納斯達克交易所 (NDAQ) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the NASDAQ OMX third quarter 2010 results conference call.

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

Later we'll conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Vincent Palmiere, Vice President of Investor Relations.

Thank you, Operator.

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

Joining me are Bob Greifeld, our Chief Executive Officer, Adena Friedman, the 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 web site at www.NASDAQOMX.com.

We intend to use the website as a means of disclosing material, nonpublic information and for complying with disclosure obligations under SEC regulation FD.

And these disclosures will be included under the Events and Presentations section of this site.

And before I turn the call over to Bob I would 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 Private Securities Litigation Reform Act of 1995.

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

And with that I'll turn it over to Bob.

Thank you, everybody, for joining the call this morning.

I'll begin by spending a few minutes highlighting the third quarter 2010 results and then I will update you on the progress we're making with some of our initiatives.

Adena will then walk you through the financials.

This morning we reported net income of $101 million or $0.50 per diluted share, an increase of 29% when compared to third quarter 2009 GAAP results and an increase of 19% when compared to non-GAAP results.

This represents an incredibly strong performance and we are delighted, particularly given the lower industry volumes we saw during the quarter.

Our success can be attributed to the steps we have taken to diversify our business and to identify opportunities to deliver value-added products and services to our customers.

During our recent Analyst Day we outlined how we have focused our efforts and goals on revenue growth measured as either an alpha or beta return.

With alpha representing our hard work and innovation, and beta primarily driven by volume and other macro market trends.

What we're particularly pleased with this quarter is that despite significant volume or beta headwinds, we were able to grow revenues and profits over the prior year due to successful alpha return initiatives.

These results show that our hard work is paying off and delivering results.

Turning to the details of the quarter, in market services, revenues increased $18 million or 8% from the third quarter of 2009, despite declines in industry volumes in US cash equities and options.

The revenue growth was driven by strong demand for access services, higher US proprietary market data revenue, increases in US cash equities revenue and growth in European derivatives revenue.

All areas where we've been able to innovate and expand our value proposition for customers.

In particular, we have seen significant improvement in our European clearinghouse where growing membership is driving increased activity, resulting in a revenue increase of 30% over the last year.

In the Nordic derivatives market, earlier this week we launched our Genium INET platform, the world's fastest trading system.

Genium delivers sub 100 micro second latency and a throughput of over 1 million messages a second.

A highly reliable, robust and scalable platform.

In addition to powering our own markets, it is also part of our commercial exchange technology offering, putting the same power in the hands of our customers.

We remain committed to innovation through technology to ensure our leadership position as a driving force in the exchange industry and to provide the best possible trading opportunities for our customers and investors.

In our US options business, we are number one in market share and we achieved our fifth consecutive quarter of market share growth.

Total market share was 28.8% for the quarter, as PHLX recorded 23.7% and NOM 5.1%, the highest levels achieved by either market.

Our share last year across both markets was 20.2% so this year's results reflect a gain in share of 850 basis points.

Very impressive.

In our issuer services segment, NASDAQ OMX signed 45 new listings during the quarter, an increase of 29% over the prior year quarter, of which 18 were IPOs, including two of the largest technology IPOs, SMARTTechnologies and NXP Semiconductors.

Corporate services continued to be a bright spot as we saw increased demand for many new products, in particular new services such as AI3, our new surveillance product, that is driving revenue growth.

When you exclude the impact of Carpenter Moore, which was sold in the fourth quarter of 2009, existing product revenues increased 20% from prior year levels.

And finally within issuer services, revenues in our Global Index Group were up 20% from last year, driven by increased demand for new licensed ETFs and other financial products.

In our industry-leading Market Technology segment, business remains strong as total order value, which is the value of signed contracts that have yet to be delivered, end of the quarter up 40% from third quarter 2009 levels.

Highlighting the quarter was the acquisition of SMARTS Group, the world leading provider of market surveillance technology to exchanges, regulators and brokers.

Integration efforts are off to a good start and we expect to realize measurable synergies by leveraging our footprint to deliver growth.

Our technology platforms remain core to our success.

We have the fastest and most scalable trading technology in the world, multi-asset trading and clearing capabilities and a culture of efficiency.

When combined, these assets create a unique formula for success that remains unparalleled in the industry.

Now let me talk to you on the status of some of our initiatives.

Progress continues to be made at IDCG, our interest rate swap clearinghouse, as BNY Mellon became a clearing member and State Street announced its plans to become a member.

IDCG has also started to process transactions, and to date has cleared $640 million with nearly $400 million in notional value outstanding.

Our innovative new price size equity exchange, PSX, was launched on October 8th and is off to a fantastic start.

In the two weeks since large, it is already averaging nearly half a point of market share each day and has exceeded 50 million shares traded daily, making it the most exceeding launch of an equity exchange, exceeding even the launch of our BX exchange.

Also, the value of this unique model is apparent as average execution size is up over 30% when compared to trades executed on the rest of NASDAQ.

N2EX, our UK power market, now has a total of 19 members actively supporting the exchange as it continues to attract the liquidity necessary for creating the power index.

Volumes have grown approximately 100% since the end of the second quarter as more than 740,000-megawatt hours traded each week with a value of more than 32 million British pounds.

We plan to launch the derivatives market in the first quarter of 2011.

With respect to NOCC, our US energy clearing business, we're pleased to report that we're seeing increased activity as more trades are being processed through our clearinghouse.

Initially trades were for contracts with very short durations.

However recently we've seen larger trades with longer durations.

The most recent being a three-month contract.

As customers begin to clear contracts with longer durations, it demonstrates an increased confidence in the clearinghouse.

As we announced at our investor day, we launched repo clearing in the Nordics on September 23rd.

And we have seen volumes steadily improve.

Our goal is to have the full interbank market, which represents some $6 billion in average daily volume, by the beginning of 2011 on our market.

Following our transaction between SAB and the Swedish National Debt Office, we continue to work with Nordic banks to develop swap clearing for the entire market.

