiple speakers).

We get to the same place; it's just in a different manner.

-- I know in their K said they're still contemplating whether they want to post to NASDAQ or not, exclusive of the routing.

Say that again?

Instinet, in their filings, has said that they are still contemplating whether they want to post to NASDAQ's Market Center.

Okay.

That's certainly their decision to make, but our number-one issue was to be able to provide to our customers access to the Instinet liquidity, and we will be doing that through the BRUT broker/dealer and the BRUT routing technology.

Okay, understood.

And the follow-up question, as far as the internalization is concerned -- obviously, that's, from what I understand, what is holding up the exchange approval for NASDAQ.

The SEC approved the Boston Options Exchange, which has a very similar internalization feature.

Do you think that could bode well for your exchange, or have you spoken with the SEC about that?

We are in discussions with the SEC about our exchange application.

I am not sure if the BOX is indicative of progress we can make.

But I think we stand on the merits of our marketplace in front of the Commission, and we fundamentally believe that's why we should be an exchange.

And the obligation of best execution transcends any definition of a market center and/or an exchange.

I am going to speak here and give some additional information on a question that was asked earlier by Charlotte.

Charlotte, I don't know if your line is open, but I'll just correct.

You had asked me a question with respect to (indiscernible) debt, the 240 million debt and the cross-default right.

Let me correct what I said.

The agreement basically states that if there is a default on senior debt, where the principal is greater than $50 million, and the holders of the 240 million notes have the ability, have the right to accelerate.

So, in this particular case, where we just have the $25 million senior note, obviously that is below that threshold.

So the right to accelerate here is not something that comes into effect.

Van Helmer, Carlo Securities.

Bob, I read your testimony to the Banking Committee a while back.

I read everybody else's testimony, and I was just as confused as I was before, as to the probable outcome of that trade-through rule.

Could you comment on that?

Well, with respect to trade-through as it applies to New York, I see this as a positive for NASDAQ, regardless of the eventual decision on opt-out or no opt-out.

When we look at the NASDAQ market structure today, and how we are gaining progress in the trading of listed stocks, the high hill to climb is that our market makers will post attractive liquidity.

We run an open-access platform, and the specialist can essentially pick him or her off in milliseconds.

Now, if the specialist has good liquidity, we have to reach out to them through IPS and take an eternity of seconds to find out, one, we didn't get a fill or we possibly did get a fill.

Now, when New York goes electronic, whether they do it under Regulation NMS or under their own head of steam, then we really will have a peer-to-peer relationship, where I can electronically reach them and they can electronically reach me.

And that works very well for us, and in a real sense opens up the entire NASDAQ world to compete with the five main specialist firms.

So I think we win, and my testimony said that we are going to get to the same place, but it's a question do we do it by a rules-based approach, where the SEC has to fully define fast (ph) and take multiple pages to write it and then lots of people to enforce it?

Or do we get to a market-based approach within opt-out?

And that's what it comes down to, to me.

We go rules-based or we go marketplace, but at the end of the day, I'm at the same place, where my people can compete with the specialists on equal and fair funding.

Now, the application of trade-through to the NASDAQ world is definitely a situation where we are trying to fix something that is not broken.

I think our market would continue to do well in that world, but it clearly would represent incremental cost to the participants, the market makers, the order entry firms.

And it's for that fundamental reason that we are opposing the imposition of trade-through in the NASDAQ stock market.

Colin Clark, Merrill Lynch.

Just one real quick follow-up from what you had said before, Bob, with regard to the QQQ's coming from AMEX to NASDAQ in June of next year.

Was that correct?

What's going on there?

Why is that transition happening?

Well, one, it's our product.

And we had a contract signed when AMEX was part of the NAC and we were also part of the NAC.

So that contract is under our control to renew or not, and I can state fairly emphatically that we will not renew it.

The Q's will come back to NASDAQ; they will trade on the NASDAQ market center platforms.

So we expect to win on two ways.

One, we will win because our market share should closely approximate the market share we have in the rest of the NASDAQ universe; and two is ARCA and Instinet are tremendous beneficiaries of the revenue sharing available under what's called the Tape B plan, the AMEX plan; they get a large dollar amount for print.

When it comes to NASDAQ, it will go onto Tape C, and their dollar amount per print will be dramatically lower.

So we win with incremental revenue, and we win as competitors have less money available to themselves.

And why are the prints so much higher on AMEX?

Because there's less of them.

AMEX actually wins, short-term at the very least, when the Q's move back.

But there's less trading activity under AMEX, and there are set rules for allocation of the pool.

And one of our comments in Regulation NMS is we look at how that pool is administered, and it should be administered on a more equal basis around actual shares that are traded.

But AMEX gets a set part of the pool.

They do less trading, so they get a higher number per trade.

(OPERATOR INSTRUCTIONS).

There are no further questions.

I thank you for your time here today, and we look forward to coming back together in three short months.

Thank you, everybody.