NYSE Euronext Q3 2007 Earnings Call Transcript

NYSE Euronext, Inc. (NYX)

Q3 2007 Earnings Call

November 2, 2007 8:00 am ET

Executives

Gary Stein - IR

Nelson Chai - CFO

Duncan Niederauer - President, COO US Cash Markets

Larry Liebowitz - COO

Joost Van der Does de Willebois – Deputy CFO

Analysts

Roger Freeman - Lehman Brothers

Rich Repetto - Sandler O'Neill Harris

Don Fandetti - Citigroup

Niamh Alexander - Keefe Bruyette Woods

Ken Worthington - JP Morgan

Rob Rutschow - Deutsche Bank

Mike Vinciquerra - BMO Capital Markets

Chris Allen - Banc of America Securities

Mamoun Tazi - MS Global

Presentation

Operator

Welcome to the third quarter NYSE Euronext earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Gary Stein. Please proceed.

Gary Stein

Good morning. I'm Gary Stein, Investor Relations Officer for NYSE Euronext. Welcome to our conference call for NYSE Euronext's third quarter 2007 results, which were outlined in a 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 full discussion of the risk factors that may affect any forward-looking statements.

You should not place undue reliance on forward-looking statements, which speaks only as of the date of this conference call. Except for any obligations to disclose material information under 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.

Please note that the results of operations of Euronext NV for the three and nine months ended September 30, 2007 are reported under U.S. GAAP and incorporated in today's earnings press release under the caption European Operations in the accompanying tables.

With me on today's call are Nelson Chai, Chief Financial Officer; Duncan Niederauer, President and Co-Chief Operating Officer; Larry Liebowitz, Chief Operating Officer for U.S. Cash Products; and Joost van der Does de Willebois, Deputy Chief Financial Officer.

I will now turn the call over to Nelson. At the conclusion of Nelson's prepared remarks, we will take your questions.

Nelson Chai

Good morning. Thank you for joining our discussion on NYSE Euronext's third quarter earnings results. For the quarter ended September 30, 2007, NYSE Euronext achieved record financial results, driven by strong performance across our diverse business lines in Europe and the United States.

In the third-quarter, NYSE Euronext reported net income of $258 million or $0.97 per diluted share, a 279% increase as compared to net income of $68 million or $0.43 per diluted share for the year-ago quarter. These results are in accordance with U.S. GAAP.

The results for the three months ended September 30, 2007 include $22 million of merger expenses incurred in connection with the mergers of Archipelago Holdings and Euronext NV, as well as exit costs. They also include a $32 million gain on the transfer of the member firm regulatory functions of NYSE regulations at FINRA, and a $55 million deferred tax benefit related to an enacted reduction of the UK corporate tax rates from 30% to 28%.

Assuming that the Arca and Euronext transactions have occurred at the beginning of the earliest period presented, but excluding merger expenses, exit costs and other nonrecurring items, NYSE Euronext's net income on a non-GAAP basis for the third quarter would have been $202 million or $0.76 per diluted share. This represents an $85 million or 72% increase as compared to net income of $117 million or $0.44 per diluted share for the third quarter of 2006.

In addition, on a non-GAAP basis, operating income grew 68% to $320 million for the third quarter of 2007 from $190 million for the year-ago period. A constant U.S. dollar/euro exchange rate neutralizing the impact of acquisitions and dispositions of businesses and equity interest for the period, and on a non-GAAP basis, NYSE Euronext's revenues, net of activity assessment fees for the three months ended September 30, 2007 increased 34%.

On the same basis, fixed operating expenses, defined as operating expenses net of Section 31 fees, merger expenses, exit costs, liquidity payments, routing and clearing fees, decreased 8% compared to the three months ended September 30, 2006.

Excluding the effect of activity assessment fees and Section 31 fees and on a non-GAAP basis, NYSE Euronext's operating margin continued to expand, increasing to 31% of total revenues for the third quarter of 2007, as compared to 26% for the same period a year ago.

