納斯達克交易所 (NDAQ) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NASDAQ OMX first quarter 2014 results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Sir, you may begin.

Good morning, everyone, and thanks for joining us today to discuss NASDAQ OMX's first quarter 2014 earnings results.

On the line are Bob Greifeld, our CEO, Lee Shavel, CFO, and Ed Knight, General Counsel and other members of the management team.

After prepared remarks, we will open up to Q&A.

The press release and presentation are on our website, and we intend to use the website as a means of disclosing material, non-public information in complying with disclosure obligations under SEC regulation FD.

I would like to remind that you certain statements in this presentation and during Q&A 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.

Actual results may differ materially from these projections.

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

I will now turn the call over to Bob.

Thank you, Ed.

Good morning, everyone, and thank you for joining us today to discuss our first quarter 2014 results.

We are pleased to report another consecutive quarter of record results, which is another proof point validating our long-term strategic vision of leveraging our organizational and technological advantages in our core businesses into adjacent opportunities, while simultaneously maintaining a maniacal focus on executing our core mission.

Before we get to the details of our performance, I want to start by acknowledging that we understand there is a topic of interest to investors, US equity market structure issues.

And we will cover this topic in more detail a little further along in our remarks, and certainly answer any and all of your questions to the best of our ability during the Q&A portion of the call.

First though, I think it is important that we provide a clear picture of the strong results we delivered in the quarter.

This will serve as a proper backdrop and context for all discussions.

When we look at the course this franchise has pursued over the last decade and the transformation we have undergone, it is quite remarkable.

The actions we took over the last year through our acquisitions and investments have positioned this Firm for the strong results we are delivering today, our second straight quarter of record financial results.

This will position us also to deliver in the quarters to come.

During the first quarter 2014, we again set a new record levels in revenues of $529 million, and non-GAAP EPS of $0.72, the latter which rose 13% year-over-year.

Even more of interest to us is the near double-digit organic revenue growth of 9%, including organic growth contribution from each of our four business segments, the principal driver for these record earnings.

We had an astounding 64% win rate in US IPOs, and hosted the largest Nordic IPO by market capitalization in 14 years.

Our index groups or AUM and licensed ETPs crossed $100 billion for the very first time.

And very importantly, our equity market share on both sides of the Atlantic saw significant increases.

To me, these are positive signs that our efforts are on the right track, and the chosen businesses we continue to resonate with positive momentum in the marketplace.

I want to turn to some of the business highlights that we think of are of particular interest and contributed to the record results we delivered.

Our model and approach continue to allow us to capitalize on the opportunities in front of us.

When we look at the broader scope of what we do and how we do it, and the value we deliver in the marketplace, it is that our businesses are rooted in advanced technology and the distribution of data and information.

We are certainly excelled at innovating in this space over time.

Technology is truly the connective tissue across all of our businesses, and allows us to have clients that move seamlessly across today's global capital markets.

Clearly, one of the more remarkable highlights for this quarter, which is central to the value proposition is our market services segment.

This quarter, net revenue was up 17%, led by strong equity market share which rose 2% in the US, and 3% in the Nordics, with a material [caps] rate also increasing in US equities.

Importantly equity tra

ding rose year-over-year for the first time since the third quarter of 2011, in both US and Nordic markets.

Truly outstanding, an event from which we are always happy to be the beneficiaries.

It is our hope that this positive trend will continue, not only for our businesses, but as further evidence that positive investor sentiment is steadily returning to the financial markets.

In Europe, the elevated IPO activity tends to help increase market share, and we continue to benefit from generally improving values of traded stocks throughout the region.

Closer to home, I want to commend our US equity transaction team, which over the course of the last nine months has seen steadily improving market share, and capture rates, which highlights our focus on strengthening the competitive standings of this franchise.

As a result of these efforts, we saw a healthy 11% year-on-year increase in US equity volumes, and in turn a 39% increase in net revenues.

While the majority of our transaction revenue, over 60%, is from derivative and fixed income products which have the strongest opportunities for us, we are encouraged by the strength the equity markets have exhibited, and they remain fundamental and core to what we do.

Building on recent momentum, our information services segment continued to demonstrate strong performance during the quarter.

Revenue rose 16% to a record $123 million, driven by both a 35% increase in our index licensing and service revenue, and continued healthy growth in market data.

During the quarter, we brought several new index products to market, including the first ETF to be launched in the new year, the First Trust NASDAQ Rising Dividend Achiever ETF.

In addition, we are certainly pleased to celebrate the 15-year anniversary of the flagship product of our index business, QQQ, now the PowerShare's Q-ETF.

It is remarkable to think that this product started with a little over $14 million in assets under management in its first year, and today has over $40 billion, and is one of the most heavily traded securities and one of the largest ETF's on the planet.

Just to give you a little more perspective of leadership in this area, we are one of the only -- one of 10 only index companies with licensed exchange traded products with over $500 million in AUM.

That is truly remarkable.

The innovative work we are doing today with our global index calculator and establishing benchmarks will continue to transform the index industry, just as the Q's have done for the ETF industry.

We are pleased with our progress, and we expect our efforts to continue to produce positive results.

Another bright spot for us, and one that bodes well for not only our business, but for the broader economy and job creation is the continued strength we are seeing in the IPO market.

During the quarter, there were 73 US IPOs, up from 34 in the prior year period.

And let's remember, last year was a pretty good year.

Our share of US IPOs is 64%, well above the levels we have been seeing for the last five years or so.

