NYSE Euronext Q2 2007 Earnings Call Transcript

| About: NYSE Euronext (NYX)
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NYSE Euronext, Inc. (NYSE:NYX)

Q2 2007 Earnings Call

August 2, 2007 8:00 pm ET

Executives

Gary Stein - IR

Duncan Niederauer - President and COO

Joost van der Does de Willebois - Deputy CFO and Chairman of the Amsterdam Market

Nelson Chai - EVP and CFO

Analysts

Rob Rutschow - Deutsche Bank

Christopher Allan - Banc of America securities

Mike Vinciquerra - BMO Capital

Patrick Pinschmidt - Merrill Lynch

Rich Repetto - Sandler O'Neill

Don Fandetti - Citigroup

Ken Worthington - J. P. Morgan

Roger Friedman - Lehman Brothers

Presentation

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2007 NYSE Euronext Earnings Call. My name is [Shikwana], and I will be your coordinator for today. At this time all participants are in a listen-only-mode, we will facilitate a question-and-answer session towards end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call Mr. Gary Stein, Investor Relations Officer. Please proceed, sir.

Gary Stein

Thank you. Good morning. I'm Gary Stein, Investor Relations Officer for NYSE Euronext. Welcome to our conference call for NYSE Euronext second quarter 2007 results which were outlined in our press release issued earlier this morning. During this call our comments 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. Please refer to our SEC filings for a whole discussion of the risk factors that may affect any forward-looking statements. We should placed undue reliance on forward-looking statements, which speak only as of the date of this conference call. Expect for any obligation to disclose material information under the federal security 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.

With me on today’s call are Duncan Niederauer, President and co-Chief Operating Officer, Joost van der Does de Willebois, Deputy Chief Financial Officer and Chairman of the Amsterdam Market, and Nelson Chai, Executive Vice President and Chief Financial Officer.

I’ll now turn the call over to Nelson, after the conclusion of Nelson prepared remarks, we will take your questions.

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Nelson Chai

Good morning. Thank you for joining our discussion on NYSE Euronext's second quarter earning results, which are disclosed in our press release issued earlier this morning. Considering our April 4th merger, this is the first time we’ve reported earnings on a combined basis. I’d first like to review a few business highlights for addressing our strong quarterly results and we’ll take your questions.

Since our last call, financial markets in America and Europe has been very active, leading to a surge in trading volume in our core derivative cash market. We are well on our way to exceeding last year's volume and listing totals in our NYSE Group and Euronext marketplace. We are encouraged by the developments among U.S. and European regulators towards more harmonized cost quarter standard. Also, we are confident that the SEC's new risk-based guidelines, the Sarbanes Oxley Section 404 compliance up less than the cost in burden for public companies that register and list their share in America.

A consolidation is well underway among the world financial markets. There has been a great deal of speculation on what’s next for NYSE Euronext. We continue to explore a range of opportunities that align with our strategic business goals those that build upon our product and geographic diversification and strengthen our leadership positions globally. As we demonstrated with NYSE Euronext combination and the merger with Archipelago, we take a measured disciplined approach towards consolidation opportunities, and we will only undertake transactions and make both strategic and financial plans for our customers and shareholders.

We are the leader in global listing in cash equities trading. We have a strong and growing presence in futures options bond and marketer data, businesses that hold great promise NYSE Euronext. Our goal is to produce a long term balanced growth across all business points. Our strong second quarter results demonstrate our commitment to that call. They also underscore the diversity in earnings’ power or the newly formed NYSE Euronext and the increasing demand for our offering on a global scale.

Into completion of the NYSE Euronext merger, we have made great progress in ongoing business disintegration initiatives. Our board, management team and business unit personnel are working extremely well together and we are far down the road on our future technology and market infrastructure road map and as we noted previously we remained highly confident in our ability to deliver $375 million in merger related cost savings and revenue synergy which we have previously outlined.

On June 6, one day before our first NYSE Euronext shareholder meeting, our board of directors declared $1 dividend payable quarterly. We are proud to note that our first quarterly payment $0.25 was made to shareholders on July 13.

Turning to our second quarter financial results this morning, and in accordance to US GAAP we reported net income $161 million or $0.62 per diluted share for the three months ended June 30th 2007. This is a 164% increase as compared to net income of $61 million or $0.39 per diluted share for the three month ended June 30th 2006.

On a non-GAAP basis giving effect to the combination that they had occurred at the beginning of the earliest period presented but excluding merger expenses exit cost and other non-recurring items, NYSE Euronext's net income for the quarter would been $172 million or $0.65 per diluted share, a $39 million or 29% increase as compared to net income $133 million per $0.50 per diluted share for year ago quarter. In addition on a non-GAAP basis operating income grew 27% to $275 million from $217 million.

Quarterly revenues are up in every one of our primary business lines year-over-year. I like to highlight that on a non-GAAP basis for the European cash equity in European derivatives that new revenues records delivering year-over-year growth of 28% and 14% respectively. The constant exchange rate and on a non-GAAP basis adjusting for acquisition and divestitures combined NYSE Euronext revenues for the quarter and net of activity assessment fees increased 12% and fixed operating expenses decreased 9% or $44.9 million year-over-year on the quarterly basis.

