納斯達克交易所 (NDAQ) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NASDAQ OMX second quarter 2010 results conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr.

Vince Palmiere, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, operator.

Good morning, and thank you for joining us today to discuss our second quarter 2010 earnings results.

Joining me are Bob Greifeld, Chief Executive Officer, Adena Friedman, our Chief Financial Officer, and Ed Knight, our General Counsel.

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

You can access the results, press release and presentation on the NASDAQ OMX Investor Relations website at www.NASDAQOMX.com.

We intend to use our website as a means of disclosing material non-public information, and for complying with disclosure obligations under SEC Regulation FD, and these disclosures will be included under the events and presentations section of the site.

Before I turn the call over to Bob, I'd like to remind you that certain statements in the prepared presentation and during the 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.

The actual results may differ materially from those projected in these forward-looking statements.

Information containing factors that could cause actual results to differ from forward-looking statements is contained in our press release and in our periodic reports filed with the SEC.

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

Thank you, Vince, and thank you everyone for joining us this morning to discuss our second quarter 2010 results.

I'll begin by spending a few minutes highlighting the quarter and then update you on the progress of our initiatives.

Adena will then walk you through the financials in detail.

This morning, we reported a net income of $96 million, or $0.46 per diluted share.

On a non-GAAP basis, net income was $108 million, or $0.52 per diluted share.

Very strong results as this reflects an increase of 21% in EPS when compared to the first quarter of 2010, and matches our previous high of $0.52, achieved during the fourth quarter of 2008.

Also during the quarter, net revenues increased $30 million or 8% from the first quarter of 2010, coming in at $390 million.

When we spoke last quarter, I discussed how the core fundamentals of our business were strong, and our results this quarter clearly demonstrate this to be the case.

Volumes were up in nearly all of the products in which we trade.

Our market share in US cash equities has remained stable, while it continues to grow in options.

Company listings have grown on the [strength] of new listings and demand for co-location continues to increase, while customer demand for our listed companies corporate services has also grown.

This quarter, just about every aspect of our business improved.

Within transaction services, US cash equity trading revenues were up nearly 70% from the first quarter of 2010, and 26% from the second quarter of 2009.

Volume matched by NASDAQ and BX totaled 148 billion shares in the quarter, up 17% when compared to the first quarter of 2010, and up 4% from levels realized in the second quarter of 2009.

Our market share has remained stable, with NASDAQ and BX combined share coming in at nearly 23% in the second quarter of 2010, down slightly from the first quarter -- from 24% in the first quarter, but up from the 21% realized in the second quarter of last year.

By staying in constant contact with our customers, we've been able to deliver continued improvements in our trading products and services.

This quarter, we realized higher revenues through a better mix of business from market participants, yielding more favorable rates for cash equities.

We've also seen strong demand for co-location and other access services as revenues in the quarter grew 28% from prior year levels.

The combined revenues for US cash equity trading and access services in the second quarter 2010 was $95 million.

What's interesting about this figure it is that it's equal.

This figure is equal to combined revenue we generated from these two business areas in the fourth quarter of 2008, a period which is generally viewed as a high watermark for NASDAQ and the cash equity business.

We are able to match our fourth quarter 2008 revenues, despite the fact that in second quarter 2010 our matched volumes were 25% lower than they were at the height of the financial crisis.

We have made a conscious effort over the past year to shift the mix of revenues in the US cash equities business to include a balance of transactional and recurring revenues, and we feel this quarter truly demonstrates how well we have achieved that balance.

Additionally, the performance of the most recent quarter demonstrates that contrary to the views of some, the cash equities business has a strong and stable foundation and compelling growth dynamics.

Now, turning to our US options business.

Our average capture rate remained relatively stable for the quarter, while we're able to grow market share, with total share coming in at 25.1% in the second quarter, up from 23.8% in the first quarter of this year, and 21.3% in the second quarter of last year.

This growth in share speaks for the continued success of the make or taker model that we implemented at PHLX earlier this year.

In the NASDAQ options market, NOM continues to make progress as it now regularly achieves share in excess of 5%.

In fact, for the month of July, our total share including PHLX and NOM, is approximately 26%.

Within the European derivatives markets, we had another strong quarter, with volumes improving for the fourth consecutive period.

Equity derivatives volume was up 44% from the prior year levels, driven by strength in index futures and options trading.

Fixed income activity was also up nicely, growing 37% from the prior year.

Overall, our derivatives revenue in Europe grew to $29 million, up more than 50% from the revenues in the second quarter of 2009.

In European cash equities, following the introduction of the INET trading platform, volumes continued to improve, with trade volume growing 15% from the first quarter 2010 while value trade grew 11%.

Revenues recognized in local currency, however, were only up slightly, while we experienced FX headwinds and we also had a cap fee structure that we introduced earlier in the year.

The Nordic cash equity markets does however continue to evolve.

The mix of trading clients is less diverse than the US, but as trading continues to develop in the Nordic market, and as co-location and high frequency trading continues to increase in popularity, we certainly expect a convergence of trading activity, which certainly over time will accrue to our benefit.

Now, turning to issuer services .

NASDAQ OMX welcomed 65 new listings during the quarter, up from 47 in the first quarter and 21 in the second quarter of last year.

Included in new listings were 27 IPOs compared with three in the second quarter of last year.

Included in the new listings were 16 NASDAQ listings from the Greater China region, including three IPOs, bringing the total number of listed companies headquartered in Greater China to 144, more than any other US exchange.

NASDAQ continues its dominance in technology IPOs, winning 80% of tech listings this year.

We recently welcomed Quick Technologies, the 15th IPO for the technology sector in 2010.

Other notable listings in the second quarter of 2010 included SMART Technologies, the largest IPO of the year, CBOE Holdings and Tesla Motors, the first IPO for an American automaker in 54 years.