This is partially as a result of the increase in healthcare listings, another sector where we continue to win the majority of IPOs coming to market.

As I mentioned earlier, we are also are seeing strong activity in our Nordic markets, where we recently welcomed ISS Group A/S, the largest Nordic IPO in over 14 years measured by market cap.

They raised $1.5 million in USD.

One of the core missions of this Firm is always to be a partner and advocate for our customers, and particularly the innovative companies who need access to capital to grow their franchises.

This was certainly the driver behind the NASDAQ Private Market, NPM, a new innovative marketplace aimed at private growth companies that we launched during the quarter.

It is early days yet, and while we cannot change the world in seven days, we are very encouraged by the robust pipeline of quality companies engaged with us, and we are very close to launching our very first liquidity program, truly an historic event.

Now I want to spend a few minutes and update you on our 2013 acquisitions which remain key areas of focus for us, as we continue to work to improve these franchises, and position ourselves to deliver significant synergies in the near future.

With the Thompson Reuters IR/PR/MM business acquisition, we have focused on how we can improve our efficiency and effectiveness, and delivering the best product and solutions for the best client experience.

Specifically, we are focused on enhancing our product offerings, and combining our best product and services to deliver something that no one else in the marketplace can match on an equal basis today.

We are leveraging our scale and expertise to consolidate and retire six legacy platforms over the next 18 months, taking our total number of platforms from 17 to 11.

This will have a considerable impact on the efficiencies we deliver to our customers, and we expect to reduce our costs.

We are on track to achieve $35 million in synergies, a major leg in a broader objective to hit our 20% margin target.

As I said, we have a long way to go until we are satisfied.

But the progress we are making is steady, and we believe the business offers tremendous value in the marketplace.

We have over 10,000 potential cross-selling opportunities, and we are incredibly optimistic about this business' potential for this organization.

Now let me move to eSpeed.

The sequential revenue decline in the quarter was somewhat anticipated, as revenue associated with supporting a third-party exchange's technology platform had been scheduled to phase out.

That said, clearly, we are pressuring ourselves to accelerate our progress with eSpeed, and May is a pivotal month for us in this regard.

May represents a culmination of the integration and transition work that was started before the close of this transaction.

By the end of May, we expect to have completed all migration of the eSpeed matching engine to our data center.

And as importantly, during the latter part of May, we will commence the rollout of additional products on the eSpeed platform.

The products will help our customers effectively manage their costs, in a challenging fixed income environment.

NASDAQ, as the new owner of this asset is uniquely qualified to do that.

We are confident that our efforts to enhance eSpeed's technology, expanding its product offering to more fully serve our clients will improve its competitive performance in the quarters to come.

Now I would like to spend a few moments talking about high frequency trading, and how we view this important topic, as it pertains to the market structure debate that has been going on.

NASDAQ, as an SRO has been awarded three exchange licenses by the SEC in the US, and we pride ourselves in providing fair and open access to our markets.

This is our obligation under the law, and we are proud of our stewardship of these licenses since 1971.

One of the difficulties of this discussion is an inability to either define or measure HFT activity.

We have all read the SEC definitions, and many have read BlackRock's definition and categorizing constructive good H activity to destructive bad H -- HFT activity.

We certainly recognize the need and desire to communicate to investors the extent of the HFT activity in our market, and to communicate in a factual data-driven method.

The availability of proper and complete data is mandatory, before we can even attempt to define this activity.

We believe a primary indicator of HFT activity, I will get that right, is a high order to trade ratio.

That data is also completely knowable.

Based on these two facts, for our analysis, we concentrated on high order to trade.

Now others may prefer different measures, and we are not here to criticize other definitions, but in the spirit of dealing with what we can clearly define and what can be clearly measured, we are adopting an analysis that focuses on firms that show a high degree of quotation to execution orders.

In fact, within this context, you can also debate where we should draw the line.

So we are going to show you several lines, 60 orders per trade all the way up to 100 orders per trade.

That is our approach.

Again, others may take a different approach, and we are not here to argue with them.

With this as a context, we looked at the market participants IDs.

We call them MPIDs.

And we looked at those who are not registered market makers with NASDAQ, and who had ordered the trade ratios of at least 60-to-1.

So the first question is, why exclude market makers?

For the very good reason that under the current regulatory regime, we believe that putting capital at risk and by continuously maintaining a two-sided market, you are one, contributing to price discovery, and helping investors by providing immediacy of execution.

Now those who are not market makers, who have the ratio of 60-to-1, 80-to-1 or 100-to-1, high order to trade, will adopt the acronym HOTT, H-O-T-T.

So for these reasons, and taking into account the caveats that I stated earlier, and which are mentioned in the deck, I call your attention to slide 21 of the presentation.

The numbers aggregate revenues from these products, and they tend to rely on their activities in market data, access services and transaction areas.

This category of high order to trade ratio firm's HOTT, when you aggregate their revenue from our various products constitutes approximately 1% of our global revenue.

We hope you find this useful.

We look forward to answering your questions during the Q&A portion.

And as I said before, this approach has the advantage of being clearly defined, and we are the first ones putting a clear definition out there, and as importantly, clearly measurable.

We have the data.

We measured it, and we know exactly the numbers we represent tie to the definition of what we are putting in front of you.

But it is also recognized, that we say this is the revenue, and we are not saying this revenue will be impacted.

And I would have to say here at NASDAQ OMX, recognizing that 40% of the market trades away from the lit markets, we certainly see significant opportunities as the market evolves for NASDAQ OMX to benefit.

So we certainly look forward to the continued discussion.