Particular compensation would have decreased $21.6 million, systems and communications would have decreased $3.3 million and professional service would have decreased $14.8 million. We continued to reduce our fixed expense base through aggressive cost management, which is driving further expansion of our operating margin.

As of June 30th NYSE Euronext had $1.4 billion of cash, cash equivalents and short term financial instrument would excluding Section 31 fees and $3.5 billion of debt. Please note that this cash balance does not include the EUR339 million we received last week from LCH Clearnet which redeemed all our outstanding convertible preference shares and 20 million of the ordinary shares held by NYSE Euronext. Under the term due to agreement LCH Clearnet is expected to buy back an additional 6.2 million ordinary share from NYSE Euronext at a price of EUR61.8 million by April 2008.

I would now like to highlight the quarterly results within our primary business line. During the second quarter, our derivatives business comprising 21% of net revenues performed exceptionally well. Liffe, NYSE Euronext's leading futures and options platform achieved a record of 233 million contracts traded during the quarter, nearly 14% higher than the year ago quarter.

Year-to-date, interest rate contracts have grown by 14% compared to the same period a year ago, another record with daily average of 1.9 million contracts traded. European equity derivatives on Liffe reached new highs with 113 million contracts traded during the quarter, and the first half of 2007 was by far the most active period in Liffe conception. A large part of this growth is attributable to the success of Bclear, Liffe’s wholesale clearing service for OTC trades, which processed 44 million contracts, 71% increase compared to the year ago quarter.

NYSE Arca Options is become one of the industry's fastest growing and most efficient options trading platform in the U.S. Average daily of volume traded on NYSE options for all contracts in the SEC's penny pilot of 106% beginning of the year to June 30, and our market share in these options was up 62% during the same period. Addition of four more market makers give NYSE options of 29 in total as of June 30.

I would now like to turn briefly to NYSE Euronext's cash trading activity. Our European cash markets, which represents 16% of our net revenues produced their best quarter ever with almost 75 million trades, a 28% increase over last year and more than double the trading activity in the second quarter of 2005. NSC, Euronext's cash trading platform processed a 149 million trades in the first half of the year or 1.2 million trades per day on average, highest figure ever. NYSE Euronext's U.S. cash market, the largest liquidity pool for NYSE-listed securities led all market to 63.7% of match trading volume in the quarter. We set a volume record on Friday, June 22 with nearly 5.2 billion shares traded or NYSE and NYSE Arca together set new monthly and quarterly record volumes of almost 61 billion shares traded in June, and 166 billion shares traded in the quarter.

NYSE Arca continues to be the largest single liquidity pool for the ETF trading in the U.S. with 42.3% of the handled training volume in the quarter. On April 26, we introduced the FINRA/NYSE Trade Reporting Facility as a low cost reliable competitive alternative for reporting off-exchange transactions. The FINRA/NYSE TRF has been adding customers and processing more than $200 million shares daily for all NMS listed securities, including 7% of trading in Nasdaq-listed issues.

On June 11, NYSE floor brokers received SEC approval to trade all securities from the group including stocks listed on other markets. In addition, we continue to work with the SEC on role efficiency for specialists. During the quarter, we more than doubled the message capacity with the NYSE trading infrastructure and further reduced order flow latency from approximately 290 milliseconds to around a 110 milliseconds.

We are now a faster marketplace and even more reliable. As demonstrated by our ability to seamlessly handle the volume and message traffic spice and recently including four consecutive record volume days last week, and new methods traffic record. Over the second half of the year, we will continue to reduce latency and offer increased connectivity for our customers to the upcoming implementation of a new common customer gateway designed for better and more streamlined interfacing with all NYSE group trading platforms, including equities, bonds and options. We are also pressing out, that for the fifth consecutive quarter the NYSE had the world’s lowest all-in cost of trading according to Elkins/McSherry in its May issue, Global Trading Cost Analysis.

I would now like to discuss our listings business which represented 13% of net revenues. Today, we have more than 3,900 listed issuers on NYSE Euronext. Our listed operating companies represent over $30 trillion in total global market capitalization, greater than the next four largest equity marketplaces combined.

In the second quarter, the NYSE added 70 new listings, which included 24 operating company IPOs, they raised $13 billion in connection with listings compared to $7 billion last year. For the first half of 2007, the NYSE totaled 142 new listings including six Nasdaq transfers and 34 operating company IPOs. They raised $16 billion in connection with the listings. Our U.S. domestic IPOs accounted for approximately 90% of qualified IPO proceeds, while our non-U.S. listing in the NYSE represented 100% of the qualified IPO proceeds raised.