Our goal remains to have a full-scale launch by the second half of 2011.

This week we also announced the launch of five NASDAQ OMX alpha indexes which are designed to measure performance between a particular stock and ETFs, giving our customers the ability to look for opportunities to generate returns.

Eventually these indices will allow us to list proprietary options on PHLX and NOM and are certainly indicative of the culture of innovation that we have developed here at NASDAQ.

We are pleased with the progress of each initiative and remain excited about their prospects.

Our strategy clearly is to continue to lever our core strengths to diversify our product offering and to deliver growth, whether it's through new capability, trading new asset classes, expanding geographically or attracting new clients.

Before I turn the call over to Adena, I want to again touch on the strength of our performance this quarter which is no more apparent than when you compare our results to the very strong second quarter of 2010.

While industry activity declined 26% for US cash equities, and 19% for options when compared to the second quarter, our earnings only declined 4% from a record $0.52 to $0.50 this quarter, results that we are proud of and from which we plan to grow.

I'll now turn the call over to Adena.

Thank you.

Thank you, Bob.

Good morning, everyone, and thanks for joining us today.

Our GAAP net income for the third quarter of 2010 was $101 million or $0.50 per diluted share, equal to our non-GAAP net income and EPS of the same period.

This represents a slight decrease when compared to non-GAAP income of $108 million or $0.52 per diluted share in the second quarter of 2010 but an crease of 13% when compared to the non-GAAP of $89 million, or $0.42 per diluted share for the third 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.

Net revenues were $372 million for the quarter, a decrease of $18 million or 5% when compared to the second quarter of 2010.

But an increase of $23 million or 7% when compared to the prior year quarter.

Within market services, our net cash equities trading revenues were $63 million, a decrease of 17% or $13 million when compared to the second quarter of 2010, primarily due to declines in US industry volumes, which were off, as Bob said, 26%.

However cash equities trading revenues increased $15 million or 31% when compared to the third quarter of 2009, primarily due to modified rates and improved market share in our US business.

Net derivatives trading and clearing revenue was $60 million in the third quarter versus $69 million in the second quarter of 2010, and $54 million in the third quarter of 2009.

The decline when compared to the second quarter is due to lower industry trading activity in both the US and Europe.

Driving the increase when compared to the prior year quarter were higher volumes in our European business.

Equity and index options and futures volume was up more than 40% from last year while fixed income volume was up 14%.

As Bob mentioned, driving this higher activity are increases in our membership as well as overall macro-economic recovery in the Nordic countries.

Membership in the clearinghouse, particularly for equities and index options, was up approximately 100% from the third quarter of 2009.

Included in the third quarter of 2010 revenues are $8.9 million from cleared energy and carbon products, $11.3 million from trading and clearing of stock and index derivatives, $4.4 million from the clearing of fixed income products, and approximately $1.5 million of other revenues and fees.

Moving to access services, revenues were $45 million for the quarter, up from $41 million in the second quarter and up $7 million or 18% from the third quarter of last year on the strength of increased demand for our services.

Within market data, revenue was $76 million for the third quarter, down $3 million when compared to the second quarter of 2010 and the third quarter of 2009.

The decline when compared to both periods is due to lower US tape plan and European market data revenues.

The decline in European revenues is partially due to lower audit fees realized this period.

Somewhat offsetting the declines when compared to the prior year period are higher revenues associated with the US proprietary data products.

In issuer services revenues were $85 million for the quarter, down $1 million when compared to the second quarter results but up $3 million when compared to the prior year period.

Driving the increase when compared to the third quarter of 2009 are higher Global Index Group and European listing revenues.

Turning to Market Technology, revenue was $38 million for the quarter, up from $34 million in the second quarter and $36 million in the prior year quarter.

Included in the third quarter of 2010 results are revenues associated with the SMARTS Group which was acquired during the quarter.

At quarter end, total order value, which represents the cumulative value of all signed orders that have not yet been realized into revenue, was $446 million.

In an effort to improve our transparency, and consistent with what we started last quarter, slide 13 of our earnings presentation contains a table that shows when we expect to recognize the current order value into revenues over the coming years.

And looking ahead within Market Technologies for the fourth quarter of 2010, assuming current FX rates, we expect our revenues to be approximately $43 million.

Finally in relation to our net revenues for the third quarter, FX had the overall impact of increasing net revenues in the quarter by $5 million when compared to the second quarter but decreasing revenues by $2 million when compared to the third quarter of 2009.

Now, turning to expenses, total non-GAAP operating expenses for the third quarter were $203 million.

Representing a decrease of $4 million from $207 million in the second quarter of 2010 and an increase of $6 million from $197 million in the third quarter of 2009.

The decrease in expenses when compared to the second quarter of 2010 is primarily driven by lower compensation, professional and contract services, and computer operations and data communications expenses.

Partially offsetting lower spending in the quarter is the impact of changes in the FX rates which had the effect of increasing expenses by $3 million when compared to the second quarter of 2010, as well as additional expenses associated with SMARTS.

The increase in expenses for the third quarter of 2009 is primarily due to costs associated with SMARTS and increases in net compensation expense, offset somewhat by lower expenses related to the sale of Carpenter Moore which occurred in the fourth quarter of 2009.

Looking forward for the full year of 2010, we are revising our guidance slightly and we expect total expenses to be in the range of $880 million to $890 million.

This guidance now includes expenses associated with the SMARTS Group as well as approximately $60 million of nonrecurring expenses.

Excluding the nonrecurring expenses, we anticipate that our operating expenses will be in the range of $820 million to $830 million.

Although a $10 million range in guidance is wider than usual this late in the year, we believe that it's prudent due to the variability we're seeing in FX rates specifically with respect to the Swedish Krona.

Results for the quarter yielded non-GAAP operating income of $169 million with operating margins coming in at 45%, up from 44% in the prior year quarter.

