NYSE Euronext's CEO Discusses Q3 2011 Results - Earnings Call Transcript

 |  About: NYSE Euronext (NYX)
by: SA Transcripts


Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 NYSE Euronext Earnings Conference Call. My name is Gary, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.

Stephen Davidson

Thank you, Gary. Good morning, and welcome to the NYSE Euronext Third Quarter 2011 Earnings Conference Call. Before I introduce today's speakers, let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext's current expectations and involve risks and uncertainties that could cause NYSE Euronext's actual results to differ materially from those in the statements. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.

We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. We believe that these tables provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures. For the call today, Duncan Niederauer, Chief Executive Officer, will review the highlights for the quarter, provide you with an update on NYSE Liffe U.S., comment on the busy regulatory and legislative calendar in the U.S. and Europe and conclude with an update on the European competition review of our combination with Deutsche Boerse. Michael Geltzeiler, Chief Financial Officer, will then review the financial results for the quarter. We will then open the line for your questions. [Operator Instructions] We are incorporating slides for the call today, which are available for viewing on our website, and Duncan and Mike will refer to the slides during their remarks.

With that, let me now turn the call over to Duncan.

Duncan L. Niederauer

Thanks, Stephen. Good morning, everybody, and thanks for joining today's call.

I'm going to start on Slide 3, which is entitled Third Quarter 2011 Financial Highlights. We're very pleased to share our third quarter 2011 results with you this morning. This was obviously a strong quarter, which benefited from strong trading volumes, increasing revenue diversification, disciplined cost control and strong capital management. In my mind, the primary story of this quarter is that our team made substantive progress towards our goal of completing the transformational merger with Deutsche Boerse while simultaneously continuing to execute on our core business strategy.

For the quarter, we recorded EPS of $0.71 per share on net revenue of $704 million, up from $0.46 per share on $599 million in net revenue in the third quarter of last year. We are at the highest level of quarterly revenue generation since the third quarter of 2008. Strong non volume-related revenues increased by $30 million year-over-year, reflecting the continuing benefit of our business diversification efforts.

Turning to our business highlights. In our Derivatives segment, we finished our first quarter for the semi-mutualization of NYSE Amex Options. Market share in the third quarter for Amex was 15% and quarter-to-date, we are trending around 16%, so we are very pleased with the development of this venture. We continued to make headway at NYSE Liffe U.S., which I will address in the next slide. While the market-wide decline in open interest after the September expiration has resulted in a leveling of activity, we remain optimistic on treasury futures and I am pleased with the recent growth in the MSCI product complex.

In the Cash Tradings & Listings segment, we have seen higher volumes and a strong year-over-year performance for listings, where we were #1 globally for the third consecutive quarter. Of particular note, we have made good headway in gaining a higher share of tech IPOs, with approximately 50%. While challenging market conditions have slowed companies coming to market, the pipeline remains strong and diversified and when market conditions improve, we expect to see a flurry of activity.

Turning to the Technology segment. In the third quarter, we completed the integration of Metabit, a leading Tokyo-based provider of high-performance market access products throughout Asia. Metabit is a key component of our Asia growth strategy going forward.

With the positive momentum that we have in our businesses and the compelling benefits of our merger, we do not believe that these factors are reflected in our current share price. So after today, we will begin a modest buyback of $100 million that we announced the other day in conjunction with Deutsche Boerse's EUR 100 million buyback. This buyback should also be a clear signal to our investors that we believe in our business model and we will use excess cash flows to create value. We are executing this buyback plan on top of an already attractive stream of dividends that we expect to pay out in conjunction with the merger.

Please turn to Slide 4. On Slide 4, we provide you with an update on the future growth drivers of NYSE Liffe U.S. As I mentioned a minute ago, although we've seen a leveling of activity on the platform in recent weeks due to a post-September roll drop-off in open interest, we remain positive about the growth prospects for the platform for a couple of reasons. First, while the marquee products are certainly interest rate futures, we are seeing some nice growth trends in our MSCI complex since we became the sole platform to trade those products. As an example, the MSCI Emerging Markets contract is quickly developing into a benchmark. While admittedly off a low base, open interest in MSCI is up 50%. Remember, over $3 trillion in assets under management are benchmarked MSCI Indices globally, so we're quite optimistic about the development of the futures market in this regard. As far as the interest-rate products go, short-term interest rate open interest was down market-wide following September's expiration. We've retained our open interest market share, which is roughly 8% in Eurodollar futures and are starting to see firms come back into the market to rebuild positions that expired in September. There is no question that the broad market volatility spike of August and September had an impact on NYSE Liffe U.S. volumes, but the fact that we were able to maintain 3% market share on volume and 8% market share on open interest in such a difficult market environment, I view as a positive. We did not suffer, as many have before, the flight to the home market that takes place when markets are challenging and volatile. Our market share remains stable and our market quality remains excellent.