Corporate services continues to perform well, reporting revenues that increased 12% from the first quarter of 2010.

The Global Index Group also saw a strong quarter.

Seven new EPS were launched on NASDAQ OMX indices in the second quarter, bringing the year-to-date number to 13.

The index product extension initiatives saw the first NASDAQ 100 index fund launched in China as well as the launch of the first Sharia-compliant NASDAQ 100 index.

In Market Technology, despite FX headwinds, our reported revenues were $34 million, consistent with the guidance provided during our call last quarter.

Highlighting Q2 was the announcement that NASDAQ OMX will deliver a new trading platform, powered by Genium INET to the Singapore Exchange.

We are very pleased with the performance of our core businesses this quarter as we are firing on all cylinders and this provides us with a solid foundation from which to grow.

Let me now touch on the status of some of our new initiatives.

Financial reform regulation, recently signed into law, establishes mandatory central clearing and transparent trading of over-the-counter derivatives products.

As a global exchange with extensive customer connectivity and a leader in exchange trading and central clearing technologies, we believe this legislation creates a tremendous opportunity for us.

We believe also that the increased transparency in this market will generate confidence, which will in turn result in higher activity levels.

And although the legislation was just signed a few days ago, IDCG continues to move forward with its progress.

Recently, it was announced that BNY Mellon Clearing will become a clearing member of IDCG, and New Edge recently cleared their first IRS transactions, making IDCG the first clearing house in the US to clear an interest rate swap contract.

Regarding competition, one key goal of the new statute is to ensure the fair competition exists between clearing and trading solutions, and our belief is that as the market evolves, there will be a number of competitors, and what we demonstrated over the years is that NASDAQ OMX thrives in such an environment.

Earlier today, we announced NASDAQ OMX is acquiring Smarts Group, the world-leading technology provider of market surveillance solutions to exchanges, regulators and brokers.

This acquisition is part of NASDAQ OMX's strategy to diversify its market technology business, and enter the broker surveillance and compliance market, as well as to increase our focus on the regulator client segment.

The market surveillance function is becoming an increasingly important function in today's exchange industry, and through Smart's market-leading technology we're able to expand and diversify our offering and global technology footprint.

Synergies will offer great opportunities with respect to this acquisition.

Our main focus here is to grow the market technology footprint and continue to lever our technology investments to produce growing revenue streams.

This acquisition importantly meets our financial criteria for accreting within one year and the five year IRR exceeds the expected return from the share repurchase program.

Overall, Smarts is a wonderful company that represents an excellent strategic fit for NASDAQ OMX, and it will strengthen our position as the leading technology partner to marketplaces worldwide.

On the US cash equities front, our plans for a third exchange remain on track as the proposal filed with the SEC for price size market is out for public comment.

We expect this market to be operational at the end of the third quarter, subject obviously, to SEC approval.

In the UK power business, earlier this month we signed up another important participant, Scottish Power and now we have all big six utilities on Board, a total of 16 companies are actively trading on the exchange.

Cleared OTC volume is averaging more than 340 million terawatt hours per week, and represents more than 25% of the total cleared OTC give ups.

The derivatives products are ready to go, once the indexes have been established.

We expect to be in full production mode by the end of this year.

We remain confident that the prospects of our core business will provide us with a strong foundation from which to grow.

As the diversity of our product offerings within transaction services allows us to continue delivering value to our customers.

The success from our listing segments provides a stable but growing cash flow business, and the strategic value of the market technology business continues to create opportunities.

Each of these businesses will move forward on tail winds provided by improving industry fundamentals.

We're also pleased with the pace of our share repurchase program, and the announcement about expanding the program that we made this morning.

Adena will talk more about this in detail in one minute.

Finally, we believe we will also drive additional shareholder value as our growth prospects gain traction in the quarters to come.

In summary, I would like to repeat some of the numerical highlights from this quarter.

US cash equity revenues were up nearly 70% from the first quarter.

US cash match volumes were up 17%.

Access services revenues were up 28%.

We had the fourth consecutive quarter of growth in European derivatives business, with equity derivatives volumes up 45% from Q2 last year, fixed income up 37% while revenues were up 50%.

65 new listings this quarter, up from 21 in the second quarter 2009, representing an improvement of 210%.

On these very strong numbers, I will now turn the call over to Adena.

Thank

Thank you, Bob.

Good morning, everyone.

Thanks for joining us today.

First, let me start with our announcement this morning about the share repurchase program.

In March, our Board approved a $300 million program, and we acted quickly, repurchasing $200 million in the first few months.

This action has delivered $0.02 of accretion in the second quarter of 2010, and promises to deliver even more as the full impact of our actions are realized in the coming quarters.

And we're happy to report that our Board has recently approved an incremental $100 million for the program, increasing the total size from the original $300 million to a total of $400 million, furthering our plans to return capital to shareholders.

Now turning to the quarter, our non-GAAP net income for the second quarter of 2010 was $108 million or $0.52 per diluted share, compared to non-GAAP net income of $92 million or $0.43 per diluted share in the first quarter of 2010, and non-GAAP net income of $99 million or $0.47 per diluted share for the second quarter of 2009.

Reconciliations of GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website at ir.NASDAQOMX.com.

As reported on slide nine of our presentation, changes in the exchange rates of foreign currencies and the US dollar had a negative impact of $0.01 to the non-GAAP diluted EPS, when compared to the first quarter of 2010 and no impact when compared to the second quarter of 2009.

Consistent with our prior calls, the remainder of my comments will address our non-GAAP results, unless I note otherwise.

Net exchange revenues were $390 million, an increase of $30 million or 8% when compared to the first quarter of 2010, and up $23 million or 6% when compared to the prior year quarter.