Markets can always get better, but as I have pointed out before, you don't improve your transaction costs by a 14-fold without some progress being made.

In closing, I would like to say the strength we exhibit during the quarter continues to again highlight the resiliency of our business model, and the soundness of our strategy.

While we have certainly benefited from more and more positive and macro industry environment, we clearly advanced the ball down the field, and increased our leadership position across all our businesses.

We continue to exceed our customers' expectations with our disciplined approach, and focus on creating value for our customers and shareholders.

I know for me and this management team, it certainly is gratifying to see our business performing as strongly as they are.

This is what we planned for and work toward, and so to see our efforts paying off is certainly a good fuel to push us to reach even greater heights in the quarters to come.

And with that, I would like to turn the call over to Lee, who will go into more details on the numbers.

Thanks, Bob.

The following comments will focus on our non-GAAP and pro forma non-GAAP results.

Reconciliations of GAAP to non-GAAP and pro forma non-GAAP results can be found in the attachments to our press release, and in the presentation that is available on our website at ir.nasdaqomx.com.

I will start by reviewing our first quarter revenue performance relative to the prior year quarter, as shown on page 3 of the presentation.

Net revenues increased $111 million to a record $529 million.

Contributing to this increase was an $82 million or 27% increase in subscription and recurring revenue, primarily from acquisitions, but also from material organic growth.

Subscription and recurring revenue represents 72% of our total revenues.

Transaction-driven revenues rose $29 million or 24%, due a little more than half to organic growth, with the rest coming from the inclusion of eSpeed, which closed at the end of the second quarter 2013 period.

As Bob mentioned, on an organic basis, constant currency and excluding acquisitions, total Company net revenues rose 9%.

I am now going to go over some highlights within each of our reporting segments.

All comparisons will be made to the prior year period, unless otherwise noted.

Information services on page 4, which includes our market data and index businesses increased revenues 16%, and operating profit by 13%.

Operating margin was down marginally, but remained at very high levels at 73%.

Market data had a 12% increase in revenues due to a wide range of drivers, including continued growth in NASDAQ BASIC which also had a price increase, the inclusion of eSpeed market data, and the impact of higher equity market share and a price change on Tape revenues, partially offset by lower audit collections which were $1 million lower than the prior year period.

Index licensing and services grew revenues 35%, due principally to the growth in assets under management and exchange traded products licensed to NASDAQ OMX, which rose 52% to $94 [billion] at the end of quarter, and secondarily to higher volumes of licensed derivative contracts.

Moving to technology solutions as shown on page 5, which includes corporate solutions and market technology, increased revenues by $60 million or 80%, mostly due to the impact of the Thompson Reuters and BWise acquisitions, but also due to organic growth at both the legacy corporate solutions business and in market technology.

Operating profit was $8 million, up from $3 million, and the margins saw a modest uptick to 6% from 4% last year.

Corporate solutions revenue comparisons show the large step-up in scale, due to the May 2013 Thompson Reuters acquisition more than tripling compared to the prior year period.

But it is important to note that we are still seeing solid organic growth here as well, in particular at Directors Desk where we saw clients increase by 24% versus the prior year.

Market technology revenues grew 4%.

The order intake of $57 million was very healthy, and the backlog stood at $652 million, just a bit under last quarter's all-time record and up 24% versus the same year -- the same period last year.

Growth included contributions from both BWise and SMARTS, mitigated somewhat by lower change request revenues.

As we said last quarter, we continue to expect year-over-year improvement in technology solutions segment margins in 2014, and continue to target a 20% margin by the end of 2015.

In market services on page 6, which includes our derivatives, equities and fixed income businesses, as well as associated access and broker services, we saw a 17% increase in revenues due a little more than half from organic growth.

In particular, we saw material improvements in US and European equity revenues, and with the impact of the eSpeed transaction and hosting revenues.

Operating profit increased 27%, and operating margin of 44% was up from 41% in the prior year period.

Net derivatives trading and clearing rose 3%.

European revenues saw a lift driven by commodities and clearing products, while net US derivatives were flattish, the net of slightly higher industry volumes and modest declines in share and capture which offset.

Net equities trading revenues rose 29%, as we saw market share several percentage points higher in both US and Europe, and our US capture was up materially, and we enjoyed better industry volumes in both.

Net fixed income trading revenues fell $3 million from the third quarter, due mainly to a planned reduction in revenues associated with supporting a third-party technology customer at eSpeed.

We will continue to recognize about $1.5 million in revenues per quarter in 2014 from this client, and then we don't expect any revenues in 2015 and beyond from that third-party technology customer.

Transaction revenues not associated with this client were unchanged from the fourth quarter of 2013 period.

In access and broker services, revenues rose $2 million or 3% to $65 million, driven primarily by pricing initiatives and new products.

And in listing services on page 7, we saw a $3 million or 5% increase in revenues on higher European listing fees, which reflect higher market capitalization there, and US revenues which reflected an increased issuer base and more new issue activity.

Operating profit decreased $2 million or 8% to $22 million, and operating margin of 38% was down 6 percentage points versus the prior year period, related in part to NASDAQ private market-related expenses.

US new listings in the quarter more than doubled to 73 from 34 in the prior year period, and our IPO win rate was 64%, up from 52% for the full year 2013, and 53% in the prior year quarter, due in part to high issuer activity in health care where NASDAQ has a dominant market share.

100% of the biotech IPOs in the first quarter listed in NASDAQ.