The key going forward is market quality and liquidity, and we have it. As a result, we are looking forward to launching options on interest rate futures in the first quarter of 2012. Furthermore, we're working to expand the capital efficiencies that our model affords to include customers in addition to the current clearing member house positions, which we hope will also go live in early 2012. Lastly, I would add that our pipeline of new customers remains robust and we are focused on expanding the breadth of activity over the platform.

Please shift to Slide 5. Stepping away from the day-to-day business a little bit, I wanted to spend some time on Slide 5. As we all know, there is a significant amount of attention focused on regulatory and legislative initiatives both here in the U.S. and on the European side.

Let's start with the U.S. first. In the U.S., a lot of market participants will focus their attention this month on the bipartisan congressional committee formed to address the deficit known in Washington as the "super committee." The group must reach a deal by November 23. We and others have been calling on policymakers to address these issues swiftly, aggressively and in a nonpartisan manner so that it does not re-create the kind of market instability that we saw over the summer. However, we also believe it is incumbent for the private sector to step up and lead from the front instead of waiting for perfect clarity and perfect information from the policymakers. We continued to advocate for the Dodd-Frank Act, implementing rules that will create transparent, stable, efficient and effectively managed derivatives markets. This will benefit not only our company but also investors, customers and the markets more broadly.

We've also been increasing our advocacy efforts and using our venue and public platform to advance key messages around job creation and access to capital for SMEs. All of this has become an important part of our overall community strategy. A couple of weeks ago, we participated in the release of a report by the IPO Task Force, done in concert with the National Venture Capital Association and others. The report recommends tangible ideas for increasing job creation and driving overall economic growth by improving access to capital for emerging high-growth companies. Recently, there has been renewed discussion of implementing a financial transactions tax on cash and derivatives trades in the U.S. We continue to think that implementation of such a tax in the U.S. is unlikely, but that hasn't stopped us from aggressively educating policymakers that a transaction tax actually would be paid for by investors, whose pensions and other investment vehicles would be reduced accordingly.

Let me shift to Europe for a few minutes because I'm sure that's where most of your attention is focused right now. Regulators over there have been very busy dealing with issues related to market structure and financial regulation. On October 20, European policymakers published proposals to revise MiFID, initially implemented in Europe in November of 2007 which was designed to make markets more efficient, resilient and transparent. While MiFID opened up the equity markets to more competition, it also created fragmentation and unlevel playing fields. We view MiFID II as an opportunity to address some of these outcomes. We welcome the EU Commission's proposal for improved trading transparency across a broad range of financial instruments, including derivatives. This will align European regulatory efforts with the respective requirements in the U.S. outlined by the Dodd-Frank Act. The timeline for Council and Parliament processes will not be specified until later in November when working groups of the 2 branches are established. And we expect the final adoption of MiFID II to take place at the end of 2012 or more likely into early 2013.

The European Commission also issued its EMIR proposal in September of 2010, which reflected the G20 mandate established in September of 2009, which calls for the clearing of standardized OTC derivatives contracts through a CCP by the end of 2012. The European Council and Parliament are negotiating the final text, which is currently expected to enter into force as planned at the end of 2012.

The European Commission also published a proposal for a financial transaction tax in Europe. Again, as we have stated publicly, we are not in favor of any form of transaction tax as we believe it will be ultimately passed through to the end investors.

Lastly, in Europe, as in the U.S., we are pushing a broad platform around access to capital for SMEs. In this regard, we believe our merger can truly be part of the solution. Ultimately, a deeper liquidity pool will make it easier for smaller companies to access capital.

Lastly, before I turn it over to Mike, please turn to Slide 6. On Slide 6, we outlined the European Commission review process, the benefits of our combination for all customers and end users and the market. As is customary with the Phase 2 merger review, we received a statement of objections on October 5, which articulated the Commission's remaining concerns with regard to our proposed combination. In response to the formal statement of objections, we and Deutsche Boerse submitted a written rebuttal to DG Competition on October 24 and then participated, at our request, in an oral hearing last Thursday and Friday. In our minds, the hearing was an opportunity to broaden the perspectives of people regarding our arguments and to underline the clear and compelling benefits the merger will provide and, as importantly, gave us a chance to provide context around some of the arguments made by our various competitors. Specifically, we demonstrated the competition in our industry is clearly global and that the merger will enhance the transparency and safety of the markets, as well as facilitating better risk management. Recent events like MF Global that are unfolding as we speak only reinforce the importance of systemic risk management. We underscored that we will be creating an integrated and liquid pan-European financial market for raising capital to the benefit of both SMEs and larger businesses, stimulating job creation and economic development at a critical time. We detailed how our derivatives businesses are complementary and, when combined, will give Europe an important counterweight to the established market centers in the U.S. with CME, in Asia with Hong Kong, and in Latin America with BM&F Bovespa. For Europe, this is an opportunity that should not be missed. And we reaffirmed that our combination will provide a direct benefit to clients at a time when freeing up capital is of critical importance. We have shown how clients will realize capital efficiencies of more than EUR 3 billion and actual cost savings approaching EUR 100 million. These benefits are unique to this transaction.