FX had the impact of reducing revenues in the quarter by $8 million so on a constant currency basis, revenue would have increased $38 million or 11%, when compared to the first quarter.

Additionally although volumes were strong in the second quarter of 2010, it was largely our business efforts that drove our results in the second quarter.

Specifically, approximately $23 million, or more than 75% of the growth in revenue when compared to the first quarter, was driven from actions that are within our control, including changes in market share, increased sales of services, and adjustments to fees, while the remaining $7 million was from actions and events that are not within our control, such as growth in industry volumes and reductions from foreign currency headwinds.

While we have enjoyed the benefits of higher volumes in the second quarter, we believe that the strength of our results were more influenced by the success of our continuous efforts to improve our fundamental operating drivers.

Now, turning to the business within transaction services.

While industry volumes increased 24%, our US cash equities revenues increased 69% or $22 million when compared to the first quarter of 2010, due primarily to improvements in our client mix and revised rates, which resulted in improved net capture rates.

European cash equities trading revenue declined slightly when compared to the first quarter of 2010.

Although trade volume and turnover both increased during the period, revenues declined due to unfavorable impact from the changes in FX, which negatively impacted revenues by approximately $1 million.

Excluding the FX impact, revenues in local currency were up slightly when compared to the first quarter of 2010, as revenue growth was moderated by a cap fee structure introduced earlier this year.

Derivative trading and clearing revenue was $69 million in the second quarter versus $61 million in the first quarter of 2010.

Driving the increase, when compared to the prior quarter, were higher volumes and market share in US options.

Market share improved to 25.1% across our two options exchanges, and contracts executed on our markets increased 23% from the prior quarter as net derivatives revenues increased to $40 million in the second quarter, up $7 million or 21% when compared to the $33 million we achieved in the first quarter of 2010.

In Europe, derivatives revenues increased to $29 million, up $1 million when compared to the prior quarter, as the revenue benefit from increased activity levels exceeded the negative impact of FX.

On an FX-neutral basis, revenues were up $3 million from Q1 2010.

Included in the second quarter of 2010 revenues are $9.5 million from cleared energy and carbon products, down $1 million from the first quarter of 2010, $13.3 million from trading and clearing of stock and index derivatives, up from $11.9 million in the first quarter, $4.6 million from clearing of fixed income products, up from $4.1 million in the first quarter, and approximately $1 million in other revenues and fees consistent with the prior quarter.

And in access services, revenues were $41 million for the quarter, up from $39 million in the first quarter and up $9 million or 28% from the second quarter of last year.

The strength of our co-location business continues to drive the growth in this area.

Within market data, revenue was $79 million for the second quarter, down $1 million when compared to the first quarter of 2010.

While modestly lower US tape plan revenues were offset by higher US proprietary market data product revenue, the European market data products declined $1 million due to foreign currency impact on the stronger dollar.

In issuer services, revenues were $86 million for the quarter, up $2 million when compared to the first quarter results.

Higher revenues come from corporate services and the listing of additional share fees more than offset the $1 million of negative impact that FX had on the European listing fees, and turning to market technology, revenue was $34 million for the quarter, consistent with guidance and equal to revenues reported in the first quarter.

In fact, excluding the impact of FX, revenues for the quarter were $35 million, slightly ahead of the guidance we provided.

At quarter end, total order value, which represents the cumulative value of all signed orders that have not yet been realized into revenue, was $453 million.

In an effort to improve our transparency, slide seven of our earnings presentation contains a table that shows when we expect to recognize the current order value into revenues over the coming years.

For example, our current estimates have $62 million of the total $453 million being recognized into revenues in the second half of 2010, and $116 million being recognized into revenue in 2011.

It is important to note, however, that the recognition and timing of these revenues depends on many factors, some of which are not within our control.

As such, the table represents our best estimate at this point, and is subject to change.

Following on a practice that we began last quarter, and because the market technology business is difficult to model on a quarter-over-quarter basis, we will again provide quarterly revenue guidance for this specific business unit.

For the third quarter of 2010, assuming current FX rates, we expect our market technology revenues to be approximately $32 million.

Normal seasonality will result in lower market technology revenues in the third quarter, due to fewer billable development hours recorded during the summer months.

Now turning to expenses.

Total operating expenses for the second quarter were $207 million, representing an increase of $6 million from $201 million in the first quarter of 2010.

Higher compensation, marketing and advertising, professional services, occupancy and general administrative expenses were partially offset by the $5 million favorable impact that FX had on our expenses.

Now, looking forward for the full year of 2010, we expect total expenses to be in the range of $870 million to $885 million, assuming current FX rates.

Included in these figures are approximately $60 million of non-recurring expenses, down from our guidance of $65 million from our last call.

Excluding the non-recurring expenses, we continue to anticipate that our operating expenses will be in the range of $810 million to $825 million.

What's not included in this guidance are increased expenses that we expect to incur from the acquisition of Smarts Group, which is expected to close in the third quarter.

Expenses for this business will be included in guidance when we update it during our third quarter call.

Results for the quarter yielded operating income of $183 million, with operating margins coming in at 47%, up from 44% in the prior quarter.

Net interest expense in the second quarter was $24 million, an increase of $1 million from the first quarter of 2010, and reflects the full quarter impact or the refinancing we completed in January, and finally on the income statement, the effective non-GAAP tax rate for Q2 2010 was 34%, within the range of our normalized tax rate of 32% to 34%.

Now, turning briefly to the balance sheet, cash and cash equivalents and financial investments at quarter end were approximately $972 million.

Of this amount, approximately $458 million is the reserve for regulatory requirements and other restricted purposes.

During the quarter, we used $20 million for capital spending purposes and $154 million was used to buy back shares, bringing the total repurchase to $200 million since the share repurchase program was announced on March 2nd.