After distributing $133 million of dividends to shareholders and repaying $1.1 billion of debt since the consummation of the NYSE Euronext merger, NYSE Euronext had $1.4 billion of cash, cash equivalents and short-term financial instruments as of September 30, 2007.

These positive results are attributable to record trading volumes in our U.S. and European markets, as well as ongoing expense control. Moreover, these results highlight the tremendous benefits we derive from operating a globally diversified company with a business model that will continue to serve us well as we make progress towards realizing the synergies related to the NYSE Euronext merger.

LIFFE, our leading derivatives exchange, traded a record 272.2 million contracts during the three months ended September 30, 2007, an impressive increase of 54% compared to the year-ago quarter. Year-to-date, LIFFE has traded 724 million contracts, a 29% increase compared to the first nine months of 2006.

Bclear, LIFFE's wholesale clearing service for OTC trades, processed 24 million contracts during the third quarter, compared to 9 million contracts for the comparable period a year ago, up 168%. This strong growth is mainly due to LIFFE's leadership position in Universal stock futures.

Our European cash markets had their best quarter ever with an average of 1.34 million trades per day, an increase of 86% compared to the year-ago period. The average daily number of trades increased in every product category traded on Euronext during the quarter.

NSC, our European cash trading platform, has already executed more trades this year through September than during all of 2006. During the first nine months of 2007, 236 million trades have been executed on NSC, up 44.5% from a year ago.

Our U.S. cash markets comprised the largest liquidity pool in NYSE listed cash trading with a 60% of match trading volume in the third quarter of 2007. Total NYSE group volume for the quarter reached a new all-time record with over 195 billion shares handled, including new, all-time volume records for the most active day, week and month.

NYSE Arca continued to be the largest single displayed liquidity pool for ETF trading in the United States with 41% of handled trading volume for the third quarter of 2007. It is worth noting that NYSE Arca’s growing U.S. leadership in ETF, representing over 41% of all the ETF listings and 67% of public ETF assets under management.

Our U.S. options business has also been progressing very well. Total volume for all contracts in the U.S. for options penny pilot up over 55% year-to-date. NYSE Arca Options’ unique pricing model and advanced systems architecture has solidified its status as an industry leader and innovator of options trading. Transaction Auditing Group, an independent third party, has recently reported that NYSE Arca Options consistently offer the best price four times more often than any other market center for options that are included in the SEC's penny pilot program. The superior market quality has led to meaningful market share gains.

In the third quarter of 2007, NYSE Arca Options overall market share was 11.8%, up from 10.3% in the same period last year. During the same period, market share in the 13 penny pilot issues was up to 13.5%, up 1.8 percentage points from the prior quarter.

In October, NYSE Arca Options traded a record 38.2 million total contracts, representing a 21.5% increase from the previous record of 31.4 million contracts achieved in August of 2007. Average daily volume was at an all-time high with 1.66 million contracts traded per day, and NYSE Arca Options now trades 14.2% of all equity option contracts in the United States.

On the listing side, our business continues to grow. Today, there are nearly 3,900 listed issuers on NYSE Euronext's market with operating companies representing $29 trillion in total global market capitalization, greater than the next four largest equity markets combined. This growth was led by 88 new listings on our U.S. markets during the quarter, including 15 IPOs by operating companies.

During the first nine months of this year, NYSE and NYSE Arca achieved 199 new listings, including seven transfers from NASDAQ, eight transfers from AMEX and other markets, and 51 IPOs by operating companies.

Year-to-date, U.S. domestic IPO listings on the NYSE represent approximately 90% of qualified IPO proceeds raised in connection with listings, while non-U.S. listings represented nearly 100% of qualified proceeds raised.

Our China story is particularly impressive. With the addition of WuXi PharmaTech and E-House in the third quarter, and with yesterday's listing of Giant Interactive Group, the NYSE has gained 14 new listings from Greater China so far this year.