The next step in the process will be for the case team and the hearing office to evaluate the information provided to them at the hearing. We plan to reengage with the case team next week in Brussels and at that point, we will have a better sense of their thinking and how they will approach the remainder of the process. On the back of that, we will then determine how to work with them to further narrow and address their remaining concerns.

It is important to understand that we entered into this process this past February with the objective of creating value for both sets of shareholders. And as we have gone down this path together, I am more confident than ever of the compelling industrial logic of the merger. That having been said, as in any deal, at some point, the logic of the combination would not hold together if we are asked to give up too much. This is not where we are right now, but I assure you that as we go through the final stages of this process, the industrial logic of the merger will not be compromised and our investors are top of mind. We look forward to continuing our constructive discussions with the Commission and the case team in Brussels, and we remain hopeful that the Commission will complete its work and present a decision in 2011.

With that, let me now turn the call over to Mike for a review of our financial results. He'll kick it back to me for the conclusion, and then we'll take your questions. Mike?

Michael Geltzeiler

Thank you, Duncan, and good morning. Slide 7 provides comparative GAAP results for the third quarter of 2011. For the quarter, revenue, net income and EPS were all above prior year and second quarter 2011 levels. This quarter, there are 2 primary reconciling items between our GAAP EPS of $0.76 a share and our non-GAAP EPS of $0.71 a share. Third quarter 2011 results included a $40 million discrete tax benefit related to a decision by the U.K. tax authorities to reduce corporate tax rates from 27% to 25%. In the quarter, we also reported a $29 million charge for merger expenses and exit costs, which included $19 million related to our pending business combination. Year-to-date, a total of $45 million has been spent on the pending merger with Deutsche Boerse.

My review of our financial results in this point forward will exclude the impact of merger expenses and exit costs, as well as discrete tax items.

Slide 8 provides a more detailed look at our financial results for the quarter and year-to-date. Diluted EPS for the quarter was $0.71, up 54% versus the prior year and above the $0.61 in the second quarter of 2011. For the first 9 months of 2011, EPS is $1.98, up 21% versus prior year. Our results for the quarter benefited from unseasonably high trading volumes, strong combination from non trading-related business and continued cost discipline, which resulted in an expansion of our operating margins to 41% as all of the incremental revenue flowed through the operating profits. Through the first 9 months of 2011, we generated over $1 billion in adjusted EBITDA, only $100 million shy of full year 2011 levels.

The effective tax rate of 25% in the quarter was due to a decrease in our full year rate from 26% to 25.75%, which was in part attributed to the sharing of profits with our partners in the NYSE Amex Options semi-mutualization. This compares with Q3 last year, where the effective tax rate declined to 24% due to some favorable tax rulings in the Netherlands. We are extremely pleased with the performance of NYSE Amex Options, which has increased its market share from about 6% at the time we acquired the American Stock Exchange to 15% at the end of Q3.

For the quarter, the pretax profit attributable to the noncontrolling interest related to NYSE Amex Options was $11 million based on the sale of a 52.8% stake in the business. This negatively impacted our diluted EPS by $0.03 in the quarter. As we indicated on the second quarter call, we repurchased 10% of the partner stake in late September, reducing our partner's equity stake to 47.5%. Unless we decide to sell this stake to another partner, we will retain more of the profits from this venture in the fourth quarter.

Slide 9 provides our consolidated and segment results on a currency-neutral basis. The U.S. dollar weakened this quarter versus prior year for both the euro and the British pound. For the third quarter, 48% of our net revenue was denominated in either euros or pounds and 52% in U.S. dollars. The currency impact on net revenue for the quarter was favorable $23 million versus prior year and unfavorable $5 million versus the previous quarter. Foreign exchange contributed a favorable $13 million to operating income this quarter versus prior year. On a currency-neutral basis, third quarter net revenues were up 14% and operating income increased 53% versus the third quarter of 2010. Operationally, revenues for our Derivatives, Cash Trading & Listings and Technology segments increased 16%, 15% and 7%, respectively.