27 closed-end funds that listed on NYSE in the first six months of 2007 raised an industry leading total of $24 billion. We also added to our leadership in ETF with 60 new listings compared to 36 in the first half of year ago. Euronext added 45 new issues during the quarter, four more than the year ago period. These new issues raised EUR3.3 billion in connection with listing, and of these new issues 15 were newly listed on NYSE Alternext, which now has more than a 100 listed companies. In just over two years, companies listed on NYSE Alternext have raised more than $1 billion and now represent a total market cap over EUR5 billion.

Turning briefly to market data which represents 15% of net revenues, growth in the quarter was fueled by an increase in data usage of both our European and U.S. market. In addition, our European market data activities continue to see solid growth in industries from expansion of (inaudible) which provides a range of value added services towards the company.

Looking beyond our primary business lines, NYSE Bonds were successfully launched on April 23, based on NYSE Arca's advance order matching technology of innovative platform, provides investors with transparent and highly efficient waterfall executions, and nearly 2500 debt securities of NYSE listed companies.

Our goal is to have over 5000 issues trading on NYSE Bonds in the next few months. And April 26 we consolidated (inaudible) and safety businesses with in NYSE transact tool which rolled up a new 86 network that connect over 8000 market participants including all US markets.

Following the completion of this second quarter it's worth noting that in July average daily volume on a European cash market grow up over 80% versus last year. All derivatives are up over 36% from last year. In the US NYSE group set over new record in executed volume for the month of July. Our average daily volume on NYSE Arca options of 84% from last July.

Our strong listings momentum also continued, in July, we add MF Global and Orbit among others. And just today Genentech joined our NYSE listed company family. There are two new NYSE Arca listings been achieved in Jaguar mining and two more on the way in August

Moreover with the record seven Chinese companies having listed on the NYSE this year already, we anticipate four more additions from China this month. Later this month we expect to begin full operation of NYSE MatchPoint electronic crossing network with the ability to Match NYSE Amex and NASDAQ issue. NYSE MatchPoint will become a valuable source liquidity to our customers and position NYSE group to be the essential player on the block crossing industry. This past Monday the combination of NASD and NYSE regulation member from over side was completed to the formation of FINRA.

NYSE Euronext was proud to help make this transaction a reality since over going significant benefit and efficiencies to the securities industry. This transaction is financial neutral to our share holders. Nearly two thirds or approximately 434 NYSE regulation employees are now part of FINRA. Going forward NYSE regulation will continue as an independent non-profile profit entity with an NYSE Euronext. Please know that the non-GAAP measures we have discussed to fully reconcile the tables attached to the text of the release. We believe these tables provide investors with useful information about our business trends and improve comparability. However our non-GAAP measures do not replace or are not superior to GAAP measures. This concludes my financial review and we'll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Roger Friedman with Lehman Brothers. Please proceed.

Roger Friedman - Lehman Brothers

Hi, good morning Nelson.

Nelson Chai

Hey Roger, how are you?

Roger Friedman - Lehman Brothers

Good thanks. A couple of questions, one, I guess let me just come back on the strategic front. So, at the analyst day, I guess last month, you or John talked about how you are growing the derivative business I think. Specifically, we were talking more about futures and I guess I wanted to come back on the options front. Is it fair to say that you planned to build that business organically of your Arca platform or are you evaluating any strategic deals in that space as well?

Nelson Chai

Well, I think we had hoped to plan to continue to build the Arca platform. We think that the performance of the business, in particular, in the penny pilot program give us lot of optimism and certainly Duncan, Larry, Jerry and others continue to talk that we are market participants and we feel we are in a pretty good spot with where we are today. And certainly where our market share is, we like to see it grow and to the extent something became available externally, we certainly would have to evaluate it but I think we feel pretty confident with both the technology, the market structure and the push with where we think that the industry is going and with where we are positioned today.

Roger Friedman - Lehman Brothers

Okay. So in terms of the market share again you've made there, are they on target with what you expect? I think you are running around 12% now which is up, but it's really up meaningfully from where you had been.

Nelson Chai

Well, little bit has to do with -- we are very comfortable with where the performance is. As you talked to the deck it’s hard when you only do a pilot program with the few stocks or few options. And I think that as the program gets extended, we anticipate seeing more market share gains if you will, Roger. And so we are hoping and we are pushing , and we’ve send our letters there and we are hopeful that we’ll see that the penny pilot program gets continues to get expanded, because we think that it will benefit us.

Roger Friedman - Lehman Brothers

Okay, great. And then internationally as well, I think the comment had sort of focused more on Asia. What about Latin America specifically Brazil, is that a market that you are interested and like to do DMF or (inaudible) sort of fit into potential strategic plan?

Nelson Chai

But we actually already have a very good strong presence there particularly in Brazil, and so there are a number of our companies listed here already. And we obviously have some good relationships with both the exchange as well as many other companies there. And we will continue to evaluate, certainly it is a high growth economy and marketplace. And so, we maintain our relationships there, but other than that, there is not much I could say.

Roger Friedman - Lehman Brothers

Okay. Let me ask one more and I’ll jump out. Can you just walk through the impact of the regulatory combination out, so we are going to see the focus revenues come out of the P&L, is that fair and you saw geared expenses?