Net interest expense in the quarter was $23 million.

A decrease of $1 million from the second quarter of 2010, and equal to the net interest expense realized in the third quarter of last year.

And finally on the income statement, the effective non-GAAP tax rate for the quarter was 32%, within the range of our normalized tax rate of 32% to 34%.

Turning briefly to the balance sheet, cash and cash equivalents and financial investments at the quarter end were approximately $838 million.

Of this amount, approximately $438 million is reserved for regulatory requirements and other restricted purposes.

During the quarter, we used $12 million for capital spending purposes and $100 million was used to buy back shares, bringing the total amount repurchased to $300 million since the share repurchase program was announced on March 2nd.

To date we've purchased 15.1 million shares, 5 million of which were acquired in the third quarter.

Additionally, as a reflection of our ongoing commitment to return capital to shareholders, we recently received Board approval to increase the share repurchase program by another $150 million, bringing the total authorized amount to $550 million.

Because we've executed $300 million of the program to date, we currently have authorization to buy up to an additional $250 million of our shares in the coming months.

Our current intent is to execute this program throughout 2011, depending on market conditions, and absent other higher return strategic activities.

We also used $70 million of cash in the quarter for debt repayment, including $35 million associated with the mandatory payment of our term loan and $35 million associated with an optional payment.

This brings our year-to-date repayments to a total of $111 million.

We ended the quarter with total debt obligations of $2 billion.

We are very pleased with the results this quarter.

In addition to demonstrating our ability to innovate and execute our growth strategy, the results also highlight that expense management continues to be a core competency.

When adjusting for expenses associated with the SMARTS acquisition, our spending in the third quarter of 2010 is on par with levels realized last year while net revenues increased $23 million.

Our ability to achieve operational efficiencies has allowed us to continue to invest in new initiatives while expanding our profit margins.

Thank you and I will now turn the call back over to Vince.

Thanks, Adena.

Operator, we're ready for questions.

Thank you.

(Operator Instructions).

And our first question comes from Rich Repetto from Sandler O'Neill.

Good morning, Bob and Adena.

The question is on the favorite topic, but interest rate swap clearing.

So a competitor announced the launch of their platform had a number of the higher profile names, including Fannie and Freddie, as supporters.

How does that reflect?

Are they still supporters and could they still be customers of the IDCG platform or how should we think about that?

I would say this, Rich.

I believe the participants in the market in both the buy and sell side are interested in having more than one platform be viable for interest rate swaps.

So we were pleased with our progress in the second quarter.

As I said, we have gone live, we have trades going through the system, our level of engagement with, I would say, all aspects of the street has intensified during the third quarter.

And as I said, we're pleased with the progress.

Okay.

And one follow-up, what was the SMARTS expense?

I know you talked about $12 million to $13 million run rate.

I think that's an annual.

But what was the SMARTS expense in the quarter?

On Investor Day we did mention that we expected about $12 million to $13 million in expenses this year from SMARTS.

We brought in SMARTS and we've recognized two months of revenues and expenses and so the SMARTS expenses were around $4.5 million for the quarter.

Got it.

And then the very last thing, Bob, I know you said it's been a successful launch of the new price size platform.

The 30% increase in size is good, but I was actually expecting even a greater size given that the priority is based on size.

Was that what you were modeling or in your sights?

Rich, I would agree with you.

We want to go dramatically higher in the size.

But as we went live, we expected it would build, it would wax higher and people have to have increased confidence in the model.

So it's in the range of what we expected, but the key point is we expect it to continue to increase.

And I would say that we're working very aggressively with the buy side to ensure that they have true direct access to the market, and direct access being defined where they can control the posting activity.

So I think every week that goes by we pick up one or two more buy side firms who are capable of doing that so we're making progress there.

I'll go back to your second question, Rich, and that's on SMARTS.

What was I think good for us is, in the first quarter, and I know you can do the engineering, it was essentially flat to us and we expect the synergies will start coming in in the fourth quarter, so I think that acquisition will be well within our guidelines for accretion within the first 12 months.

And going back to your first question, I want to make it clear that we certainly believe, and I think everybody in the industry believes, there will be more than one competitor over the long-term for clearing of interest rate swaps.

Okay.

That's very helpful.

Thanks for the information.

Our next question comes from Dan Fannon from Jefferies.

Good morning, guys.

Can you talk about the US cash equity business?

You've had a successful last 12 months of improving your net capture rate, the competitive environment looks to be a little bit more stable.

Can you talk about your outlook there for any potential price changes, actually maybe some improvements, if there are any, or if you think we're in a stabilization period here for some time.

We're talking, I think, a quite innovative move that is effective November 1 with our pricing for US cash equities.

And it's the first time that I think the pricing is targeted to what I'll call the natural buyers or sellers, the natural providers of liquidity.

And it operates on the theory that if we attract more of the naturals then others will follow.

And I would say in discussions with our customers over the last week or so, it's been the strongest positive reaction we have received from any pricing action that I can remember.

And we have four firms that are committed come Monday to provide what I'll call significant incremental volume to the platform.

So we're excited about that move.

And then on the access services or the access revenues, can you give us a sense of what is driving that and if we can look at that as a growing component of your revenues going forward based on the levels we saw here in the third quarter?

It certainly has been a growing component over the last several quarters and we expect that to continue.

In the third quarter 2010 the team did a very good job of introducing some of the products and/or services to that business and that's helped grow it.

Adena, you want to add anything?

And I would say that certainly the levels that we're seeing this quarter in terms of the growth, that is the sustainable growth, it's not a short-term type of thing.

But it is definitely a nice growing part of our business.

And it demonstrates the balance that we're continuing to achieve between the transactions revenues and the recurring revenues in the US cash business.

Yes, and it's becoming increasingly clear that we are the preferred data center hosting operation for the industry and we are the beneficiary then of more of the activity in the industry and that's certainly helping drive our financial results.

Great.

Thank you.