Slides 10 and 11 detail the financial performance for our Derivatives segment. Global derivative volumes increased 33% year-over-year, driven primarily by a 14% increase in European derivatives and a 53% increase in U.S. equity options. Against this backdrop of strong trading volumes, net revenues increased by 20% in the quarter. As with most other exchanges, higher levels of volumes are very often accompanied by lower capture rates as clients hit tiers and earn volume discounts. Derivatives accounted for 32% of our net revenues and 41% of our operating income in Q3. The average net rate per contract for NYSE Liffe derivatives was $0.68 in the third quarter, compared to $0.67 in the third quarter of 2010 and $0.74 in the second quarter of 2011. Within the first few days after each quarter end, we publish a preliminary estimate of our quarterly capture rates for our primary trading venues. These are truly estimates and in this quarter, higher-than-anticipated liquidity payments related to Euribor futures and options activity resulted in a slightly lower revenue capture than was originally expected for European derivatives. Mix of business, combined with the strengthening of the dollar, drove the decline in capture rates compared to the second quarter of 2011. Beginning December 1, we have modified pricing for the trading of individual equity options and index futures and options on NYSE Liffe, Amsterdam and Belgium. These ADVs represent approximately 10% of total NYSE Liffe volumes through September 2011. And we expect this pricing change to decrease NYSE Liffe overall capture by an annualized 3% to 4%. The revenue capture in U.S. options was $0.155 per contract in the third quarter, below third quarter 2010 and second quarter 2011 levels. The decrease in the rate per contract was driven by an increase in the mix of market maker volumes over Amex.

Similarly, Slide 12 and 13 show the financial performance for our Cash Trading & Listings segment. Cash Trading & Listings net revenue was $353 million in the third quarter of 2011, up 18% versus the prior year period and up 8% compared to the second quarter of 2011. European cash ADV of 1.9 million transactions increased 40% from the third quarter 2011 -- 2010 levels. And in August, trading volumes spiked 70% to a record 2.2 million transactions per day. In U.S. cash equities, volumes increased 9% to 2.6 billion shares.

Market share was down in Q3 for both U.S. cash and our 4 European markets compared to the prior year. Tape A share in the U.S. was 36% and European cash share was 66%. The decline in European cash market share in the third quarter of 2011 was driven by higher levels of participation by global trading firms trading on alternative European trading venues. Listing revenues increased $8 million year-over-year and is up $19 million year-to-date compared to last year.

Revenue capture for U.S. cash remained at $0.038 for 100 shares handled for Q3, well above the $0.032 recorded in the third quarter of 2010. Since the second quarter of 2010, we have implemented dynamic tiers based on overall U.S. consolidated volumes, removed the inversion at the highest tier at Arca and added step-up tiers to capture trading activity for members that are now coming direct to NYSE as the result of changes to sponsored access to begin to take effect in July.

Revenue capture for European cash decreased to $0.64 from $0.66 in the third quarter of 2010 and $0.74 in the second quarter of 2011. Decline in capture was driven by a combination of higher volumes with clients hitting tiers and overall lower trade size, which began in August and continued through September.

Slide 14 details the financial performance for our Information Services and Technology Solutions segment. Information Services and Technology Solutions revenues was $125 million in the third quarter, an increase of $12 million or 11% from Q3 prior year. The increase is primarily driven by an increase in safety and co-location revenue and revenue growth from managed service sales from TSE, WSE and Sigma X. This increase is against a tough comparison as last year's Q3 sales included the sale of UTP to Qatar for $6 million. Information and Technology Solutions accounted for 18% of our net revenue and 10% of our operating income. Operating margin was 25% compared to 21% in the third quarter of 2010 and adjusted EBITDA margin was 36%. Year-to-date, revenues are running 10% above the prior year period. While we have been targeting a full year growth rate in excess of 15%, we now expect this figure to be slightly north of 10% for 2011. We continue to see strong interest from broker-dealer community to outsource large portions of their trading infrastructure. However, challenging market conditions for the banks has delayed decision making and pushed out our pipeline.

In the third quarter, we closed and fully integrated our Metabit acquisition. Metabit is a Tokyo-based provider of market access services to the Asian market and supports our growing focus on the Asian markets and strategic goal of building a global liquidity network.

Slide 15 provides a harmonized view of fixed operating expenses. Third quarter operating expenses were down $3 million versus last year on a reported basis. 40% of our expenses in Q3 were denominated in either euros or pounds. After adjusting for FX and the impact of transactions, such as NYSE Blue joint venture and the acquisition of Corporate Board Member, the fixed operating costs were down $21 million or 5% from the third quarter of 2010. Despite the intense focus on the merger and post-merger integration planning, we continue to make good progress this year on reducing our standalone operating expenses. Year-to-date, our fixed costs are running slightly below the prior year on a reported basis. Excluding the impact of currency and changes to our portfolio, our expenses are running 4% below prior year levels.

Slide 16 provides you with a view of our expected full year 2011 fixed costs. Based on results through the quarter, we expect to achieve our cost guidance for full year 2011 operating costs of less than $1,650 million on a constant dollar, constant portfolio basis. On a related basis, we expect full year operating costs to approximate $1,622 million. This compares to a 2010 cost base of $1,678 million. We are anticipating full year incremental costs from year-over-year portfolio changes of approximately $28 million, which include the impact of Corporate Board Member, NYSE Blue and Metabit. The dollar has been consistently weaker in 2011 versus 2010. We anticipate that this will result in about a $30 million increase in fixed costs year-over-year for 2011. Factoring in the portfolio changes and the impact of currency fluctuations, we expect full year 2011 expenses to approximate $1,680 million.