Nelson Chai

I think what we will do is, as you know, we just announced it on Monday, Roger. Over the next period of time, we will put out a pro forma to help and understand it. And you heard in my comments, we talked about financial mutual, there is some format on up-front payments and that’s going to continue to be as part of service contract. And so we will help you through that in the coming weeks.

Roger Friedman - Lehman Brothers

Okay. The question I would ask, I wondered why it’s financially mutual, I think a couple of years ago you talked about this, that regulatory was running at a slight loss but given that the focus revenues drive the revenue component and that's driven by the investment bank’s profitability and given huge increase in profitability. It just seems like that business would have actually been running at a profit most recently?

Nelson Chai

Yes, I think you are right in terms of where the trends are on focused revenues and the impact, and so, yes, a few years ago it was losing money. And I think, today, it probably is slightly on the upside, right. And so, the question is that you have to look in terms of -- into the crystal ball, what’s going to happen, and one of the reasons why we put the business together was for efficiencies and the reality in terms of (inaudible) will be showed with the streak.

Roger Friedman - Lehman Brothers

Yes.

Nelson Chai

And so, I think you have to take that into account as you think about why this thing was done. This is not done, it's something that was a huge win for us financially. This is done because this is the right thing to do for the industry, and I think, both us and the NAC recognize that going in, and we took a very, I would say, cooperative approach to make sure that we put together a fair deal for the industry in neutrals, so we can be involved.

Roger Friedman - Lehman Brothers

Got it. Fair enough. Okay. Hey, thanks Nelson.

Operator

Your next question comes from the line of Ken Worthington with J. P. Morgan. Please proceed.

Ken Worthington - J. P. Morgan

Hi. Good morning. First, maybe talk a little bit about the internalization of Europe post message. Is there a structural or other reason why European internalization levels in cash equities won't be similar to those in the U.S. over time? And then, even the message doesn’t address futures directly. We hear that some brokers are using message as an excuse to press internalization futures products as well. Is that a threat? And ultimately is there anything you can and are doing to protect market share abroad?

Duncan Niederauer

It’s Duncan. I'll try to respond to that. Ken, I think on your futures question to go backwards, it’s way too early to tell because the only place we've really heard about people talking about derivatives in a different way, and talk what I would call the OTC derivatives business. So, I think those efforts their showing there are so embryonic, it's too early to tell.

Now, if you think about your first question, the internalization rates and Nasdaq in this country have been more tied I think is historically to the nature of the beast, right. It was a market making model, so by definition, if any trade that was done as principle, you could argue to internalize trades. So the percentage of Nasdaq trades that never really got discovered in kind of a central market place has always been quite high. And I think the European market structures are quit different.

So, in advance of the message, you see a couple of startups like Chinext, making a little bit of ground in a handful of stocks and I think we are certainly going to put offense there and not just defense, but I think its very, very early to tell and given the market structure in Europe. I'd be surprised if a lot more gets traded upstairs. A lot of volume as we all know has already traded upstairs in Europe now, whether German stocks or stocks or on U.K. stocks, and I don’t see why a message is necessarily going to change that.

Ken Worthington - J. P. Morgan

Okay, perfect. Thank you. And then, may be just another one for you Duncan. How high were payments made to specialists this quarter? And I guess, are they acclimating to hybrid, and are the execution statistics improving from where they had been over the last quarter or so? And then, to what extend in future do you have the ability or willingness to start to reduce those payments, the life support to the specialist system?

Duncan Niederauer

I think to go back to what we talked about in the last earnings call, the payment plan is what is right now, its I guess just under $9 million a month collectively, the specialist group so call it roughly $105 or $106 million year. As I said at last earnings call, I'm less interested in reducing that number from $105. I am more interested in having it tied to performance and market quality metrics. So I have got a drastic -- a proposal in signing the SEC now that they responded pretty favorably to, and what I would imagine is you will expect to see us on or about September, we came to distribute a similarly sized pool, all other things being equal, but it will be much more tied to quoting performance and liquidity provision performance which I think are much more closely tied to market quality.

Now, one thing I am putting in this new plan, or at least contemplating is the size of that pool could go up if we do a lot more volume, besides that pool could go down as we do a lot less volume. So, I am trying to align everybody’s interest so that the specialist is motivated to perform better and be a more consistent liquidity provider. And our participation rates are down to about 4%. I’ve said many times, I don’t think a higher participation range is directly correlated to higher market quality, but I do think that the more you set the NBBO, the more liquidity you provide NBBO and the more flexibility I'm able to give the primary market nature and their ability to hedge that exposure, liquidity begets liquidity and you start to turn it in a very positive direction.

Ken Worthington - J. P. Morgan

Okay. So, the first part of the question, are the execution statistics -- actually are they starting to improve as the specialist acclimate or are we still about the same place where we were last quarter?