To date we've purchased ten million shares, 7.7 million of which were acquired in the second quarter.

Our total debt obligations at the end of the quarter were $2.1 billion.

In the second quarter, we made debt prepayments of $42 million.

Specifically, although our term loan does not require us to begin paying down the debt until the third quarter of 2010, we made an optional term loan debt repayment of $25 million in the second quarter and additionally, we prepaid $17 million of other debt related to the 2008 acquisition of Nord Pool.

These actions are consistent with the committment we made when we announced our share repurchase program, which is to pay down an additional $100 million in debt this year above the required payment of $70 million.

We are pleased with the results this quarter as they demonstrate our scalable business model and reflect the benefits of our efforts to drive top line growth in our core businesses, most notably, our US cash equities trading business, European derivatives and the corporate services businesses.

The strength of our core business leaves us well prepared to leverage scale as our new initiatives begin to deliver top line growth in the future.

Our share repurchase program is progressing nicely, as it delivered $0.02 of accretion to our shareholders this quarter alone and the accretion is expected to grow in the third quarter as the full quarter impact of the ten million shares that we repurchased is reflected in the third quarter results, and we will continue to operate the business in a disciplined and capital efficient manner.

Thank you, and I will now turn it back over to Vince.

Thank you, Adena.

Operator, we're ready for questions.

(Operator Instructions).

Our first question comes from Celeste Brown of Morgan Stanley.

Please go ahead.

Hi, good morning.

How we doing today, Celeste?

Good.

Probably not as good as you it sounds like.

Yes, we're doing quite well, thank you.

So, this question is for either you or Adena.

It sounds like you think your US equity capture is sustainably higher.

Is it, should it be as high as what we saw in the second quarter and then also if you can just give a little more color on the favorable client mix in the US that you discussed?

Thanks.

Sure.

We do believe the capture is sustainable, and we certainly expect it to be in range to what we saw in the second quarter.

What you're seeing with respect to customer mix is a number of different things.

One is, with regard to what we'll call sponsored access or naked sponsored access.

We saw a number of firms want to have their own BD, their own standing with the regulators that come into us directly, and then as a result of that, they then had to earn their own way in the pricing tier, and that helped us in that regard, so I think that trend line will continue.

And then on the more recurring base of revenues that you have, that non-trading revenues, it sounds like they should also stay at higher levels, particularly Access Services we shouldn't see a sequential step down or anything like that?

No, we expect it to continue to increase actually and as we enter the Summer months, that stable revenue obviously is a comfort to us in the transaction business.

Okay, thank you.

Our next question comes from Dan Fannon of Jefferies.

Please go ahead.

Good morning.

How you doing, Dan?

Good thanks.

Building on the net capture here quickly, you've made positive pricing changes over the last six to nine months.

Do you anticipate further improvements in pricing in the near term?

Well, I think I'll stand by the earlier comment.

We expect the capture rate to be in the range that we saw in the second quarter.

That being said, we have to look continuously at our pricing model.

We have to be engaged with our customers, and in I think constant communication, and we think about it all the time, so it's hard to predict the future, where it might go but I think I can give you comfort that what we saw in the second quarter will follow through into the third and the forth.

Okay, and then switching over to options, can you talk about your strategy there in terms of maximizing profit share and balancing profitability as you look at kind of pricing within that market?

Well, options, just like equities, requires us to understand what the customers need from their market centers, and the Management team there has done a remarkable job of anticipating and listening to their customers, so when you look at the product line extensions we made to both Philly and NOM, they were not so much about pricing but about features and functions that the customers need, so we think that's going to be the dominant determinant of our success in the quarters to come.

It's not so much a pricing game.

Our next question comes from Howard Chen of Credit Suisse.

Please go ahead.

Good morning, Bob, good morning Adena.

Good morning.

Nice quarter.

Bob, as you and the team do the postmortem on the events of May 6, you and the others in the industry have proposed a lot of changes but just specific to business model, could you discuss how potentially it changes your outlook or the timing or the prioritization of some of the initiatives you're working on, if at all?

Well, certainly we put the implementation of the circuit breaker as job number one and we did that in a very short period of time and it's a credit to our technology team, but as we look at what changes might happen as a result of May 6 from what we have in our development queue, it really is a immaterial impact.

Clearly, we will take a pretty vigorous stand with respect to sub quotes and we're prepared to roll that in, in various short order, so May 6 was an important event.

It's an important event for us to respond to in a positive way, but it's not impacting our overall business plans.

Okay, great and then Adena, just a broad question on capital.

During the quarter you got a lot of share repurchase done.

How do we think about that pacing of it going forward, and I guess just I'll wrap something else around that, like for the debt to EBITDA is now about two times.

Is that a good place to be in your minds?

Thanks.

Sure.

In terms of the pace of the share buyback, I would say that we will continue to be opportunistic in the way that we execute the share buyback and we clearly think that the strength of our business and the growth prospects of our business outweigh the current price we're trading at so we believe this is the right time for us to be upsizing the buyback and continue to be active in the marketplace.

In terms of specific timing, that's not something we generally discuss, but in terms of the debt to EBITDA ratio obviously as our EBITDA continues to strengthen and we pay down debt, we'll continue to find ourselves with a lower ratio and I think that we're certainly very comfortable where we are today.

I think that with the cash flow generation of our business, we have the ability to look at leverage if there's something very strategic and attractive for us to consider, but right now, we're extremely comfortable right around the 2.2 times that we're going to be looking at.

Okay, thanks so much.

Our next question comes from Daniel Harris of Goldman Sachs.

Please go ahead.

Good morning guys.

Just want to touch base on the Nordic Equities business.

Obviously some good numbers there on the trade count and volume and the revenues were flattish on the local currency basis and that's obviously due to the fee caps you guys put in place.