Slide 17 details our cash in deposition as of September 30, 2011. The company ended the quarter in a strong financial position, well positioned for our combination with Deutsche Boerse. As a result of our strong EBITDA generation through 9 months and a weak dollar, our debt-to-EBITDA leverage ratio was 1.6x in the quarter, down from 2.2x at the end of 2010 and at the lowest level since the NYSE and Euronext merged.

Q3 capital expenditures were $49 million compared to $82 million in the prior year quarter. Year-to-date capital spending is $116 million. We are clearly on track to be well within our full year guidance of less than $200 million in capital spending. This week, the Board declared a $0.30 quarterly cash dividend for the fourth quarter of 2011, which is payable on December 30. Given our strong financial position and current valuation, we expect to execute our recently announced $100 million buyback during the fourth quarter. This repurchase was announced in conjunction with Deutsche Boerse's buyback program, designed to preserve the 60-40 ownership established in our business combination agreement.

I'll now turn the call back to Duncan for some concluding remarks before we open the line for questions.

Duncan L. Niederauer

Okay. Thanks, Mike. So in closing, everybody, our results for the quarter were strong and we are pleased with the progress we are making on our strategy to create a global capital markets community that will empower our clients to innovate and collaborate. As the result of our diversification efforts over the past several quarters, our non volume-related revenues are increasing, lessening our dependency on trading volumes. While we have seen some leveling of our growth trajectory for interest rate futures on NYSE Liffe U.S. and NYPC, we remain confident that our continuing efforts to broaden the trading community on the platform will bear fruit in the coming months. Clearing in post-trade will continue to be a particular area of focus for us as a combined company. We are continuing to see momentum in our Listings franchise, securing the #1 position in global IPOs for the third consecutive quarter.

With our hearing before the Directorate General for Competition of the European Commission now complete, we are entering the final phase of the review. We look forward to continuing our constructive discussions with the Commission and case team in Brussels and are hopeful that the Commission will complete its work, as I said earlier, in calendar 2011.

Lastly, recent unfortunate events at MF Global that have negatively impacted thousands of hardworking and dedicated employees have not had an impact on our platform. Our teams both here in the U.S. and in Europe are implementing proven procedures to mitigate risk and stem losses. They have also been working diligently with other market participants, exchanges and regulators to ensure an orderly unwind of positions and to facilitate the transition of customer positions to new clearing members.

With that, we'd be happy to open the line for questions and I'll turn it back to Stephen.

Stephen Davidson

Okay, Gary, we're all set.

Question-and-Answer Session


[Operator Instructions] We have our first question coming from the line of Rich Repetto of Sandler O'Neill.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Duncan, I guess the one question I have, because I have one, is on MiFID and sort of the surprise attack on the vertical model. Because when you look at sort of the European competition, this is something that would -- could stay around whether or not you do the merger, and hopefully you do, but your comments, I know it's too early to tell, I know the final version would be much different, but can you just give us your views more specifically on the MiFID II and how it pertains to vertical clearing?

Duncan L. Niederauer

Yes, sure, Rich. And that's a question we've been getting a lot lately. And I think -- let me answer it by saying the following. I think a lot of observers compare EMIR and MiFID II and sort of view them as if they're at the same point in the process. And the way I would describe it is this, if you think about the EMIR legislation, that's been proposed, it's been vetted, it's been nearly agreed and it's on the verge of being implemented over the next 12 to 15 months. There's been a lot of debate at the European level and, obviously, a big part of that was to take into account not only what was happening in Europe but also what was happening globally in terms of the reregulation of the financial industry around things like Dodd-Frank, and it seems to us that the final product took all of that into account. So if you think about how EMIR is envisioned to be implemented, it's very similar to Dodd-Frank and what's going on in the other developed markets around the world, limited opportunity for regulatory arbitrage. If you then switch gears and talk about MiFID II or whatever we want to call this next piece of legislation, I wasn't actually that surprised knowing who the proposers are and how the process begins. It is not unusual to see some rather idealistic views slip into the initial proposal that would come out in a piece of legislation like this. I would remind everybody that this has been proposed by one area of the Commission. It has not been vetted, it has not been reviewed, it is not really -- the process is only beginning to take into account some of the other things that I think were correctly taken account -- taken into account with the EMIR discussion. And you are always going to have this push and pull between what I call idealism and pragmatism, and I think we're optimistic that as Europe looks at MiFID II and looks back at what MiFID did and didn't do and then looks about how the rest of the world is thinking about its own derivatives businesses, my guess is if the vertical silo is ever going to be encouraged to go in the direction of being horizontal, that is something that the markets will do together and in concert, rather than one region at a time. So I don't think we want to overreact to MiFID II, that it's -- since it's so early in the process and is not nearly as vetted and developed as the EMIR legislation was. Hopefully, that gets at your question, Rich.