Duncan Niederauer

Having moderately more success in terms of their ability to taken actions, because since 290 milliseconds is going to 100 milliseconds and now 110, the throwing time is obviously going down commensurately. So they are having a little more success getting involved. There’s slightly more -- available in an offer, the fill rates are down a little bit, volatility is down a little bit. It’s hard to separate whether that’s I am getting more or less accredited from what’s going on since July 9th with the NMS Pilot so I am still evaluating that but it seems like it’s fairly consistent with the last quarter with some signs of improvement and I think really the rule changes are going to be repeated seeing a margin difference.

Ken Worthington - J. P. Morgan

Okay great. A last question. Cash equity volume has been exceptionally strong in Europe; can you just talk about the growth drivers and the sustainability potential for that growth? Thank you

Duncan Niederauer

The European markets?

Ken Worthington - J. P. Morgan

Yeah in the European cash markets?

Joost van der Does de Willebois

One of the key value drivers there is the market settings change a little bit. This may be a little bit later than it’s most of the cases here in US and a group of trading is taking a place, it now accounts to more between 30% and 40% of our volume. And that’s one of the big growing drives in the European markets.

Ken Worthington - J. P. Morgan

Okay, great. Thank you

Operator

Your next question comes from the line of Don Fandetti with Citigroup. Please proceed.

Don Fandetti - Citigroup

Hi good morning and quick question about – can you give a sense of how important your priority is to get self clearing for a wide derivative and do you think you can solve this through acquisition or can you build it internal, just want to get update advice?

Nelson Chai

I think first of all, Don, you saw that the announcement struggling LCH and the actions there so we are taking our position down there. I think that is certainly a something that we are spending a lot of time on both thinking about it and working through and had some good discussions already with the folks over LCH and I think for us, what we want to do is we do understand our position is a future clearing business relative to the other competitors and we will spend some time focusing on it. We don’t think necessarily that you necessary have to go start something to know but we are hope for the, way other work through it but again it something that we are spending a lot of time on.

Don Fandetti - Citigroup

Okay. And then just lastly, Duncan at the analyst meeting you seemed to imply that you are doing some serious thinking about Arca pricing any thoughts today?

Duncan Niederauer

I think look at something that you have to continually evaluate we are cognizant that our pricing is different than other marketplaces I thought it was inappropriate to do anything in front of right DMF the rollout of the pilot at least to start. So, I have been analyzing very closely how the performances has been since July 9, it actually seems to be quite stabilized and very straight since July 9, on the Arca side.

So we are hanging in there 15% to 18% now and remember as I alluded to earlier, the denominator of what's going on at Nasdaq is really 70% to 75% with the earnings 25 to 30 is just upstairs trends that and I think it really part of the equation at the Arca model is not position to get those other than through the TRF that Nelson referring to earlier. So we are looking at it we are watching it closely but no decision named.

Don Fandetti - Citigroup

Okay. Great, that’s all I have. Thank you.

Operator

Your next question comes from the line of Rich Repetto with Sandler O'Neill. Please proceed.

Rich Repetto - Sandler O'Neill

Good morning guys.

Nelson Chai

Hi Rich.

Rich Repetto - Sandler O'Neill

First question Nelson is, on your remarks about consolidation or acquisitions is seem like a little bit refine comments and I guess just the point just to take it one step further, can you define it, will you do a dilutive deal or -- how many years do you need for deal to be accretive to really think seriously about it.

Nelson Chai

Rich, obviously it depends on a deal by deal basis, right and so to the extend a property came across that we had zero strategic value there is no synergies and no overlap I guess and that’s area we would say that we would not do a dilutive deal at any cost right. To the extend there is the chance to have a grand slam home run on every cynical metric in terms of synergies, in terms of strategic and everything else, we certainly would evaluated.

I think the common is there that we are going to balance the strategic versus the financial on both of them and certainly are very focused on shareholder return and shareholder value and hopefully that you will see that the two deals that John Thain has done since he is been here been extremely both strategic as well as financially beneficial to shareholders.

Rich Repetto - Sandler O'Neill

Okay. The next question goes to one of my favorite topics, on the expense cuts and again this is first quarter of the officially merged company but could you talk about either head count reductions or if you look quarter-to-quarter looks like the expense levels away from the variable transaction expenses were up 5%, up in line with revenue.

Nelson Chai

Yeah and Richard it is harder and so we are trying to figure out the way to better deal with you and the other folks on the phone and so you have to take a few things in the account as you know European business is the GL TRADE and we bought (inaudible) and we bought transact tools, they bring some small ads on the expense side, they are roughly $10 million or $11 million on the expense side that has been basically neutral on the bottom line today.

And the same time you got to really take into account the impact to FOREX which hasn't had an impact. So, just as an example to FOREX impact in the second quarter this year versus last year on topping station Europe is roughly $8 million. So, you have to take those into account we are trying to work through the best metric to show at you. From a headcount perspective if you just look at the second quarter of this year versus second quarter of the last year headcount at the NYSE is down about 17%. So, they would have been about 3000 employees a year ago in the quarter and now they are 2500. So, I think that's a pretty good metric in terms of some of the moves we are making here.