How are you or what are you seeing in terms of new client sign ups the pace of activity over there that's coming from clients that weren't involved earlier this year that I know you guys are targeting to help grow that revenue base?

Great question.

We believe in the third and fourth quarter we will see demonstratable benefit from the efforts we've put in over the last two years, where we have an increased number of what would be commonly known as high frequency trading firms who desire co-location services, in advanced stages of testing with us, so we expect third and fourth quarter, we will see an increase in velocity, an increase in number of members in the Markets and we're obviously looking forward to that.

Okay, that's really helpful.

Just moving on to the interest rate swap clearing transaction that you said actually happened within IDCG.

Can you put any color around that?

What kind of trade was that?

How large and are there other trades that -- was that just a test trade or is this going to start being something we see coming through more often?

Well the first thing I'll say is it was not a test trade.

There will be more trades coming probably this week we anticipate and we certainly anticipate the open interest in the clearing house to be increasing in the months to come.

Further details I'm going to leave to a later date, and some of the participants in the trade will probably publicize the fact that they were involved with these trades.

Great.

Thank you.

Our next question comes from Rich Repetto of Sandler O'Neill.

Please go ahead.

Hi, Bob, hi, Adena.

I don't know Rich Repetto.

I'm just going to go by Rich R from now on.

I guess my question is on slide seven, the Market Technology table.

So is that table just, are we supposed to take that as if nothing changed that's the revenue you would recognize?

For example, are there any, I'm sure there's potentially higher revenue in 2011 I would think than $116 million?

Right.

So this represents the revenue that's been committed through contracts but yet has not yet been recognized and clearly, Rich, we have some level of variable revenue that comes into the business from requests, from advisory services and from other services that we offer and provide that can be recognized more immediately but this is essentially recognizing that we have a lot of clients signed into long term deals but their revenue recognition will only occur after we've delivered the initial technology and they start to accrue, essentially we start to amortize the value of the contract, so this is certainly not a full picture of the revenue for the remainder of this year or for next year.

It's just a reflection at least of what's already been signed, and what we can look forward to, and we'll continue to work on providing increased clarity and transparency around this business going forward, but this is at least a step.

So Rich, this is the revenue in the bank.

We have an entire salesforce who only get paid if they deliver incremental revenue to these numbers.

Got it.

Got it.

Okay that's helpful, and then my follow-up is a bit more on the flash crash, Bob.

You went through sort of the basic mechanics of the response, and I guess no big changes, but the longer term thing I believe is this consolidated tape and being able to provide the SEC with the audit trail to really I guess, look at where all of the trades came from, and I guess the question is, I thought that they tasked or some of the expenses would flow through the SROs.

Have you taken a look at that?

Is there any expense that we could expect or you're looking at having on how would you handle it if you did, if you have to provide this auditing trail to the SEC?

Well, the first thing I would say is Rich, we can certainly connect some dots with respect to May 6th and our interest in Smarts and the acquisition that we announced today so now we've stepped to the forefront on a global basis with respect to surveillance technology, and May 6th certainly has resonated around the planet and we believe there's going to be a strong market demand and increased market demand that's already a strong demand for surveillance technology, and as we said, Smarts has been a leader in providing technology for surveillance through exchanges.

We think their mandate will dramatically increase where they will be serving both exchanges, regulators and broker dealers, so we feel very good about this acquisition and we feel very good that in the post-May 6th world we're ideally positioned to provide some of the data that you're talking about.

Okay, that's helpful.

Thanks.

Our next question comes from Michael Carrier of Deutsche Bank.

Please go ahead.

Thanks.

Just Adena, one question on the expenses.

If you try to mute out the FX benefit that you got in the quarter you had about a 5% sequential increase since the first quarter and obviously some of that is just due to the strong volumes across the business but if you look at the third quarter and maybe the back half of the year, do you have some flexibility in some of those cost buckets and case volumes, I think right now they are down about 20% for the quarter but if you ended up getting into a soft volume environment, do you have some flexibility there?

Yes.

So if we look at where the primary increase came from, from first quarter to second quarter, it is in compensation, and there's a combination of things driving the costs up there.

The first thing is that we did do an equity grant in March to all of our employees, and so essentially options expense, equity expense did go up for the year and we're seeing a full quarter impact of that, so that's more structural.

We also implemented a merit increase in June so that also is more structural, but we also increased our accrual for our incentive compensation based on the strength of our second quarter results so clearly if the results in the second half of the year are not as strong as we anticipate, then that would be at some level of variability there.

Additionally, in the second quarter, we spent a bit more on marketing and advertising slightly and we have some other things that I would say are a little bit more discretionary and the last thing I would say about third quarter is we always have a little bit of a benefit from the vacation accruals where that does bring down our comp expense a bit in the third quarter so there's certain things that are seasonal.

Other things that are structural but I think we have some variability.

There's no lack of levers we can pull to bring the expenses in.

Right.

Okay, and then just one follow-up on the US cash business.

You changed pricing and obviously got a big benefit this quarter.

If we look at the market share, it looks like it's sliding slightly, not a huge deal there, but if you look with your conversations with the different constituents in the markets based on what your current pricing has been and some of the competitive moves out there in the market, what's your view in terms of the current structure and is that give and take in terms of if market share slides a bit, are you still comfortable with the current pricing you have implemented?

Well the first thing I would say is with respect to market share we see in July a slight uptick in market share, we're around 24% so I'm not sure where you see it sliding, so we see it slightly increasing, so I would say with respect to pricing, repeat what I said earlier.

I think the caps rate we had in the second quarter, you can reasonably expect to see that in the third and fourth quarter within range.

That being said, we evaluate the pricing and how we can best serve our customers on a continuous basis, so we handle things as they develop.

Okay, thanks a lot.