Next question comes from the line of Roger Freeman of Barclays Capital.

Roger A. Freeman - Barclays Capital, Research Division

Just I guess I wanted to ask around the Technology business. You've made the comments that the banks, given market conditions, budget constraints can push out projects. I know it's hard to kind of lookout past this year, but I guess one of the -- one of the things I wonder is, are any firms are you hearing any feedback that they're waiting to see if this combo goes through, how it comes together in terms of the size that you'll be and wanting to limit any exposure to you in terms of outsourcing technology.

Lawrence Leibowitz

So this is Larry. First, I don't think we've heard from any customers that want to see how big we are, to see if they want to give us a contract or not, but they also -- but they do want to know who they're going to be dealing with and will it be in -- "Baseled" in or where it's going to be from a data center perspective, so I think that, that has been an issue. But I also think that a lot of this is internal stuff going on at the banks as they go through their turmoil and just the turbulence of their results. So we don't see anything that detracts from the reason for this business, the strategic direction of the business. We're not backing off our $1 billion target. Sorry, Dominique, if you're listening. And in fact, we would expect that we're going to have to adjust that target should the DB deal go through because they actually have some technology businesses as it is. So again, sorry, Technology guys, the bar is just going to go higher. So we think that there's some timing issues here, probably some of that was going to be natural, anyway, but the merger and other things are probably making people -- giving people a reason, an excuse to push off some decisions.


The next question comes from the line of Jillian Miller of BMO Capital Markets.

Jillian Miller - BMO Capital Markets U.S.

Duncan, you had mentioned the context of preserving the industrial logic of the deal with Deutsche Boerse. I was just hoping you could give us a little more color on what conditions in your mind might threaten that logic. I know in the past, you've said that you wouldn't really be open to considering spinning off one of the derivatives operations but there's a lot of other things that could be asked of you, including some kind of clearing open access.

Duncan L. Niederauer

Right. So I don't want to use the call as an opportunity to speculate about what we'd be willing to do or not because we've promised the competition authorities we will not front run the process and we're trying to be respectful of it, but I will try to get at your question by reviewing a couple of the things we did at the hearing. If you think about what we might be asked to do at some stage, it's going to largely come down to how the markets are defined and whether we all agree on what the real areas of overlap are. And I think most of you on the call understand just how complementary the businesses are. You understand which products overlap and really don't. And I have said publicly that if we were ever asked to divest 1 of our 2 derivatives businesses, while several of our competitors have expressed an interest in that for obvious reasons, that would undermine so much of the logic of the combination that it would be not -- it would not be sensible. So what we've been trying to work on with the Commission is to merely state the facts, stick to the facts, encourage everyone to use the same facts and be realistic about where we do overlap. Both of us have an individual equities options business. For example, we have a single stock futures business, we're both in the OTC equity business and I think when you think about this, other than that, there's not a lot of obvious overlaps. At the same time, we're realistic. We've said from the beginning, we never thought it would be unconditional and there are certain remedies that are structural in nature and others that are behavioral nature. And I think all we have to do is learn more next week, understand what's being asked of us and then, as we promised the shareholders, not behave in an irresponsible way. They have invested their trust in us and I don't plan to undermine that trust.


Next question comes from the line of Alex Kramm of UBS.

Alex Kramm - UBS Investment Bank, Research Division

Real quick, I want to come back to the -- I guess, integration with DB1, if this deal goes through, I don't think we have heard a lot of that. Is that really moving forward a lot still or is the focus really on antitrust right now? And if it is -- continuing to move forward, can you give us a little bit more color of anything that you have decided recently, any sticking points still or decisions that haven't been made that maybe are big or anything new that you have decided in terms of how you guys are going forward with platforms, data centers and so forth?

Duncan L. Niederauer

Sure. Thanks, Alex. Yes, we have been keeping that mostly internal for obvious reasons. I would describe the process, which has been ongoing for months now, as being conducted in the right spirit. Both teams have an integration captain that are both senior people from both companies leading the way. They've continued to outline the key decisions that have to be made in terms of corporate systems, the ultimate auditing decision, what will the NewCo board look like, what is the organizational construct, what's the desired culture of the new company, what are going to be the decisions around the technology and clearing platforms, and we've been actively engaged in all of that. We have been somewhat reluctant to report any of that publicly because we also think that's a bit presumptuous on our part until we learn a little bit more about how the process plays out. But I think we're set up to move fairly quickly because many of those decisions are well in process, and some of those decisions, in fact, around organizational construct have already been made but we are a bit reluctant to communicate them broadly at this point for obvious reasons. The thing that I think I'm most pleased about is we just -- to give you an example, we just completed a culture survey of the top 250 people at the 2 companies combined, and the results were encouraging, strikingly similar, and I think the path to the culture that we want the new company to have will not be a subject of disagreement. And I know many people were concerned that the 2 corporate cultures were substantially different enough that, that would be difficult. That does not appear to be an issue given the findings we just had from our key people at both companies. So I would say we're making very good progress there and we will -- when we're able to, we will communicate some of those decisions in more of a public domain.