Rich Repetto - Sandler O'Neill

Would you say it would be fair to judge that both yourselves and the Euronext had their own separate cost cutting programs -- and successful program going on in place already. That's why I'm saying since you formed the merged company, what are the changes in headcounts since then?

Nelson Chai

Well, since we've got the merged company which we really didn't focused on getting the integration plans finalized, and wasn’t through it, and I think as you know, a lot of the synergies are going to come primarily on the technology side, and we are finalizing those trends right now. We actually have a pretty good action plan and game plan going forward, and so they are to come. And I think we are pretty clear when we announced the NYSE Euronext deal about that those we would be working on those today, which we haven’t and those will be coming in the following quarters.

Rich Repetto - Sandler O'Neill

Understood. And then, the last question goes to Duncan and the topics about the specialists, and I guess what I hear you say is that this proposal you have to the SEC also has rule changes, and not only rule changes and how you support the specialist but also rule changes on how they trade it? I guess the whole parity issues, because you can't really pay them at least from what they are saying, they can't perform their jobs until they get some sort of regulatory parity, not regulatory, but parity in how they can trade. Is that correct?

Duncan Niederauer

Among the rules I had in front of them right now, Rich, none of them is tied to parity. I think it is an issue that has to be addressed. We said pretty publicly that, look, a lot of these rules made a lot of sense two and three years ago. I think now that average have fully rolled out, the markets a lot more electronic, we get to learn from what we've seen in the market. And my point to the SEC is that rules that made sense two or three years ago may have already outlived their usefulness and should be revaluated. One could easily argue that one of them is parity to say it to someone who is at NBBO. But, after one joins them they go to back of the line, it doesn’t make obvious sense to me or anyone else I talk to. So you can safely assume that I will eventually put something in front of the SEC on that, but that is not among the rules I put front of them right now.

Rich Repetto - Sandler O'Neill

Understood. And one quick last follow-up. If you take, Nelson or Duncan if you take a look at your liquidity and routing expenses as a percent -- in the NYSE alone, just in the U.S. business. As a percentage of your transaction revenues, it up-ticked slightly, it went from like 69% say up to 72%. I found that surprisingly because now you are charging for the routing and you don’t have that negative sort of spread that you had before. Was that a mixed issue or just trying to understand that?

Nelson Chai

Yeah. Richard, I think it’s a combination of mix and then some DTC fees and some other fees might have increased a little bit. But, I don’t think that you should read too much into the trend.

Rich Repetto - Sandler O'Neill

Okay. Thanks guys.

Nelson Chai

Okay.

Operator

Your next question comes from the line of Patrick Pinschmidt with Merrill Lynch. Please proceed.

Patrick Pinschmidt - Merrill Lynch

Good morning.

Nelson Chai

Hi Patrick.

Patrick Pinschmidt - Merrill Lynch

Just a quick question on the Liffe business, trying to look at the sequential trend there and I look at the volumes, the volumes were up 7%, but then if you look at the gross margin, that seems to have declined sequentially. And can you maybe help me understand, is this a product mix issue or pricing?

Joost van der Does de Willebois

This is Joost. I think it’s a product mix issue because you might note that the specially, let say that the fees we earn, let say on Bclear business are substantially different from the ones that are in the normal equity business. So, I think that must be the key issue, especially if you take into account the big volume growth in Bclear. Nothing has changed on the sort of interest rate contracts, and there has been a little change in Amsterdam on the equity option business, but that has been leveling out with the volume.

Patrick Pinschmidt - Merrill Lynch

So, really the only swing factor is the Bclear business then?

Joost van der Does de Willebois

Right.

Patrick Pinschmidt - Merrill Lynch

Okay, great. And now for a quick mall in questions, in terms of the intangibles amortization and I think for the pro forma for the first quarter that released at the end of May, your 35 million now we are 25. Is 25 the run rate now going forward?

Nelson Chai

It is, and in the first quarter we haven’t finalize the first account, we put that after the help you guys with your modeling and so I guess there's a roughly 35 if I recall correctly, but perhaps if you look at model, we also put out some minority interest around 7 I believe. You would have to net that. If you look now in terms of -- now we finalize everything, the 25 is the good run rate and you won’t see the counter in the minority interest line.

Patrick Pinschmidt - Merrill Lynch

Okay.

Nelson Chai

So, we've just kind of finalized that, our first accounting there.

Patrick Pinschmidt - Merrill Lynch

Okay, great. That’s helpful. In terms of the tax rate, that came in a little bit lower, a bit sequentially. How should we think about that for the balance of the year?

Nelson Chai

Well, in the quarter, it has to do obviously as you know with the mix in U.S. and Europe. In Europe you don’t get tax and some capital gains. So, that helps a little bit, I think if you look at the six month number, it still is around 34%, I would try using that for modeling purposes.