Our next question comes from the line of Alex Cram with UBS.

Hi, good morning.

I just wanted to get back to Richard's question earlier on IDCG.

I don't want to harp on it too much, but you made this whole comment about how you spent a lot of time talking to buy side, sell side and that there is this need for more than one solution, which I totally get.

But we've been spending the last two or three weeks talking to the buy side too, and quite frankly, when we gave them the choice of where they want to clear, it's CME and LCH.

And you guys came up in discussions a couple of times but it's rather from really large organizations that just want to have options, but when you talk to the guys that actually are active in the OTC markets, they do not really talk about you.

So I want to just see where you are seeing this support coming from and who these guys are that you think will be clearing with you because we're, quite frankly, not seeing it.

Thanks.

Okay.

Well, obviously we may be talking to different people.

But I would say this, that our buy side support is coming from several larger players who are, I think, in certain ways, the acts in this activity who are committed to the platform, and we're comfortable where we are with them at this point in time.

And as you saw during the quarter, the range of clearing of FCMs available has increased and I would say that the size in the balance sheet that the firms, such as State Street and Bank of New York represent, clearly is a positive development for IDCG.

Fair enough.

And then just one quick one here.

The European businesses are doing pretty well so far this quarter?

And I just wanted to get a sense if you put this more on the alpha or the beta category.

Is this just markets over there or do you actually see proof that some of the new technology that you've put on there is actually having an impact?

Maybe you can give us some updated data in terms of high frequency participation and things like that.

Thank you very much.

Great question.

I would say for the quarter it was obviously a combination of alpha versus beta, but in the quarter I would say it was more beta that drove the bigger dollar increases.

But probably more importantly to us, in each of the new initiatives we had we saw fairly dramatic progress forward.

And I highlighted some of them in my talk.

So I would not repeat that.

But responding to your question with respect to high frequency trading, first in the US in the equity market there, we saw notable increases.

We just received the co-location contract from a very large US based high-frequency firm yesterday.

But it hasn't driven in the meaningful way the numbers that we think it will as we get into 2011.

And with respect to our derivatives operation, understand that we have proprietary product for equity index derivatives of which we are also the clearing enterprise.

And that represents a huge upside for us with respect to the advent of high frequency trading coming into that marketplace.

And I would say that's lagging probably three months behind our efforts on the equity side.

So all good things happening there primarily driven by beta in the quarter but enough significant alpha developments that makes us very optimistic for results in 2011.

Very good.

Thank you.

Our next question comes from Michael Carrier with Deutsche Bank.

Good morning.

A couple of questions on pricing.

It looks like in the US and in Europe on the cash side, we were all prepared for some improvement whether it's on the FX side in Europe or some of the tiers that were hit last quarter.

On the derivatives side it looks like it was the opposite, it looks like there was a little more pressure both in the US and in Europe, even adjusting for the FX shift.

So just trying to understand what was taking place in the quarter, whether it was customer mix, product mix on the derivative side?

Thanks.

I'll start with the US side and our options business, clearly remarkable gain in share.

Part of that share has to be attributed to pricing actions that we've taken, which lowered capture but overall was a benefit for the organization.

We also, as we've covered before with the dividend recapture trades, we have a lower cash rate for that.

So I think the plan has gone as we foresaw it with respect to our options business and we do appreciate the position that we've gained as a result of that.

With respect to the European derivatives business, we do not see any significant movement with respect to how we price the product.

I would attribute it more to just a quarter to quarter variation.

Okay.

And then on the tech line, you gave the expenses related to SMARTS.

Any color, because I think just expectations were for something around the 32 level on the tech side so obviously because it closed the revenues came in sooner.

But just the core number versus what SMARTS added?

Sure.

For the quarter we had about $5 million in revenues coming from SMARTS.

So the core revenues for the quarter were $33 million.

Okay.

Thanks a lot.

Our next question comes from Niamh Alexander from KBW.

Hi, good morning, thanks for taking my questions.

If I could go back, I remember on the Analyst Day I think you mentioned there might be a significant amount of your cash freed up from being restricted for regulatory purpose in the Nordic markets.

Has that been freed up right now?

When you talk about your cash side line for regulatory, is there scope for that to go down further?

The answer is no.

And the plan was more towards the balance, towards the end of 2011.

So our plans are to introduce a default fund structure in the Nordic market.

Today we self fund the default fund within the Nordic clearinghouse and we're going out to a member default fund in conjunction with some regulatory changes there.

But we have to work with the members and also with the regulators to implement that program.

And as we mentioned at Analyst Day we would expect that to be a benefit to us in late 2011, early 2012.

Okay.

Thanks for clarifying that one.

And on all this cash that you have that's free, is it more of a buyer's market now in terms of maybe deploying some for acquisitions with ready sellers ahead of acquisitions -- or tax changes, rather.

It's never as much of a buyer's market as you would like, obviously.

But I would say that the market is pricing itself somewhat more realistically than where it was a year ago.

So I think there is plenty of opportunity out there and certainly something that we evaluate on a regular basis.

Is the pace of what you're looking, not bankers bringing you ideas, but is the pace of actually what you are taking a hard look at, has that increased over the past quarter or so?

I think that's a fair comment.

Okay.

Thank you.

And then just lastly, could you give us an update on, we're seeing a lot of different proposals and suggestions with the SEC working with various people in the industry.

But some of the things we should just be watching at from a risk to earnings, should it like co-location revenues or should it be if the SEC wants to attach some obligations to the high frequency community?

How should we think about which risks to mutter?

The first thing I would say is the IOSCO report that was released the last several days is interesting, and I certainly think it represents an opportunity for exchanges and it represents the collective view of the securities regulators across the planet.

So I would direct you to that.

So as we look at pending regulatory changes we certainly see, I think, more opportunity than down side.

With respect to obligations on market participants, we think that would be a relative positive to us as a primary market if that was to come about.