In Europe, the new issue market has been busy as well, with NASDAQ OMX hosting the IPO of ISS Group A/S, which by market capitalization is the largest new listing on a Nordic exchange in 14 years.

Turning to expenses, our non-GAAP operating expenses increased by $78 million from the prior year, with the vast majority of the increase coming from the two acquisitions.

Organic expenses, excluding the acquisitions and assuming constant currency, rose 6% this quarter including GIFT spending above our normal organic expense growth rates, due to higher incentive compensation costs, as well as the initial temporary investment spend we are making into our acquisitions.

Non-GAAP operating income in the first quarter of 2014 was $214 million, up $33 million or 18% from $181 million in the prior year period.

Non-GAAP operating margin came in at 40%, down from 43% in the prior year period, primarily the result of a larger contribution from the lower margin technology solutions businesses due to the Thompson Reuters acquisition.

As we achieve cost synergies related to this transaction, we expect to see technology solutions and overall margins increase.

Net interest expense was $28 million in the first quarter of 2014, an increase of $7 million versus the prior year due to increased borrowings associated with our acquisitions.

The non-GAAP effective tax rate for the first quarter of 2014 was 32.8%, at the low end of our 33% to 35% guidance range.

Non-GAAP net income was $125 million or $0.72 per diluted share, compared to $108 million or $0.64 per diluted share in the first quarter of 2013.

The $0.08 increase in our EPS reflected a $0.09 improvement in our core operating profitability, a $0.02 benefit from the acquisition net of financing costs, partially offset by $0.01 of increased spending on GIFT initiatives, and $0.02 due to a higher fully diluted share count.

Moving on to the balance sheet, on page -- on slide 13, we are showing our debt structure and debt maturities.

Our higher debt and leverage versus the prior year reflects the completion of our acquisitions of Thompson Reuters at the end of May and eSpeed at the end of June, financed largely with debt, while both our debt and leverage declined over the period since those acquisitions, reflecting debt pay-down as well as improved EBITDA.

In the first quarter, the Company paid down $121 million in debt, including $95 million in repayment on the revolver and $26 million on our term loan.

The changes in foreign exchange rates led to a $1 million increase in the US dollar amount of foreign-denominated debt on the balance sheet, netting to a $120 million decline in total debt compared to the fourth quarter of 2013.

Our gross debt to EBITDA leverage fell to 2.6 times from 2.8 times last quarter, and a peak of 3 times at the closing of our acquisitions in the second quarter of 2013.

The deleveraging process is on track, and consistent with our original expectations, and we continue to expect leverage to return to the mid 2s range by the end of the second quarter of 2014.

As we have said previously, when we have achieved our leverage target, we will have the flexibility to consider all of our capital allocation alternatives, including share repurchases.

Thanks for your time today, and I will now turn it back over to Ed.

Operator, will you please open the line for Q&A?

Yes, sir.

(Operator Instructions)

Our first question comes from Ashley Serrao of Credit Suisse.

Your line is now opened.

Good morning.

How are we doing?

Good morning, Ashley.

Doing well, thank you.

Our first question, just on colocation, direct data feeds.

And I know that the SEC has been looking at these practices for a while, but was curious if there is any change in customer behavior for -- our customer demand for these service, since the media scrutiny intensified?

The answer is no.

We have seen the backlog remain fairly consistent, and customer activity is at a normal level.

Thank you.

And then on cash deployment, it looks like you are ever so close to your debt-to-EBITDA target.

But in the past, you have spoken to being opportunistic should an index property come to market.

But apart from that, is there anything else that makes sense, that intrigues you today?

I would say this much, that what we see in the marketplace is from our point of view is somewhat frothy, and valuations on the sellers are, I think overdone at this point.

So we are less inclined to be involved with any transactions with the current market sentiment.

And I will leave it at that.

Thanks for taking my questions.

Thanks, Ashley.

Thank you.

Our next question comes from Richard Repetto of Sandler O'Neil.

Your line is now opened.

Good morning, Bob.

Good morning, Lee.

I guess, first question will be sort of on some numbers in more detail.

But the US market data, $71 million, very strong.

But I guess I'm trying to figure out, it has been volatile.

It is much higher than last quarter, but third quarter was $73 million.

So I'm trying to see what -- why this isn't more, I guess, level.

It is a good issue to have because, since it is up, but just try to see the -- what is driving the increase here?

Yes, Rich, I think the components that have driven a little bit of the volatility in the market data line have been the audit component, which has varied from quarter-to-quarter.

We recognized that.

We actually have been working to try to make certain that some of those audits resolutions are going to be evened out across the quarters.

I think that is the primary driver of the volatility.

The other component is, of course, on the Tape revenue which maybe influenced by market share fluctuations.

We had, as Bob noted, strong market share in our US cash equities business, which contributed to strength within that business.

But I think the primary issue is really the audit component.

If we were to break out the audit-related revenues in the first quarter of this year, it was approximately a $6.6 million element, whereas in comparison to the fourth quarter of last year, it was effectively negligible.

And in the first quarter of 2013, we had audit revenue of $7.9 million.

So that is I think creating some of the noise that you are seeing.

Got it.

Thank you.

And then, my follow-up is a broader, I guess, more deeper question.

But Bob, when we talk about market structure, and you are excluding the market makers.

And let's just say if we both agree that some of this behavior that is being professed to be out there, let's just assume it is in the minority.

But if there were regulatory changes that did impact -- to try to prevent some of the, let's just say a small portion of predatory behavior, wouldn't that impact market makers as well, if they met whatever the -- again, I agree with you the definition of high frequency trading is still pretty gray right now.