Our next question comes from Niamh Alexander of KBW.

Please go ahead.

Hi, thanks for taking my questions and congrats on the quarter.

Thank you.

You're welcome.

If I could touch on the SEC and I know Adena, you and I had spoken about this before, there was something with respect to the financial regulatory form, the transparency act that really benefits your business and maybe your competitors too but I'm not clear on exactly when you can start to implement it, and this is basically that really takes a big inhibitor off your business, am I correct in thinking that now you can implement a price change and then kind of let the SEC know, and wait for them to get back to you within a certain period of time before you have to submit a filing, wait for them to get around to looking at it, wait for a comment period, so that really kind of removes an inhibitor, am I understanding it correctly and if I am, when does this take effect?

Well, I think you have a good understanding of it.

It's internally what we call the Meeks amendment and we're certainly happy to see it in fin reg, and to distill it down, it essentially reduces dramatically the SEC's pocket veto and that is if we put a filing to them which is proper for form, they need to publish it for comment, and to the extent they do not, then the clock will start ticking based upon when we publish it on our website, so it puts a discipline to the process with the Commission, and we can have some deterministic outcomes to a number of filings, and we have certainly had a vast number of filings through the years that kind of go into the ether, and this should dramatically change that environment, and I think for the betterment of the Commission, for the market and for our particular prospects.

What's particularly exciting about this is unlike a lot of fin reg, this ruling is effectively immediately, so it is in theory in place today.

We're certainly feeling our way with the new ground rules and I think you could say the same for the Commission but it certainly will be a positive for us.

Okay, that's good to know, thank you.

So still you need to get approval before you can put the prices in effect but it just speeds up that approval process?

Yes, non-data pricing can be deemed immediately effective, so we've got greater latitude on that, but I would again caution in that we're working with the Commission right now to understand the rules of the road, and Ed Knight is here, our General Counsel.

Ed, do you want to?

One thing that Congress did is made it clear that all fee filings by an SRO are eligible for immediate effectiveness.

This means not only our member fee filings, but also our non-member fee filings, so in the past, there's been some question about that, and now that question has been resolved clearly by Congress.

They want us to compete and that is why they want our fee changes to be immediately effective, to heighten the competition, and we think it's good for our planning.

We will now have much more visibility in terms and predictability around our prices.

Okay, that's really helpful.

Thanks for the color and congrats on getting that done and my second question on Nord Pool.

I just want to understand the business a little bit better in terms of the revenue pie right now, maybe the opportunity.

Because you just bought in the trading, and then you just rolled out in London, so if you could help me understand right now maybe the total pie and what London could add to that?

Well, we said this previously.

We believe the London market opportunity for power is roughly equivalent size to the Nordic market.

The UK market is bigger again with respect to gas.

Our first focus though is power, and then the earlier part of your question, we completed the rest of Nord Pool that we did not own, and we had significant amounts of the economic benefit already.

The completion is a good thing for us but it's not material.

But I think generally though, up until for the first and second quarter, we're kind of on track around a $50 million per year revenue for Nord Pool.

That's kind of the average that we see for that marketplace generally is around $50 million a year.

Okay, that's great.

Thanks for taking the questions.

Sure.

Our next question comes from Roger Freeman of Barclays Capital.

Please go ahead.

Hi, good morning.

Oh hi, Roger.

How are you?

Good, Bob, thanks.

So I guess first just coming back, Adena, to that slide on the Market Technology, sort of lay out over the next few years, maybe one thing that would be helpful is for you to kind of look at maybe historical, the last couple years of revenues, what percentage of the revenues ultimately are sort of near term, where you get an order and there's a delivery in revenue accrued in a space of maybe three months or so, and what percentage of that does that end up being of total revenue as opposed to long term contract as I assume is what we see here.

In general that's something we're working on, Roger but I think what we've been looking at internally is approximately 80% of the revenue is based on prior commitments, contractual commitments that are over the length of the agreement whereas about 20% of the revenue really comes from shorter term deliveries.

Now, that can vary quarter-over-quarter, so certainly, we had a very strong quarter for instance in the fourth quarter of last year, that was based on some shorter term revenues but on a general basis it's kind of 80/20, and recognize that of course this is only the revenue from contracts we've already signed and are in place and agreed to, and as Bob said, we have constant sales efforts to improve those contracts, change them, so for instance a client might choose to go under a contract for trading and then a year later choose to sign with us for clearing and things like that, so those types of things are obviously not reflected in this table.

And as Roger as you probably know, under US GAAP, if we sign a big contract unlike five or 10 years ago, it's hard to recognize a significant portion of the revenue.

It tends to want to come in over a period of time.

Yes, got it, and then I guess my second question is just around IDCG.

Bob, last quarter you were talking about some of the technology and operational hurdles that were sort of in the way and I guess I'm wondering if you can comment on it at this point three months later how much of that has been overcome and also with the legislation having sort of taken place over that time period, did you see clients at all sort of pull back on any making any decisions one way or another in anticipation of how that was going to sort of play out?

Well, a couple answers here.

One, with respect to our efforts for technology integration, they really proceed a pace with a large number of players and what we identified is we had to get some over the line where we were doing production trades, so we're happy to be in that State right now where we have committed players who are putting real open interest into the clearing house, as I said we've had several trades, we expect several more this week, so that is noticeable progress.

I would say with respect to fin reg, clearly there's a spectator element to it by us and all others in the industry and literal spectator during that last night as it was broadcast on CSPAN-2, but what's been interesting in the time period, the short period of time since its been passed, are conversations with what I'll call the traditional players in the space to have increased quite dramatically, and increase with respect to the different levels of the organization that we're dealing with.

And if I could equate this period of time to anything, it would be back into the ECN days, the early ECN days in the equity world, where everybody felt compelled to talk to everybody else, so we're going through that period of time right now.