And if I was to predict anything, I certainly do not think something would happen in 2011 and I think it's a very difficult road to try to properly define what responsibilities and corresponding privileges you'll give to market participants.

And to the extent to regulators want to get on that slippery slope, it's a hard thing to come to a conclusion on.

But you're not anticipating significant changes in the next 12 months at least?

No.

And you have to realize the aspect of the fact that the Commission has a fair bit of work with respect to Dodd-Frank and there is legislatively mandated time certain outcomes that they have to come to.

So you have that reality to deal with.

The other thing I'll say on the regulatory side and ties back to your earlier question is with respect to our Nordic clearinghouse, we see in Europe a clear direction from the EU and ESMA that they want clearinghouses to have member guarantee funds.

So we are working with our members today, they're being quite, I think, cooperative, but you also do have the looming fact that this will become probably the rule of the land.

And that clearly represents an opportunity for us to free up substantial capital in the following 12 months.

Okay.

Thanks for taking my question.

Our next question comes from Daniel Harris from Goldman Sachs.

Good morning, guys.

Wanted to turn to some of your other new initiatives, specifically here in the US.

The NOCC, you talked about starting to see some longer duration contracts and I'm just wondering can you put some color around who, without obviously going into names, but what types of companies are your core clients here and how do you see that potentially growing over the next few years?

So, importantly, longer duration and higher value contracts.

So we processed a trade just last week where the initial fee to us was around $17,000 and through the duration it was probably another $25,000 on top of that.

Now obviously those trades have been few and far between.

But the fact is that we have increased confidence from the community.

And the community that we deal with right now are what I'll call naturals.

So we do not have so much the intermediaries in the space.

We certainly want them to come into the space and that will help liquify the market.

But it's primarily the fundamental players in the market who are our customers right now.

And sticking with IDCG, you talked about having some volume there during the quarter and open interest at the end of the quarter.

Was there any revenue and how should we think about that in the short-term, ie, is it de minimus or should it be something that we should start modeling in?

I would say right now it is de minimus.

We have revenue, we're happy to have revenue.

And it certainly cuts down on the burn rate, but it's nothing that you need to model at this point in time.

Okay.

And then just lastly from me, going back to access services, I hear that the demand for your product is growing.

I was a little bit surprised at the pace of growth this quarter.

Adena, I think you said that that level is sustainable, but was this just a number of new clients, was this cross selling more products?

And was anything in here via Europe?

Thanks very much.

Sure.

There is not a lot of revenue coming from Europe yet.

As Bob mentioned, we are signing up firms and the access services revenue does include some European revenue and we do expect that to grow as the high frequency firms do enter the European market but it's not a substantial part of the revenues today.

I would say that the revenue growth in the third quarter is sustainable because we have essentially new services we're offering, cross selling of other services.

And remember, this also includes membership fees and other monthly fees that go along with accessing our market in addition to actual lines coming in as well.

So it's just a combination of things this quarter that has resulted in that growth and we're very pleased with it.

Okay, thank you.

Our next question comes from Roger Freeman from Barclays Capital.

Good morning, Adena, Bob.

First on the repurchases, I didn't hear you mention and I think any indication around $100 million in the fourth quarter.

Adena I think you talked about that at the Analyst Day, and I'm not sure if that's changed.

And also with respect to repurchases, wondering what the logic is in doing piecemeal increases to the authorization as opposed to maybe something larger and just reporting progress again?

Sure.

We do anticipate to continue to execute the program this quarter.

And as we said at Analyst Day, we could see ourselves taking in as much as $100 million this quarter.

Obviously depending on market conditions and things like that.

And then the $150 million authorization we received from the Board is really to carry us into and through next year and it is supposed to be part of an ongoing program that we're starting to develop around this.

Okay.

That's helpful.

And then the backlog in the technology business, it looks like, if I got this right, 2011 came up $2 million bucks, 2012, $5 million, and overall it looks like no sizable wins in the quarter.

This is only the second quarter you're giving this data out so I want to think about what to expect quarterly.

Do you frequently have quarters where there is nothing or is there seasonality where it tends to be weighted or certain parts of the year when that builds?

Sure.

That's a great question.

First of all, the sales cycle in the Market Technology business is long.

And for us, we've had, I think, very good success in essentially signing on some very large contracts in quick succession.

But then you can have periods where it takes some time to develop the relationship and sign further contracts.

So it's going to be, as we've said before, it's going to be lumpy that way.

But obviously the GAAP recognition of revenues smooths some of that lumpiness out over time and that's why we're showing that revenue recognition table.

The other thing I would say is the third quarter is always our quiet quarter because of the fact that people are on vacation, people are out of the office and you don't tend to make as many sales during this quarter, nor as many deliveries or enhancements.

So it does tend to be our quietist quarter.

But having said that, sales, again, it's a long sales cycle so you shouldn't expect big wins every quarter or anything like that.

And to follow-up from what Adena said, you'll see the orders will be episodic and lumpy but the revenue will be quite smooth based upon US GAAP.

Okay.

And also Singapore and Australia are both also customers of yours.

Any thoughts preliminarily on a merger, is that an opportunity or a risk?

It's an opportunity.

We signed contracts with them recently and I think a credit to our team in the contracts, it was not a shock that this kind of deal would happen.

So I think it represents a good opportunity for us, and clearly these markets will want to be tied together and we can help them do that in some fundamental way.

Okay.

Lastly just real quickly on tape revenues, US I think was down about 7%, and your market share overall was flattish, I think down 30 basis points.

A bit of a disconnect there.

I know there is issues around quoting sometimes that effects that.

Is there anything you can point to, how that worked against you maybe this quarter?

Okay.

Roger, before we get to that, I would like to back up to the Singapore question.

What was interesting is, I happened to be in Singapore for announcement of our ability to essentially trade some of our listed stocks in the Singapore market.

And as much as I've criticized what I call meaningless MOUs between exchanges, this is getting to be a real operational connectivity between exchanges that will work.