Patrick Pinschmidt - Merrill Lynch

Okay. And then finally, in terms of merger expenses, you have $16 million in the GAAP and then there is foot now in the pro forma that sights 99 million figure or the second quarter. Can you help me understand what the difference in there?

Nelson Chai

The GAAP number would be for the NYSE side, from April 1 until June 30, and for the Euronext side between April 4 and June 30. And so that’s total is 16, and right before the deals are closed, Euronext expends through on their side till April 2 - April 3, roughly $83 million of the expense cost so that would be included some of there banker fees, legal fees and another things and that way from a GAAP basis it wouldn't show up in the GAAP numbers.

Patrick Pinschmidt - Merrill Lynch

Okay.

Nelson Chai

Do have further.

Patrick Pinschmidt - Merrill Lynch

Okay but we're still looking in term of a GAAP figure of 70 million for the full year in merger expenses. I think 70 or 76 million.

Duncan Niederauer

I think that it was a deal related cost as a take cost one time deal cost.

Patrick Pinschmidt - Merrill Lynch

Okay

Duncan Niederauer

And I wouldn't change in years numbers.

Patrick Pinschmidt - Merrill Lynch

Okay great. Thank you guys

Operator

Your next question come from the line of Mike Vinciquerra with BMO Capital please proceed.

Mike Vinciquerra - BMO Capital

Thanks good morning. I wanted to ask couple of questions on the European business when look at the derivatives. The strength appears to be mostly in individual agree products, up much stronger on the year-over-year basis then say interest rate, anything in particular going on between the two product categories that's driving the equities and not so much in the interest rate side?

Joost van der Does de Willebois

Well I mean there again I think most of the growth is coming out of the be clear businesses what happen that we start to offer let say an original equity options just 300 companies and its nice to note but I mean that we now offering them on 500 companies. You should know there are lot of just companies coming out of the reform. Euronext let say countries are coming from all the other countries as well Italy, Spain, Germany, Switzerland. And other number more and 20% of this volume generated by be clear is coming out of those countries. So I think that's the main reason.

Mike Vinciquerra - BMO Capital

Okay now it helpful Thank you very much. Nelson deeper into the liquidation of the LCH position talk about your plans for cash I can come over the few my self but just curious is gone be north of 550 million US are there any tax implications or are there any gains that you have pay some taxes and what are your plan doing with the cash overall?

Nelson Chai

Now that it’s very limited in terms of the gains of the pay on -- the tax of the pay on that we are going to use it for general corporate purposes, you know we have dividends, we still have commercial paper that we are committed to paying down and other than that will stick.

Mike Vinciquerra - BMO Capital

Okay just on the debt itself ,you got a three billion classified as short term in debt can you just remind me how that structures is there going to be a need to refinance over the next 12 months or you going to pay down some of that and after refinance in much smaller piece?

Nelson Chai

Well as you know the three billion is in commercial paper and so it by definition it is you continue to pay down and roll it over and so that’s what can you do and it’s actually working very well.

Mike Vinciquerra - BMO Capital

Okay then just one last follow up on some one else’s question was asking about the passing through the routing charges when you guys have a nice stay with the end talking about the revenues from the different categories and cash trading in the US it’s 268 this year 268 million versus the 187 million last. Can you give us some ball park what was the difference purely based on volume and growth in your business and what was actually related to passing through the routing charges?

Duncan Niederauer

And I think we are disclosing that information. We’ll talk about internal let’s see but I think we are disclosing that level of detail.

Mike Vinciquerra - BMO Capital

Okay thank you.

Operator

Next question comes from the line of Christopher Allan with Banc of America securities. Please proceed.

Christopher Allan - Banc of America securities

Hey guys how are you doing?

Duncan Niederauer

Hi how are you?

Christopher Allan - Banc of America securities

Just in terms of the $55 million in expense savings does lay down this part of the merger. Where do you guys stand after, one quarter?

Nelson Chai

Yeah we again most of that proposals going to come on back half of this year and so its presence is kind of leading that effort for us internally and we actually have been working with all the business unit leaders and again this is not the non-technology stuff that we are working through and people have signed off and we actually have planned to perfect to go after that.

Christopher Allan - Banc of America securities

Got you so do not expect to propel in another quarter as it’s already dropping in?

Nelson Chai

You probably wouldn’t see it realistically until the first quarter of '08 because all reactions are going to happen in the back half for this year.

Christopher Allan - Banc of America securities

Okay were there any service charges this quarter?

Duncan Niederauer

No.

Christopher Allan - Banc of America securities

Okay and then just a one little market question. The marketing and other expenses jump pretty significantly sequentially. Or was there anything seasonally there or I think in a line?

Nelson Chai

Yeah there has been some seasonality and so some marketing expenses tend to go based on programs so if you sponsor an activity -- that activity happens in that quarter that's when you recognize it and so they will tend to be spike and so for us you tend to have a little bit higher than the second and third quarter based on whether it be media buy or media schedules or else that sponsorship type stuff we would do.

Christopher Allan - Banc of America securities

Great, thanks a lot guys.