We're engaged in those discussions, but in the meantime and most importantly we continue to focus on executing our plan because we clearly have a working system with the proper regulatory approvals that have positioned to meet customer needs and so it's our job to build up transactional and open interest activity in it, and we're in the process of doing that.

Okay, great.

Thanks.

The background noise you're hearing is we're right above where they do the market open this morning, so you'll hear some happy voices and claps and cheers as we go through the rest of the call.

I thought they were cheering for my comments.

Our next question comes from Matthew Heinz of Stifel Nicolaus.

Please go ahead.

Hi, good morning.

How are we doing?

Doing well, thanks.

Just a question on the US options business.

You guys have clearly been successful in growing market share there without sacrificing a whole lot in the way of revenue capture and I'd just like to ask you about the C2 platform at CBOE and what impact you think that might have on your business, and kind of just the flow of the industry.

It seems like some people have been talking about that platform maybe mopping up some of the excess flow that gets pushed away from their floor, and I'd just like to know what your thoughts are on that.

Well, one, we have a tremendous amount of respect for the Management of the CBOE and the capabilities in the marketplace.

We're obviously proud to have them being NASDAQ-OMX-listed Company, but the options world is competitive, has been for the last several years and C2 will be an interesting new entrant.

BAS was certainly an interesting new entrant but we as you'd expect have to focus on the strength of our offerings and how they meet customer needs and we certainly have an active development calendar for our options platform in the months to come.

We will have a significant upgrade to the NOM platform with respect to its connectivity into the marketplace, in and around the end of the year, so we continue to execute and we certainly like our positioning, and we certainly appreciate the results that the Management team has delivered to us over the last year.

Oh, great, thanks.

One quick follow-up just on the market tech business.

Appreciate the guidance there for Q3.

Just like to know a little bit about how you're thinking about your strategy there and what type of competition you're seeing out there other than the usual suspects, NYSE, and some of the other exchanges?

Well, I thought you would certainly bring up Smarts because when you talk about the strategy in market tech we kind of revealed a bit of it today, so when we look at the technology provision business, we said surveillance, and we had this thought obviously prior to May 6th but coming out of May 6th it popped where to the top of the list and there was nothing really number two, so to be a major player in the surveillance was a strategic imperative to us.

We're fortunate to enter into an acquisition agreement today with the clear global leader in the space, so we think each and every technology deal in the days to come will have a very strong surveillance component to it, so we feel very good about that.

Also, in terms of outside of the acquisition, when you look at the success in the last quarter of Genium INET, and the contracts we have entered it's quite impressive and it's quite impressive that major global exchanges are comfortable with our technology offering and our support offerings to partner with us on these initiatives, so the positioning in Market Technology is today stronger than its ever been.

As you can see the pipeline is remarkably strong and this certainly will be an engine of growth, earnings and revenue growth for us in the years to come.

Okay, great.

Thank you.

Our next question comes from Alex Cram of UBS.

Please go ahead.

Hi, good morning everyone.

Hi.

So just wanted to come back on a couple of things here.

First on the US pricing, but not to beat a dead horse but you're saying it's going to be roughly stable in range, but if I look at the second quarter, I mean that was obviously a very unique quarter in terms of the volume, the volatility and so forth so if I look at some of your competitors, it sounds like their pricing certainly went down given their tiers and so forth, so I assume that some of your tiers or more people hit your tiers as well so with volumes down right now shouldn't we really be seeing a little bit of an increase here going forward?

I think that's a fair conclusion if everything was equal and I did say we expect the capture to be within a range but clearly the second quarter will have more people hitting volume tiers than you have in the third quarter, so that's a fair enough conclusion.

All right, good.

And then just second, just coming back to IDCG and fin reg, you just made some comments of the discussion that you're having but maybe if I focus specifically on the dealer side, can you give us a little more color on how the discussions have gone there?

I mean, last quarter I think you made some comment on how you really are focusing the buy side and then the dealers will actually essentially have to play nice to participate.

If I look at the competitive landscape out there, I'd say one of your competitors that has been a lot more friendly with the dealers recently made some moves that might have created some tension, so I'm just wondering if maybe your discussions with the dealers have changed a little bit, if there's more interest at all.

Well, first, I would say that you're paraphrasing my comments from the last quarter a little bit generous, but it's our job one is to make the IDCG product attractive to all entrants into the marketplace, and when you think about a clearinghouse and/or an exchange type of trading facility, that's our fundamental role in life, so we are in conversations with the participants.

I would definitely say that since fin reg, our conversations with what you would perceive as the traditional dealers in the space have intensified, they are very direct with us with respect to aspects of the IDCG model that they would like to see changed in some way, and we have to respect that input and balance it against the input we get from the buy side, and we're in the process of I think coming to what would be seen as a happy medium, with respect to the product offering, so we're pleased most by the fact that we are in the process of doing trades.

We're production ready and we will have building momentum in terms of what this offering is about.

All right, very good.

Thanks.

Thank you.

Our next question comes from Jillian Miller of BMO Capital Markets.

Please go ahead.

Thanks.

Good morning.

I was hoping to get some more additional detail on the interest rate swap clearing solution that you launched in the Nordics.

I was wondering what the potential size of the market is and maybe what would be helpful is if you could give us an idea for what you'd consider successful annual revenues from the operation at maturity, and then I was also curious what you believe your competitive advantages are compared to say Swap Clear that I think also offers clearing for the kroner-denominated swaps.

Well, I would say with respect to our Nordic offering, we enjoy broad support from the user community both buy and sell-side, and also from the regulatory environment in the Nordics.

In addition, we obviously have technology that's integrated in to the basic systems in these firms, and we have great customer relations in that area, so we feel strongly about it.