We have the clearing infrastructure in place between DTCC and the Singapore clearinghouse, and we have a number of our leading Chinese-listed companies which has a strong interest in that region to trade available to this.

So I think that's great progress and certainly indicative of the type of relationships we like to have with exchanges going forward.

On the tape revenue, Roger, first of all there was somewhat of a decrease in the macro revenue, the overall gross revenue that we get from the tape plans.

And that generally was a result of some softer demands on the retail side which generally corresponds to the summer.

But also as a general matter, beta revenue is a lagging indicator.

So you tend to find that we're still moving our way out of some of the destruction that's occurred in the financial markets.

So the gross revenue came down in the quarter.

And then in terms of the net revenue take, you're right that there was a little bit of a disconnect, and it's because of that quote sharing element to the sharing plan, as well as, depending on where you are strong in market share, some of the tapes are richer than others.

So if you have more revenue coming from a richer tape, then you tend to have an elevated amount of revenue in relation to your market share and vice versa if more of your market share is coming from some of the tapes that spread the revenue out more.

So it's hard to calculate, but you're right that there was a little bit of a disconnect between market share and our tape share.

Okay.

Thanks a lot.

Our next question comes from the line of Howard Chen with Credit Suisse.

Hi.

Good morning, everyone.

Bob, on the US options business, I know your goal has been to maximize profit and not necessarily market share.

Market share is growing, but looking back it looks like the net revenue capture is tracking down 20% from year ago levels.

Do you think you've achieve that right balance?

And maybe if not, what needs to change for you to get that balance right?

I would say this.

We've got an incredibly capable team running the options business and there is a number of innovations that they have been really anxious to bring to market.

And I've mentioned some of them before.

Primarily around complex orders.

And we're getting close to where we have both regulatory approval and the technical capability to do that.

And I think as we launch those products, they certainly will help with the capture rate.

But going back to your opening comment, our goal is certainly to maximize profitability but it's never 100% one way or the other.

So clearly there's been a market share element in our actions in the last year.

And we think we've achieved the right balance.

Understood.

Thanks.

And then switching over to Market Technology, just could you give us a feel for where the margins are?

I know that 25% to 30% goal is more of a year end 2012 but just current state of play would be helpful.

I would say that the progress on the margins for Market Technology is reaching our level of satisfaction.

I wouldn't say we're overjoyed with it, but we're pleased with the progress and it's a work in progress.

And Howard, we do publish that in our Q, so you'll see that next week.

But it is in double digits right now in terms of profitability.

Great.

Thanks.

That's helpful.

And quick one on the numbers, Adena, just end of period share account, if we could trouble you for that.

201.

Thanks so much.

Our next question comes from the line of Chris Allen with Ticonderoga.

Good morning.

Just a quick numbers question.

What should we be using for the tax rate moving forward?

That's a good question.

And the reason why the tax rate came down a bit this quarter is because on a relative basis more of our revenue was coming from outside the US.

So our European operation was strong this quarter and with the lower volumes in the US on a relative basis it came in higher for our overall business mix, which then brings the real tax rate down.

So that's why you had the drop in tax rate from second quarter to the third quarter.

On a going-forward basis I would say that we're looking at a tax rate of 32.5% to 33%.

And it's assuming that the business mix stays relatively consistent with what we've seen over the last few quarters.

Got it.

And then on slide 14 you talk about the $80 million to $85 million in incremental revenue from the investment spending you've done in 2010.

Can you give us some color in terms of where you stand relative to that goal, what's been the progress over the course of the year?

Sure.

We update that every quarter.

So we obviously feel pretty good about that number because we just updated it.

And I don't know if you noticed, but the coasts associated with our new initiatives came down from the prior quarter's version of that slide.

So we are again really managing our expenses very well against those new initiatives and we do feel comfortable with the range we have in there for the $80 million to $85 million of revenues for the year.

And our progress is good.

I think, recognize that some of those initiatives were launched in 2009 and they obviously have more progress against them and others were launched in 2010 and we do hope that they bring us some revenues into 2011 and '12.

And I would just say that we're increasing bullish on the investments that we made.

We know that not every one of them will pay off, otherwise it would be a guarantee.

But clearly there has been noticeable progress.

We've referenced a number of the items already during the call.

But getting first dollar revenue on these new initiatives is an important milestone and we achieved that in numerous ways in the third quarter 2010.

Sounds good.

And just one last question for Bob.

Obviously with the Singapore Australian announcement, there is a lot of chatter around the next potential wave of M&A among the exchanges.

How do you think this plays out over the next couple of years from your perspective?

I think with the Singapore Australia announcement you see both the positive and the negative.

Clearly there is some compelling commercial logic behind that transaction.

But there is also a political aspect to the transaction.

I've said somewhat facetiously that I think at the end of the day there will be one exchange, and that's obviously not going to happen.

But when you're in a transaction processing business, and you can lever a fixed-cost platform, that creates some compelling commercial logic.

So that's a basic backdrop to our industry.

It's been there forever, since the markets went electronic, and it will always be there.

But as we said, these initiatives, these acquisitions, it has to represent everything lining up in a perfect way for you to want to do them, and that's a difficult set of circumstances to forecast.

Thanks a lot.

Our next question comes from the line of Matthew Heinz with Stifel Nicolaus.

Hi, good morning, guys.

I think in the last few years we've all been harshly reminded of the cyclicality with respect to the cash equity business, and it appears that we've bounced off the bottom in terms of the competitive cycle.

But I would be curious to hear your thoughts on where you think we sit in the volume cycle, just from a historical context perspective?

That's a great question.

I certainly believe from historical context, and we have studied this and made reference to it during the Investor Day, we're near a bottom of a cycle.

And when you recognize that we're living through net equity outflows, when the competition for that investment dollar, the fixed income market is basically paying zero, and in the case of chips in the last auction less than zero, you know that times will get better.

So equities at this point in time are not in vogue.