Nelson Chai

Thanks

Operator

Your next question comes from the line of Rob Rutschow with Deutsche Bank. Please proceed

Rob Rutschow - Deutsche Bank

Hey good morning.

Nelson Chai

Hello.

Rob Rutschow - Deutsche Bank

I guess if you could drove in a little bit further on the compensation I think that was up about 8% during quarter and so I am wondering if that was primarily in Europe in the Euronext piece or if there was some growth there in the US.

Nelson Chai

It was actually primarily in Europe and there are three different things there that would give you the difference in the run rate. One is a little bit on the Forex side announces a couple of million bucks. One was GL TRADE and we made acquisition that roughly added about $2 million of cost and as I mentioned in previous remarks that this is a roughly breakeven and then on the NYSE side in the first quarter we had a curtailment charge $12.8 million and again that’s also included now in the second quarter numbers so the combination of all the three and if you actually take those out then you will see the reductions during the quarter

Rob Rutschow - Deutsche Bank

Okay. One another house keeping item the share account is different between the pro forma and GAAP numbers, why is that?

Nelson Chai

Yeah, the GAAP numbers, the weighted average number and the pro forma is ongoing.

Joost van der Does de Willebois

The GAAP number if you will is calculated based on the fact that Euronext has been acquired on April 4, so you have, you only take -- you pick up the shares from April 4 on was the pro forma number as soon as it happened on January 1 to a full bond.

Rob Rutschow - Deutsche Bank

So that there's share equivalence in the 266 number, that’s the difference. And so, should we expect to the share count to rise towards that?

Joost van der Does de Willebois

You would expect the share counts to be in line with the pro forma.

Nelson Chai

Rob, just -- I would step on as being our corporate controller.

Rob Rutschow - Deutsche Bank

Okay, so 266 going forward. Okay. And then the last question, a lot of the media attention you have gotten have been related to M&A and potential M&A activity, it seems like you setting us up for a deal in the second half of this year. Is that your desire to get something done by the end of the year or sort of what's the timeframe that you are looking at?

Nelson Chai

Actually, I was actually hopping not to do that, I was actually just hope -- there has been -- we are obviously mentioned a fair amount about what may or may not happen and I just hope I -- what I wanted is, just reassure people that as we think about these projects if you will that we are taking a very measured to them. I can't comment on whether or not anything could happen in the first or second half of this year or there anything in the future, I would say that as opportunities arise, we do evaluate them, but we are going to be pretty judicious in terms of our evaluation of them. So, we are actually not trying to set anybody up for anything, just in terms of just reiterating our position of being judicious and thorough in terms of our evaluation process.

Rob Rutschow - Deutsche Bank

Okay. Thank you.

Operator

You have a follow up question from your line of Roger Friedman with Lehman Brothers. Please proceed.

Roger Friedman - Lehman Brothers

Thanks. Duncan I wanted to follow up on a couple of things about the specialist business. So I guess I was expecting that the parity rules would have been something will be addressed at this point. I was just wondering why that’s being out pushed off to a later point, and can you also just clarify then what are some of the -- what were the key issues you are addressing with the SEC now, is about the ability to narrow the quote in terms of the increments that they can quote at?

Duncan Niederauer

I think, we will get all of these Roger. I am just trying do what I think is the most appropriate orderly fashion, and also have to keep in mind that what -- where the SEC has an appetite, where our client have an appetite, etcetera, and so I think I am just trying to do it in -- what I think is the most sensible order of operation that I have been able to devise. So, what we already changed is the ability to hedge after 4:00, and before 9:30, that’s already done because I think an important thing, and I'm to ask to try more liquidity and run bigger positions, then I have got to give them the new ability to hedge. The ones that are down there right now or amending some of the [outlaw] rules that I think are outdated which you have seen some comment in the press with specialist on. We have a different set of rules for stabilization and these stabilizations the S&P 500 as opposed to the rest of the universal. I'm trying to extend to the most we have in the S&P 500 are of that.

And then lastly, the other I am working on with them right now is the one you alluded to, which is I think the concerns about heading were pretty rapid two three years ago, given that 96% of our volume is attached to the nickel spread or lower. I am trying to eliminate the price improvement parameters where a specialist as anyone else would be is free to improve the accordance spread by as little as a penny. So then you can do it by sub-pennies and Nasdaq and that I think what's happened is that rule has eliminated anyone if you trying to compete in that spread. I thought that was a more important one to change earlier than the parity one, where it will change.

Roger Friedman - Lehman Brothers

Got it. That's very helpful. And then the last question on -- is you quoted that the special participation is down to 4%, I'm wondering if you can break that down by market cap, in other words, are the smaller mid, small cap names considerably higher than that?

Duncan Niederauer

Only slightly higher, not considerably higher.

Roger Friedman - Lehman Brothers

Okay. Thank you.

Operator

At this time I would now like to turn the call over to Nelson Chai for closing remarks.

Nelson Chai

Well. Thank you everybody, and thanks for calling. If there's any follow-ups, feel free to call Gary. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.

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