We did put up the first trade in the Nordics, and it was interesting, we did that with the governmental enterprise, so we're very comfortable in our positioning.

With respect to the size of the market, I will give you a broad parameter that it is a eight figure per year market, and we really don't know that much more than that but we certainly expect to have a leading share in the market in the time to come.

Great, thanks, and just a quick follow-up on the same general topic.

Are you using the IDCG technology and the same methodology for the Nordic clearing or is that something you've designed specially for the Nordic market?

I think it's roughly equivalent.

There are some differences in the risk management capabilities, but we do expect that to converge over time, but right now the risk is a little bit different.

Okay, thank you.

Our next question comes from Jonathan Casteleyn of Susquehanna.

Please go ahead.

Yes, good morning.

Wondering if you can give us more details about your buildout in European trading, cash and derivatives.

I know there's a technology change there a couple quarters ago, and also you've been adding clearing members.

Any way to scale the future growth?

I know at one point you looked at it as a percent of GDP, the trading values you expected.

Is there any new assumption or forecast there?

Well, it's really somewhat the same.

What we've been articulating is the fact that we wanted to get the INET technology into that marketplace.

One, it was more capable than the prior technology but two, it had wide global appeal, so that has been completed and I think I said earlier in the call, we expect to see some of the fruits of that effort in the third and fourth quarter as some of the global players are now able to interface with our Nordic marketplace in somewhat of a seamless way and the other major building block we had to put in place was to get to central counterparty clearing, so we did that so the building blocks are in place.

We expect it to deliver returns to the participants in the marketplace and to our shareholders going to the third and the fourth quarter.

I see, so to pin you down to a number saying above or below sort of long term economic growth sort of hard to do I guess?

That it is.

Okay, and then can you just talk about net listings in the quarter?

I know you talked about your new account wins or new listing wins obviously a very good thing but did net listings in the exchange improve quarter-over-quarter?

I think actually we did, right?

Yes, our total number of listings increased for the quarter.

Net listings increased?

Yes.

And that was a good reversal of a trend line.

Okay, great.

Thank you very much.

Our next question comes from Justin Schack of Rosenblatt Securities.

Good morning.

How are you doing?

Hi.

Most of my questions have been answered but I'm wondering actually if you can comment at all on your outlook on volumes.

I think on the last call you'd made some comments that suggested that the increases in volumes we were seeing at that time were sustainable and part of maybe a trend where you would see that continue through the next several quarters as the economy improved, since then volumes have been down quite a bit so I wonder if your opinion has changed at all there?

Well, Justin, I would say in terms of how we look at volumes, we try and look at it on a yearly basis and we certainly look at the prior year and we also go into a given year with the expectation that there will be one or two months of higher volatility that will result in higher volumes.

We don't ever really know which months it will be but if you look back year on year, it tends to be fairly accurate and then you tend to have a couple months where volumes are quite light, but in all this Justin, we are clearly humble enough to realize it's more art than science.

Sure, thanks, and I guess just one quick follow-up on the Nordic cash business.

You mentioned all of the steps that you've taken there with counterparty clearing and the item matching and that certainly should and sounds like it is attracting more high frequency players, and typically what we see and you guys know this better than I do and a situation like that there tends to be greater impetus for fragmentation, you do have competitors there now.

I would imagine that those platforms will also start to look attractive to some of the participants that you're bringing to the marketplace and so you see maybe some more pressure on market share and pricing.

Could you comment on whether you think those pressures are going to increase going forward and to what extent have you kind of taken some of the pain up front with the pricing hit earlier this year or do you foresee any further action on that front?

Well, Justin, we think there's wisdom to the pricing action that we've taken and that we essentially put a fee cap in for the existing players and they were the beneficiaries of the fee cap on the second quarter and it's our belief that they are appreciative beneficiaries of the fee cap, and that will seek to have the center hold, and I think we see that, so while we're obviously aware of competition, we think we are the place of liquidity for the Nordic market, and we think through the first half of this year we strengthened our hand in that regard, through as you referenced the technology of the central clearing, but also through the pricing actions we put in place.

Thank you.

(Operator Instructions).

Our next question comes from Michael Wong of Morningstar.

Please go ahead.

Good morning.

Good morning.

You've really been building a competency in power, energy and carbon by acquiring trading and clearing assets in Europe and the US.

Can you talk a little bit more about your vision for your presence in Europe and the US in that market?

Is your vision regulation-dependent and are you expecting expense and revenue synergies with these acquisitions let's say for infrastructure spend and revenue synergies with your current client base?

Well I would say with respect to UK power, it is clearly not regulation dependent and what was interesting to us, we were invited into that market and the invitation came from what we'll call the natural players in the market, the utilities, and what was interesting, also strong support from the intermediaries in the market, so we saw that as a broad based approach to the market.

As we look at or power efforts in the US, it's similar.

It's driven first and foremost by the naturals in the marketplace, so they aren't so much regulation dependent.

That being said, I think the move for over-the-counter products to go to clearing and to some sort of transparent trading is a positive driver of customer activity.

Okay, thank you, and going to your Nordic cash equities business, about how much of your volume do you believe is effected by the fee cap and for the future growth of your European cash equities revenue, do you see it more driven by new customers, higher volume from current players that haven't hit the fee cap, the same amount of shares traded but general appreciation of value traded from just their appreciation in that stock market, or tech events such as high frequency trading and co-lo?

Number one.

We certainly see more participants in the marketplace as the primary driver.

Okay.

Well, thank you so much and congratulations on a good quarter.

Thank you.

Appreciate that.

All right, Operator.

I think that concludes our call for this morning.

I'd like to thank everyone for joining us.

Thank you, everyone.

Thank you.

Talk to you next quarter.

Ladies and gentlemen, that does conclude today's conference.

You may all disconnect and have a wonderful day.