Next question comes from the line of Patrick O'Shaughnessy of Raymond James.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

This is Patrick O'Shaughnessy from Raymond James. One of your exchange competitors headquartered in Atlanta made an interesting comment yesterday. He suggested that if the regulatory environment in Europe became less favorable, there's nothing structurally to tie them to Europe, that there's some flexibility involved. They could potentially relocate to a more regulatory advantageous geography. To what extent do you think that sort of philosophy would be applicable to NYSE and, I guess, perhaps to Deutsche Boerse as well?

Duncan L. Niederauer

I did not hear the observation. I was traveling yesterday. But I must say I, in large part, agree with it. And whether you're looking at it through a lens of the competitive landscape in general or even if it's just as narrow as what happens with the discussion around a financial transactions tax and, for example, in which jurisdictions it were to be implemented, be it the world, a region, part of a region, individual countries, et cetera, I think what we've been trying to impress on the policymakers on all of these decisions is that many of the countries who operate may be viewed as nationally focused or, to use the patriotism word, patriotic, but capital is not patriotic and the markets are indeed global and capital can flow across borders pretty easily. So when we talk about things like the financial transactions tax, we appreciate the pressure some of the policymakers are under. We understand the populous views on measures like this. But I think it's incumbent on all of us as business leaders, in a professional way, to continue to impress on them what some of the potential outcomes of these decisions will be and set aside from the things like increased volatility and widening of spreads that would happen if you did something like a tax. But ultimately, all of these decisions will inevitably lead to jurisdiction shopping, which it sounds like the comment yesterday was really talking about, and remember that a lot of the policymakers will think that it's easier than it probably is in reality to implement decisions that would require them to behave in an extraterritorial way. And I -- history tells us that's not quite as easy as everybody thinks, right? So I would be pretty much in agreement with Jeff or whoever said that, that the business leaders would be -- they would be required to think about other ways to conduct their business, looking out for all their other stakeholders' interest, right? So I would agree with the comment.


Next question comes from the line of Niamh Alexander of KBW.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Just another issue that the regulators or politicians are kind of holding on a little bit lately, but regulators, especially the SEC maybe and the IOSCO report high frequency trading, it looks like it's probably a move towards maybe some requiring these firms to register at least and I don't know if they have additional requirements in terms of compliance and costs, but can you help me frame how much of your revenue comes from these firms? We don't think it's all that much actually because the fees that they are paying is typically a lot lower than everybody else. But can you help me frame that and maybe how to think about what could substantially shrink that?

Lawrence Leibowitz

Yes, this is Larry again. That's a good question and I think it's actually harder to get at partly because it's hard to tag specific traders as high frequency and partly because the way the market currently works, when people talk about it being 70%, 75%, all they're really saying is it's all electronic trading, including algorithms, so there's a lot of different types of trading going on in the market and you're right. So certain classes of high-frequency traders, particularly market makers, actually were probably close to breakeven if not inverted on. And so if anything, some of that stuff may actually increase profitability. It really depends on exactly what got changed. I would not disagree with you that I think there are a couple of directions that regulators around the world are looking, many of which we don't disagree with. So for example, whether it's registration of trading, whether it's better transparency around who's doing what, whether it's surveillance across markets, those sorts of changes, we think are actually very good for the market. All the academic research clearly shows that high-frequency trading -- they fail to link high-frequency trading to negative aspects of the market, either increased volatility or gaming. Nonetheless we think shining more of a light on it to give people comfort is a good thing. But in terms of the economics, it's really hard to get a read on. Some of it may actually end up being better for the exchanges but, again, that's not the reason we should advocate or be against it. What we really want is more integrity in the markets, people feeling confident in the markets, and I think that that's why we work pretty actively with regulators and market participants alike. To be honest, many of the high-frequency trading firms or other firms that do these things are in favor of some of these measures as well because they feel that they've been unfairly tarred by people who have not brought forth any evidence that there is actually a harm to it.


The next question comes from the line of Daniel Harris of Goldman Sachs.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

I was wondering if we could shift gears here to the NYSE Liffe business and similar to some of the conversations from last quarter, you still have a much higher level of open interest than we're seeing in volumes, some of that is blocky coming from the asset management side, but I was wondering if you could touch base a little bit on that and what you're trying to do to drive the volume up with the open interest. And one of the other things that we've continued to hear is that while the bid-ask spread is very similar if not on top of the broader market, the depth of the market is just not there yet, which is one of the reasons why the volumes still persist at your peers, so I was wondering if we can get some of your views around that.