But wouldn't your market makers be impacted as well, if there was some sort of regulation?

Well, I would say two things.

One, before I get directly to your question, it is important to recognize that I think it is broadly held that there are HFT strategies that are seen as beneficial.

And I think the BlackRock report is quite constructive, and that is just not BlackRock, but many people.

So even when you look at the revenue impact to us say, at the mid case of 80-to-1, it is $20 million to $26 million, that -- part of that number, and it could be a majority of that, is seen as good for the market, in terms of the activity that they do.

So I want to make that very clear.

With respect to market making, I think if anything, we need more market making in this marketplace, in particular as you go down the market capitalization curve.

So if anything, I think you will see a strengthening of the market making function in the years to come.

The immediacy of the liquidity that they provide to investors is a value component of the market.

So I have yet to hear anybody, in any context say that market making activity is bad for the marketplace.

And I certainly stand by the thought that, in the smaller and mid tier stocks, we have to do something to encourage more market making.

And that is one of the prime discussion points to Jobs 2.0, how do we bring more market making into the marketplace?

I would agree 100%, Bob.

But I guess, the question is, if there is -- as investors look at NASDAQ, and they, if there is some -- any types of controls, or if there is any changes, they are looking at how could that impact overall volumes?

Not to say that market makers aren't important across the caps spectrum and more needed, but just that they could impact volumes even for electronic market makers.

Yes.

I, again, Rich, let's make it clear, we are talking about market making the way we are, right?

These are people who are providing a two-sided market, who always have to be on the adverse side of the investment decision, providing immediate liquidity to the marketplace.

And under our rules have to be within a certain percent of the inside market on a continuous basis, right?

So I think in any construct you talk about, nobody is going to try to restrict that activity.

Why would you?

The market needs that.

Got it.

Okay.

Thank you for the answer.

They are exposed continuously, and this is a pure market making activity we're talking about.

Understood.

Thank you.

Thank you.

Our next question comes from Bill Katz of Citi.

Your line is now open.

Thanks very much.

I had to jump off for a moment, so I apologize if you covered this, or if it was already asked.

But from your definition of the HOTT, what from just an obvious perspective might you be excluding?

And then secondarily, has the dialogue with the regulators changed at all, just given the greater scrutiny following the release of the book?

Yes, so I would say when you look at the HOTT definition, what is in the number, which would be construed as good, is certain activities with respect to what is traditionally known as HFT.

So, for example, somebody who makes directional trading bets, somebody who is doing [Stat-R], these functions would fit into this definition that we possibly have here.

And it is unlikely that any regulatory focus would be on eliminating the ability to make a directional bet in the market.

So from that context, the number could be overstated.

We are not representing it is, but they are in that bucket.

The second side, on the other side, is what Rich hit upon.

Right?

The market makers are not included in this bucket.

And we have particularly left them out.

They have strong obligations under NASDAQ OMX.

They have to, as I said maintain a two-sided market continuously, have to be within the inside market, and have to be ready to take an execution, whether they really want it or not.

So that is a valid, and it is a fundamental construct of the market.

And let's understand that NASDAQ when it was founded in 1971, was founded on market makers being the cornerstone of the growth of this market.

So you have got market makers excluded on the one side, and included in this bucket is a lot of activity that BlackRock and others would see as, and ourselves as good for the market, but we didn't have any way to provide greater granularity.

The advantages of this HOTT approach, as I said in my prepared remarks, it is definable, it is measurable.

You don't have to agree with it, but it is a clear way of trying to get from -- away from this amorphous definition of, what are we talking about here?

And just what has been from the regulatory feedback?

Has anything changed -- (Multiple Speakers).

Sorry.

That's okay.

Yes, I mean, we are in constant conversation with the regulators.

I don't want to speak for them, but I think it is in a normal state of discussion.

And again, so as my follow-up, and again I apologize if this is already covered.

Just in terms, that we are that much closer now to [6/30].

The stock has pulled in a little bit on the controversy.

How are you thinking about capital management priorities, as you work down the debt?

Yes, I think it is important to recognize the hallmark in NASDAQ OMX is we, we execute very well.

We do what we say we are going do.

So when we announced the acquisitions, we said we had to obviously focus on delivering the value to our investors on those acquisitions.

And if we did that, we would be able to de-lever.

And if we are able to de-lever, then we would be in a position to go back to a more aggressive capital return philosophy.

So I am proud to say that we have done well since we announced the deals.

We are making progress.

We are not quite there yet.

And we are focused on the operational excellence right now.

And as soon as we get to where we need to be, then we will take that decision.

All right.

Thanks for taking my questions.

Thank you.

Thank you.

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

Your line is now opened.

Thanks.

Hello guys.

So Bob, thanks for all your color in the slide you laid out here on HOTT.

Just kind of curious, when you looked at this, why did you decide on 60-to-1 as being the good metric, as opposed to some ratio lower than that?

And then wondering, if you looked at these number, if you actually included the registered market makers, and what would the numbers look like if that was the case?

Yes, well, let's start by saying we started with 100-to-1, in that NASDAQ uniquely in the US put in a pricing scheme, that basically had a penalty for those who are above 100-to-1.

And if we looked at the regulatory actions in Europe, what was contemplated and discussed, it was always around 100-to-1.

So we started with that.

And I would have to say for the team who spent many hours, that was a lot of work.

And then, one of the advantages of being the CEO, I said, well, why don't we do it for 80-to-1?

And then we did that.

And then, late last week, I said, why don't we do 60-to-1?