Clearly when people seek higher returns, equities will I think regain some of its luster and so we're living through somewhat the bottom of the cycle.

And as I said in my comments, I think that makes this quarter that much more impressive for us to deliver $0.50 in a slow summer month when equities are at the bottom of the cycle.

That's very helpful, thank you.

And then as a follow-up, you've clearly been very aggressive with returning capital over the last several months and becoming even more so, but at what kind of levels in your stock do you think that the value proposition might shift in favor of doing more acquisitions or some other types of investments?

That's an answer that shifts based upon the particular opportunity.

Clearly with SMARTS we saw a clear return higher than a share buyback and we spent the $75 million in cash there as opposed to increasing the buyback.

So I think we have the right disciplines in place.

As I said, with acquisitions we now have three pillars.

One, it has to accrete within 12 months.

Two, it has to be strategically significant.

And three, it has to provide a better return than the share buy back.

It's a great way for us to operate the business and we look at everything through that prism.

Okay.

Great.

Thank you.

Our next question comes from Mike Vinciquerra from BMO Capital Markets.

Good morning.

One question on the options side I thought is interesting.

As you gain share, we've noticed that NOM has actually picked up significant share.

And if I'm doing the numbers right you're at an all-time high on a three month rolling basis.

Anything particular to NOM that is helping to drive more activity there?

That's a great question.

One, in terms of, we think NOM's best days are ahead of us.

As I think I referenced in the last call or at the Analyst Day, we are going to convert the NOM and Philly platform to be essentially identical.

And the important part there is when you look at NOM today, it has obviously a large membership base that are committed to the platform, but it still does not connect into the entire options marketplace.

So as we make this move, then we'll be able to benefit from the fact that the Philly platform is completely connected into the options world.

So we have a number of players who want to be in NOM that we're going to make it very easy for them as we go into 2011.

But as you look at -- going back to directly to your question -- as you look at the fact that we have the options trading in pennies today, it certainly makes the NOM market model that much more attractive to a larger number of player and I think that's been the fundamental driver of our success.

Adena, can you share the net take between NASDAQ versus PHLX.

Is there much of a difference between the two platforms from your perspective?

No.

There isn't, actually.

I think they've converged well and so that there is not a significant difference.

Okay.

Good enough.

Thanks, guys.

Our next question comes from Mark Lane with William Blair.

A couple of quick ones.

So Adena just to be clear on the capital management, the share repurchase authorization expansion, is that meant to send a message that that's what your intention is, the willingness of your commitment to share repurchase for next year?

Certainly we do want to indicate that there is an ongoing element to the repurchase program that we're introducing into 2011.

And again, we'll look at market conditions, we'll look at all of the uses of our cash but assuming this is the right return for us, then we will continue to use that cash into 2011.

I think it ties back to an earlier question.

Our Board has chosen to look at this on a continuous basis.

It will be a topic at every board meeting.

So we're not out there saying, here is is the extent of the program that we'll decrement against.

So this is what we're entirely comfortable with doing.

As you can probably see from our past actions when we announce a share buyback, we mean it, that we will actually do it and the Board will take it as it comes or review the set of circumstances that exist quarter by quarter.

Okay.

And then just really quickly on IDCG and the pricing, you had thrown out some pricing a few quarters ago very early on.

When you look at the competitive landscape of the three players in the market, one is a utility, the second one is not saying anything about pricing, they're negotiating with the dealers on revenue sharing arrangements, et cetera, et cetera, not a lot of detail there.

Do you really feel like the pricing structure that you laid out is still relevant as you try to garner attention for IDCG?

Definitely.

But I would put one qualifier on that.

I think with respect to pricing, you'll see some preferred pricing for a founding group of members for a period of time.

But the basic pricing model that was outlined we feel comfortable with.

Okay.

Thank you.

Our next question comes from Ed Ditmire with Macquarie.

I have a quick question.

Since this is your first time really buying back shares in 2010, can you give us any color on your price sensitivity on your buyback decision?

Of course the stock prices are considerably higher now than when you started the program, to try to give us a sense of when you guys might feel that the price is too high.

I can say that since we started buying back shares back in March, we have achieved a very good average price.

I think that our average price of the buyback has been $19.95 of the $300 million that we've bought so far.

And we do obviously look at the price as an element of making our buying decision but we don't publish any sort of criteria around that.

No, and I think the way to think about it is how we look at acquisitions.

So to the extent our stock goes higher than other uses of the cash, become that much more attractive.

So it's really knitting different alternatives together as opposed to saying, okay, this price is too high or too low.

Can you just maybe give us a hint, are we anywhere even close to the lines where different alternatives become more attractive?

You guys are firmly the cheapest exchange among all publicly listed exchanges in the world.

Thanks for reminding us.

It obviously makes it harder for us to do an acquisition with our stock being lower, that's for sure.

And it makes it easier for us to want to buy back shares.

And I think we can probably leave it at that.

And then again to the Hong Kong AFX, on one hand I think that having companies that are -- I'm sorry, between Hong Kong and then Singapore AFX potential tie-up, you have some customers in Market Technology that are just getting bigger and bigger from a market cap perspective.

These guys are firmly in that top tier of global exchanges now.

And I'm thinking about, on the one hand, is your technology business becoming more valuable as its customers are taking a bigger place on the world stage, or on the other hand, are companies like these, do you think, are they comfortable not controlling their technology?

You reference the two exchanges that have signed up major long-term agreements with us, and in particular with Genium INET, so I think these facts speak for themselves.

Again, our technology is unparalleled on a global basis right now.

We're not only incredibly proud of the speed and the through-put, but the application capabilities absolutely are outstanding with these products.

Genium INET was built off the Click platform and Click has been renowned through the industry for several decades now with the ability to configure it, to process and trade any asset that you can think of.

So you combine that with the power and the speed and the capacity of the INET messaging bus, you truly have something that is very difficult to replicate.