Duncan L. Niederauer

Yes, thanks, Dan, and we'll try to -- maybe we'll invite one of the NYSE Liffe folks to come to the next call as well because I think as we go into 2012 and we start with the new product launches and get some more clients in the pipeline, I think that's all going to be important. I think your observations are pretty accurate. We've been pleased with the liquidity and the tightness of the spread. But I think we need more market participants to make the market even deeper but the tightness of the spread has not been our issue. I think we've got market quality, we've got enough liquidity. Some of the block positions that helped the open interest earlier, in fact, were part of what did not get rolled in September. I think we've started to see the open interest build back up. Our goal is to still broach the $1 million contract open interest level by the end of the year. But I think our 3 or 4 key initiatives now are: We need to get some of the key players that are involved, involved; we need to get -- secondly, we need to get more brokers and some members of the buy side involved; thirdly, we need to help these customers find their way through some of the connectivity issues and to be realistic as we get through the end of the year. Not a lot of people are spending on the customer side. They're spending a lot of time worrying about new technology innovations, so that may be early next year. And then fourthly and probably most importantly, is expanding out the product set. I think we will see more depth to the market -- when we list the interest rate with the options on interest rate futures in early 2012, I think that's going to be the next thing that helps us take the next leg up. So we're certainly not giving up. I think we're a little frustrated. We were spoiled by our early success and it certainly has leveled off, but we're continuing to invest in the business. Our partners are continuing to invest in the business. And I think we'll have more good news coming out of there in the coming few months. Leibo, you want to add one thing to that?

Lawrence Leibowitz

Yes. Also remember that the smart routing technology that you see so widely used in equities isn't nearly as in place on the futures' depth, probably because there was only destination for some of these products. And so what you've got to do is convince people to get connected, that there's enough of a reason to do it. They've got to improve the logic of how they decide where to route, and so you hope to get this sort of snowball effect where you keep giving them more and more reasons why they shouldn't ignore this venue. And so I think that's kind of the process and it just takes a while for the momentum to grow because it's not just them turning switches on.


Ladies and gentlemen, our final question comes from the line of Chris Allen of Evercore.

Christopher J. Allen - Evercore Partners Inc., Research Division

Duncan, you talked before about informing policymakers about the implications of transaction tax and other structural changes. Where do you think your understanding level is and does it differ by regions? Because the focus right now or the worry right now is that the euro zone may implement a transaction tax even though the U.K. or the Nordic region and the U.S. may not go along. Obviously, it's been heightened recently by the recent draft from U.S. congressmen and senators. So any color on that will be very helpful.

Duncan L. Niederauer

Yes. I won't reiterate what I said earlier, Chris. I'll just try to add to it a little bit. I think we -- I think the understanding level is actually pretty high. I don't think the policymakers are confused about what the ultimate impact would be. I still think there is a tremendous amount of political pressure and I would not expect that to abate anytime soon. Part of it feels to me, and this is the part where I'm being a little more speculative, is having been in a lot of these conversations in different areas of the world, I think part of it is to provoke a response that not may -- that may not be exactly in the form of a financial transactions tax. So I believe as you see the debate go the next few weeks here, this will take on different shapes. And what people are saying is, "okay, if it's not that, then here's the problem we're trying to solve, how are you going to help us solve the problem?" If the financial transactions tax doesn't work because it's a passthrough tax, how do we create some kind of a de minimis charge that gets the money paid by the people we want to be paying it and supporting the efforts we want to be supported. My sense is also that in certain parts of the world, some of the regulators, and there is precedent for this so you can't blame them for this, view this potentially as an opportunity to create a self-funding mechanism for their budgets in a way that the SEC's seen in this country for years has partly served to do. That's a big part of the SEC's budget every year. And if you are the regulators in certain parts of the world and you're concerned about your ability to garner a meaningfully sized budget, you could understand why, looking through a very narrow lens, this looks like a potential route to solve your problem there, where you don't have to have your hand out every year looking for a budget. So I do think the policymakers we talk to generally -- not all of them but generally, they understand it. And my belief is that you will see this morph into a discussion about different kinds of surcharges as this unfolds the next few weeks, so let's see what happens. Okay, thanks, Chris, and thanks, everybody, for being here this morning. Stephen, do you want to wrap it up?

Stephen Davidson

Thanks, Gary, and thanks, everyone, for dialing in and we'll speak to you next quarter.

Duncan L. Niederauer

Maybe before then but no later than the quarter from now. Okay. All right. Thanks, everybody. See you.


Thank you very much, ladies and gentlemen. That now concludes your conference call for today. You may now disconnect. Have a pleasant day. Thank you.

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