And then yesterday, I said, why don't we do 40-to-1?

And they said well, boss, we would love to do that, but there is no way we can get it done for this earnings call.

So I think in the future, we might show a 40-to-1.

And like you say, it is a bit of work, and if you look at all of the assumptions that are there, this is not an automated process.

So I compliment the team for getting this amount done.

So we, on the second part of the question, with respect to market making, we haven't looked at it.

I don't know if we can, and to do it as clearly definable as we are.

But I do want to say again, that in any discussion I have had with any regulator in both the US and Europe, market making has never come into the conversation.

We certainly see with the Volcker Rule, that market making was carved out.

And if you want to use that as a model, you see that they recognize in that construct that market making was fundamental.

And any discussions I have had both with Congress and with the regulators in the last year to 18 months, is to how to improve the market making function.

And as I said, the discussion around Jobs 2.0, is how do we make market making a key part of the success of the marketplace going forward?

So I just don't think it is in the scope of any discussion at this point in time.

But Bob, do you think a lot of the concerns people may have, could be solved with just the speeding up of the SIP?

And if you think that, what do you think the impact of that would be, and would you be supportive of that?

Well, it is a great question.

So the first thing that is out there, that is incorrect, is the SIP versus the prop feeds, it is apples and oranges, right?

So you have to understand, they provide different data to the marketplace, right?

So you can't say one replaces the other.

You would have to redefine what the SIP is, at this point in time.

The prop feeds provide the entire book, right, for a individual exchange.

And the SIP provides the top, right, and only the top for the bid or the offer.

The bid could be coming from one exchange, the offer from the other, and you don't get any depth of the book there.

So I am always confused when knowledgeable people talk about the one versus the other, because they are just in fact, different.

The other piece of data, which we will talk about in more detail in the future, is the performance gap between the SIP and the prop feeds is remarkably small.

Obviously, we will work with the SIP committee with respect to what information they want to put out.

But if you look at the history of the SIP over the last two to three years, the focus has been on speed.

We, obviously, post August changed some of the focus to resiliency, but the entire focus was on speed of the SIP.

It is also important to recognize the SIP does a different function than the prop feed, and the SIP has to do an aggregated -- an aggregation function.

So when you compare the speeds, that is also unfair, in that if I take in five prop feeds from five different execution venues, then I have to write the code, and run the process to pull that aggregation together.

So the SIP is doing that for you.

So when you talk about the raw speed of the SIP, versus the raw speed of the prop feeds, it is different.

So it is different data, it is a different function.

And so, that is a lot more nuanced discussion, than you commonly read about.

Thanks for that, Bob.

Okay.

Thank you.

Our next question comes from Mike Carrier of Bank of America Merrill Lynch.

Your line is now open.

Thanks guys.

Just first question, just on some of the non-transaction revenue areas.

I think last quarter when the technology revenues came in really strong, you noted some of the items that drove that.

I just wanted to make sure, when we look at market data, the index business, both of those definitely came in stronger.

And then on the flip side, I would say the listing business, despite your gaining of IPOs and the number of companies and shares that are listed, it just seems like that stalled a bit.

So anyway, I just wanted to make sure on those like three areas, if there is anything that you would point out, either on the negative or the positive side?

I will just start with a -- not answering your question, but an important point.

I think it is amazing that we passed $100 billion in assets under management.

I mean, clearly when you were talking about NASDAQ OMX, I myself don't think of myself as such a large player in the space.

But it has been a remarkable progress and another strong quarter for that group.

With respect to the listing business --

Well, I think actually, in the listing business, we were really pleased with the 3% growth that we saw in that business.

I think Michael, if there were some areas that I think in the non-transaction side that we saw some declines, it would be in our technology solutions business, particularly around the market technology revenues.

Which relative to the fourth quarter, it really had more to do with some accounting elements in our BWise business that contributed primarily to a $4 million reduction relative to the fourth quarter in that area.

As well as a seasonal drop in change of request and advisory revenues from the fourth quarter, which were down about $7 million.

But again that is -- typically we see strength in the fourth quarter, and not so much in the first quarter.

And then, we had a small drop in software-as-a-service revenue of about $2 million.

So I think, if I were to isolate among the non-transaction revenues, where you saw some declines relative to the prior quarter, that is where they would be.

But again, we saw organic growth on a year-over-year basis.

And within corporate solutions, we were down slightly from the prior quarter by about $1 million, due to the loss of -- or the phase-out of some of the New York Stock Exchange partnership revenue.

But that was offset by strength in our public relations business.

The number of press releases were up, as well as the growth in Directors Desk.

And so, that is where I would focus on, in terms of looking at the non-transaction revenue trends for the quarter.

Okay.

That's helpful.

And then just as a follow-up, the color on the HFT or that segment of the market, that is helpful.

I think when you look at sort of the two items that are out there, there is one that is a debate on market structure.

And then there is the second one, which is more the legal side.

And obviously, the market structure is much more quantifiable, and the legal side is not.

But just given that the AG has been looking into this area, maybe the FBI, is there anything that when you look at it, obviously you can only talk about NASDAQ specifically.

But in terms of subpoena is there that you would be worried about, or is it an ongoing thing where the market is being investigated and there is nothing you would say is out of the ordinary?

Right, I will just start quickly on the market structure, and then let Ed Knight answer the legal questions.

So as I said in my prepared remarks, we have 40% of this market that trades in the dark, and that has been a discussion ongoing.

It is certainly our hope, that as a result of some of this controversy, that there is an acceleration of efforts to bring more of that market into the lit and transparent world.