Also, I would say that in terms of the relationships we have with exchanges like Singapore and Australia, as Bob mentioned, we did just sign up long-term agreements.

But also with the announcement we made with Singapore, the relationship with these exchanges goes beyond just straight technology, as well.

So they are looking at us increasingly as a partner, like we've done with this dual listing initiative.

And as they increase their importance in the global stage, they also are looking at how to partner with other global markets and we're an obvious choice for them since we have a common technology.

I think that's a great point.

And clearly that's part of the future of the technology business, to be a partner.

And with our relationship with Singapore you can see we're taking a lead in that area.

Okay.

Thanks, guys.

Our next question comes from Chris Harris from Wells Fargo Securities.

Thank you, good morning.

Looking at your cash equities business again here, it looks like your market share might be under a little bit of pressure here so far in October, and I was just wondering if you would comment what's been driving that and whether this new pricing modifications November 1st is an attempt to maybe help out share there in the cash equities business.

Two responses.

One, in times of lower volatility the rate of internalization increases and we certainly have seen the BIX decline, so that's a real-life factor.

Two, our pricing actions on Monday, we certainly expect that it will help us gain share.

And as I said, it's pricing action targeted to the naturals in the marketplace.

And we have a basic belief that that has a ripple effect in terms of activity in the liquidity pool.

So we're very optimistic about that.

Okay.

And then on IDCG, would you guys ever consider selling a portion of your interest in that, bring another partner in or another exchange perhaps, or is this something that you're maybe 100% committed to?

One, we're 100% committed to it.

But that doesn't preclude other options or other partners.

We certainly do not see it likely that we would sell equity to another exchange right now, but there are other people that it could make sense to.

And hopefully as you follow us over time, you see that we take pride in being flexible of mind and we're open to whatever will make sense at the end of the day.

Okay.

Great.

Thank you.

Our next question comes from Jonathan Casteleyn of Susquehanna.

You've talked about, it broadly in some of your prior comments, but I'm just wondering, is there any way to characterize the regulatory view on high frequency trading, especially in light of their recent flash crash report?

Any way to sum their view up on the practice?

It's hard for me to speak for the regulator and it would probably be foolish for me to try to.

But I think the flash crash report showed that there are many different factors that go into our US equity market structure, and clearly high frequency trading, which before the report was assumed to be a culprit, came out of that report relatively unscathed.

So, I would say it's hard to draw any conclusion from that except that we should take pride in the fact that we have taken steps.

I call them blunt instrument steps, one with respect to the circuit breaker, two with our proposal for stub quotes.

I think there is active discussion about limit up, limit down and replacing circuit breakers.

We support that as a better way to go.

And that puts in the basic controls in the market.

Then the longer discussion would be how do you put in the finer implements of control in the market.

And as I said, those kind of discussions are competing with many other initiatives inclusive of the Dodd-Frank regulatory bill.

From that perspective do you think the bulk of the work has been done?

Have they satisfied some of the questions raised by that incident?

I think they've satisfied, as I said, the macro questions.

When you think about a circuit breaker, you're saying, okay if something happens in the market that we do not necessarily like, we're going to shut the market down.

And so you take yourself out of that risk profile.

But then the second order question is, is that the best way to do it and is that the best market structure in place?

And how do we get to a point in time when we do not have to shut the market down?

From our point of view having to shut the market down is somewhat an admission of failure.

And so the more granular question is how do you create a market structure where you don't have to hit a circuit breaker or have to hit a limit up or limit down.

And that's going to be a longer road as we discuss how to get there, and part of the discussion will be about privileges and responsibilities for certain market participants.

And as we know from past markets where there were privileges that bad things can happen to markets so it's a very nuanced discussion and I think that will take a period of time.

Understood.

And just quickly to Genium INET, the exporting of the platform into Nordic derivatives.

At status quo volume is there a benefit there?

There will be from an expense side.

And that benefit is not today.

But as we move the fixed income operation onto Genium INET then we'll have another platform retirement and that will be the Saxis platform.

We're not quite there yet.

We took the major step but we do have to migrate the fixed income market to it.

Is it substantial savings, or how do you characterize the savings?

We haven't put out a number out there yet, and I'm not prepared to answer it.

I'm looking at Adena here.

I think our Market Technology group and particularly our IT ops group continues to find ways to become more efficient, and you do see that in our expenses in terms of our ongoing expenses continuing, we strive to bring those down, and this will obviously help that probably later in 2011.

But it won't be anything dramatic.

I think it will just be part of our efficiency program.

It's always a good thing to retire a platform, we're anxious to do it, and the savings tend to be larger than you think when you find an elimination of X amount of work that is there.

So it will be a positive thing and it will come sometime in 2011 but it's hard for us to put an exact number on it right now.

Thanks a lot.

That's very helpful.

And our final question comes from Rob Russo with CLSA.

Hey, good morning.

Most of my questions have been asked and answered, but just a quick one on the Nordic markets.

You went to central counterparty clearing, but the revenues have been relatively flat.

Is there anything going on there that's not readily apparent in the numbers?

And do you have new brokers still looking to sign up for those markets?

Thanks.

Yes, speaking plainly, I think our expectation was for the new entrants to be productive in the marketplace would have happened sooner.

So that's somewhat the bad news.

The good news is they're all engaged, the pace of activity has picked up and in a certain way we think the end state is better than we would have thought a year ago.

As we mentioned previously, one of the very largest high frequency firms which has been testing their models against the Nordic market ordered their co-lo, signed the contract for the co-lo just yesterday.

So we hope to have them operational sometime in the first quarter.

So we're making progress, it's just a little slower than we thought but I think the ultimate opportunity is actually larger.

Okay.

Thanks a lot.

At this time I would like to turn this over to our speakers for any closing remarks.

I would say thank you for your time today.

As I've said in my prepared remarks, we're quite proud of the fact that against what we call a beta headwind we were able to deliver alpha results to our investors and look forward to talking to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone has a great day.