And certainly, early indications are that, that will be some great opportunity for us.

So we are clearly excited about that.

Ed, with respect to the legal?

I guess, what I would say, make a couple of points.

One is, one of the beauties of electronic markets is the record that is created when you trade electronically.

We are a self-regulatory organization.

We are constantly survelling our markets, working with FINRA, innovating in this area.

We believe in aggressive surveillance and investigation in the markets to protect investors.

We support other investigators around the world, in all of the markets in which we are active.

There is virtually no regulator or investigator that we haven't worked with at some point in time.

Most of those reviews are confidential, so we have a policy of not commenting upon them.

But we are for vigorous enforcement of the law with regard to these [markets].

Thanks.

Thank you.

Thank you.

Our next question comes from Alex Blostein of Goldman Sachs.

Your line is now opened.

How are you doing, Alex?

Great, thanks.

Good morning, everybody.

So I just wanted to follow up on a couple of things, I guess.

Understanding that there is not a whole lot of tangible items right now on the regulatory front, but one of the topics that obviously is widely debated as well, is a potential change to the make or take pricing structure, whether augmenting it slightly, or just considering other options for pricing all together.

Clearly, the other big player in the space has been pretty vocal about it.

What are you guys stance on the issue?

And I guess, how would that impact the business?

Well, first, understand that many markets that we compete in, we don't have make or taker, in -- (Multiple Speakers).

Just in the cash equities in the US, of course.

What's that?

Just in the cash equities in the US.

Yes, but I am talking about our experience, on the success, where markets where the maker taker it doesn't exist.

So in the Nordic market in particular, equities, we don't have maker taker.

We certainly have traders that fit the definition of HOTT or HFT, which ever you want.

And as you saw with the numbers, we have done fairly well.

So from a point of view of maker taker practically, we don't think it has any real impact on us.

We would have to see.

Certainly, we look at the Nordics as a great reference point.

But we also philosophically see that there is some value to provide incentive to the person who provides the initial liquidity into the marketplace.

The concept of somebody showing their hand first, by putting an order into the marketplace, and then giving optionality to the rest of the market to respond to that, the concept that that person should be paid or incented to do that, I think is a fair concept.

So from a practical point of view, we are relatively agnostic.

From a philosophical point of view, we understand there is merit to paying somebody to showing their hand first.

Got it.

Thanks for that.

And then just a follow-up, Lee, probably one for you.

When I think about the pricing changes you have made, both in the market data side and the extra services side over the last quarter or two, obviously that has had an impact on revenues.

I am just trying to understand, what is the appetite I guess for further pricing increase in both of those areas?

And I guess, the capacity on the client side to handle more price improvements or price increases?

So, one, we don't think in price increases.

We think, how can we better serve our customers, and obviously deliver more value to them.

And as a result of that, we lessen the -- their burden.

So you see the increases we have in revenue, is not us just charging more.

It is us delivering more value to our customers.

So we continue to focus on that.

We think there is certainly a greater opportunity to better serve our customers in the quarters to come.

And I would just add, Bob, as an example of that, what we have achieved with NASDAQ BASIC, in terms of saving the industry a substantial amount of money is --

It has been amazing.

Huge.

And we certainly launched that product.

We wanted to get people connected to it.

And so, some of the price increases there, we still are saving our clients a substantial amount of money and creating value for them.

Yes, I mentioned the products we are going to come out for eSpeed in the end of May, which will, I think affect us more in the third quarter.

Those will all increase revenue for us, and I think somewhat impressively.

But it will represent a net cost decrease for our customers.

And certainly, as I mentioned the fixed income world has its own set of challenges.

And for us to come out to products and services that reduces their overall cost footprint, I think will be very well-received.

Got it.

Great.

Thanks for taking the questions.

Thank you.

Thank you.

Our next question comes from Akhil Bhatia of Rosenblatt Securities.

Your line is now opened.

Hello, good morning.

Good morning.

Just a quick question on eSpeed.

Can you talk about the market share trends you have seen since the acquisition closed?

Because I think we understand that there is a new competitor in the on-the-run space.

Can you just talk about the market share trends?

Yes, I think our market share has been relatively flat.

We are gaining some momentum.

We ran into a couple issues with the legacy data center, and that set back our progress, and we are then are building back up.

So our market share has been flat.

We are not happy.

We think there are opportunities.

And as I'm referring to, I think our opportunities are the fact that we are going to come to market with a consolidated offering that meets their -- a greater set of their needs, across both the voice and the electronic world.

So we have the unique ability to take some of the voice capability, and put it into an electronic market, and at a significantly lower cost than we have today.

So I think that will then have some sort of side or ancillary benefit to our market share.

The other thing not to be understated is the move to Carteret is happening.

It is happening in basically two weeks, and we have got a lot of customers waiting for that to happen, to them further engage with us.

Okay.

And then, just as a clarification, Lee, you mentioned in market data, you had the $6.5 million of audit in the quarter.

Was that all in US, or was there some in Europe market data, too?

I think, the $6.5 million refers to both US and European.

So it is across all of our clients.

Okay.

Thank you.

Thank you.

Our last question comes from Niamh Alexander of KBW.

Your line is now opened.

Hello, thanks for taking my questions.

And if I could go into the market structure too.

Help me understand, with the latency advantage that I guess, part of the whole -- the book ceases, is the latency advantage is unfair or whatnot, and IEX is trying to kind of eliminate it.

If for example, there was a new rule imposed to kind of have a minimum latency, would that significantly reduce your CapEx, because there has been quite a lot of spend in innovation in kind of reducing the time, getting to all of the different markets?

And I am just wondering if that would significantly reduce your spend, your CapEx for start, and then maybe some of your running costs?

What is the assumption you are putting out there again?

I am just asking the question, like if there were some minimum latency introduced?

Like if the SEC wanted to kind of eliminate some of this latency advantage that supposedly is predatory, HFT traders have an advantage over slower traders?

So if there was some minimum time imposed, and would that significantly reduce the spend to kind of -- that has been going on to reduce that latency?

Well, I would say this, and I am thinking off the top of my head.

But from the exchange side, it probably would.

But understand from the customer side, there is always going to be a race to the speed bump, right?

So now there is a race for the market, if there is a speed bump up, then there is going to be a race to the speed bump.

And the person who gets to the speed bump first, then has to be logically put first in that queue.

So putting some type of delay, in terms of how the lit markets work doesn't really change much.

From our side, if they want us to have a slower system, then obviously we can spend less money doing it.

But I don't think it is material.

So the HOTT -- I guess, you are saying, is not material.

I am just trying to understand that, if there has been quite a lot of spend on reducing the latency, which is the whole -- the discussion in the book about the latency, is it really just 1% of the business?

Or is it just you think that other customers aside from HFT, would want to continue to have you spend, to make sure they can kind of trade faster and faster?

Well, we certainly do spend a fair bit of money, and we take a lot of pride in the speed of our technology.

But I would say this, the focus over the last number of years is really the elimination of the tails.

The customers want to see a consistent execution experience against a range of volume outcomes.

And so, we do that, and we are proud of that, so we look at that very closely.

We have a great engineering team.

And I believe that regardless of what happens in the market, as the market evolves, to have great engineering capability is a fundamental advantage in NASDAQ OMX, and we intend to keep that.

So I don't see us change our expense profile, based upon any market structure changes.

Okay.

Interesting.

Thanks.

And if I could, just lastly, NASDAQ BASIC, the market data that you advertised, that is something that is kind of -- it is almost competing with what the Tape data.

Is that fair?

And help me think about the risks to maybe your Tape share or the Tape data, if NASDAQ BASIC continues to gain more traction?

Well, obviously, it does.

I mean, with the value proposition, if a customer can get NASDAQ BASIC, it is not representing a complete set of data like the SIP would, but it is near enough, and it is at a significantly reduced cost.

At the time of order entry then, you obviously have to go to the SIP.

But if you are looking in, for reference purposes, certainly in a retail environment, it has a 90%-something correlation to the market.

So it is a -- as you can tell, a very effective product.

And so, if somebody leaves the SIP and goes to NASDAQ BASIC, then it is a net positive to us.

But I guess, the brokers have been arguing for quite a few years now -- quite a few years to regulators, that the Tape pie of revenue should be reduced, and they shouldn't be paying as much.

I am just wondering if there is some risk here that NASDAQ BASIC if it is too successful, does it kind of support the argument that the Tape fee should start to come down?

I haven't heard that.

But certainly, as NASDAQ BASIC grows, there is less revenue in the pie.

But with NASDAQ BASIC, we get 100% of that revenue.

So it is a smaller number, but we get a larger percent of it.

Okay.

Fair enough.

I will follow-up later.

Thanks.

And I think the important thing to understand, is that we have obviously have implemented this strategy, with the expectation that this is a net positive for us, factoring that, the transition of Tape revenue into NASDAQ BASIC revenue.

Okay.

Fair enough, Lee.

Thanks.

Thank you.

And at this time, I would like to turn the call back to Mr. Bob Greifeld for any closing remarks.

Thank you.

All right.

So again, we are obviously very proud of this quarter.

We have delivered record results.

It is important to note these record results, were done in the context of increased spending.

You have heard Lee mention GIFT spending is up.

So we are proud of the fact that we are able to serve the long-term masters through our GIFT initiative, and also meet the investors needs in a given quarter.

So the strategy we have put in place over the last decade is working.

In many ways, it is accelerating, so we are proud of that.

With respect to our definition of HOTT, we don't expect it to end any debate of what HFT is, but this has the advantage of being measurable and definable.

And as you can see, the numbers are small within the context of NASDAQ OMX.

I do want to repeat, that within this HOTT definition, there clearly is activity that is beneficial for the market.

I think that is recognized by both the buy side, the regulators, and certainly by us.

So from that point of view, those numbers are, I think overstated.

With respect to what is not in there, is market making and we had a couple of questions on that.

But I will repeat again, NASDAQ was founded in 1971, on a market maker foundation.

It is fundamental to liquidity provision in the marketplace.

If anything, I think you will see that as a more important part of the marketplace going forward, as opposed to less important.

And I do want to concentrate on the fact that we have been advocating for evolution of the markets for a number of years now.

And we have been somewhat frustrated by the fact that the pace has been slow.

We certainly feel increased optimism that with this publicity, we can have maybe an acceleration of the evolution of the market.

And with 40% of the market trading away from the lit markets, there is certainly great opportunity for us.

And I know our team is excited, and we are working on a couple really exciting things now, that I think we can use to really bring volume back to lit markets.

So a very strong quarter.

We are using that as excitement to continue to do what we do, and do well.

We're executing very well, so we are proud of that.

And we look forward to engaging with you folks during the quarter, and to the next quarterly call.

So thank you for your time.

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

This does conclude today's program.

You may all disconnect.

Everyone, have a wonderful day.