In the aggregate, there are 45 companies from Greater China listed on the NYSE with a market capitalization of $1.6 trillion. In September, we were privileged to become the first foreign exchange in the world to gain approval to open a representative office in Beijing.

Our European markets listed 37 new issuers during the third quarter of 2007, compared to 26 for the comparable period a year ago. Of those new listings, NYSE Alternext added nine IPOs for a total of 109 listings at the end of September. For the first nine months of 2007, NYSE Euronext European markets, including NYSE Alternext, have gained 107 new listings.

As you know, we completed the combination of NYSE and NASE member firm regulation activities on July 31, leading to the creation of FINRA. Approximately 427 NYSE regulation employees transferred to FINRA, while approximately 250 remain at NYSE Regulations, principally in market surveillance and listed company compliance.

To clarify the financial impact of this important transaction, please note that our third quarter results include one month of NYSE regulation activities prior to the completion of the FINRA transaction.

On a non-GAAP pro forma basis, as if the FINRA transaction had completed at the beginning of the third quarter of 2007, our revenues would have been $10 million lower; our compensation expenses would have been $5 million lower; occupancy costs would have decreased by $1 million; Professional services, marketing and other expenses would have decreased by $500,000 each.

Using an effective tax rate of 41.5% in the U.S., our EPS for the third quarter would have been $0.006 lower.

With regards to NYSE Euronext merger synergies, we continue to make solid progress and remain confident in our ability to deliver the $275 million of annual run rate cost savings and $100 million in revenue synergies promised in connection with the merger.

Our business units have already begun to leverage the unique benefits derived from the NYSE Euronext merger. For example, in listings, by working closely with the U.S. and European regulators, our Global Listings Group has established an innovative fast path listing to facilitate Global cross listings on the NYSE and Euronext. In derivatives, the European equity [NYMEX] options on the CAC 40, AEX and [FTSE] 100 will be launched on NYSE Arca during the fourth quarter.

In addition, leveraging our NYSE Arca ETF activities in conjunction with the BGI iShares, two ETFs will be listed on LIFFE; the FTSE 100 ETF in London and the Euro STOXX 50 ETF in Amsterdam.

The technology road map we have previously outlined is expected to produce significant cost savings and a unified technology trading infrastructure. As an example, we have initiated Project X, which involves the overhaul of our four trading systems and the creation of a common customer gateway for trading. Tangible signs of our progress include the consolidation of our U.S. ticker plant and the creation of a secured network gateway. With respect to non-technology related annual cost savings, we expect to deliver beyond the $25 million run rate savings we've already communicated.

There are a number of initiatives already underway that are expected to positively impact our financial results over the next three quarters. For example, we have consolidated in the NYSE and Euronext insurance program, which represent approximately $5 million in annual run rate savings. In addition, streamlining of our European real estate portfolio will generate $4 million to $5 million of annual run rate savings.

To support record volume growth and market reliability, we continue to invest in our technology infrastructure. This is resulting in faster, more reliable trading and greater system capacity. NYSE Euronext exchanges have achieved a number of new volume and message capacity records, notably during the record volume days and weeks in August.

Additionally, the NYSE plans to upgrade message capacity to 64,000 messages per second by year end, up from 25,000 at the beginning of 2007, and up from the current 38,000. Effective October 1, we introduced new pricing on NYSE and NYSE Arca Equities transactions that strategically leverages the unique combination of the NYSE, NYSE Arca and improves our competitive position in trading for both NYSE and NASDAQ-listed securities.

On October 31, we announced free trading on orders on the NYSE opening options effective November 1. These initiatives reinforce NYSE Euronext's ongoing commitment to providing customers with choice and the best trading experience possible.

In Europe, we are ready for MiFID and the new competitive landscape. Europe is fully MiFID compliant and is very well positioned to compete in this environment. For example, our recent announcement of SmartPool in cooperation with BNP Paribas and HSBC is the first European exchange-led multilateral trade facility. SmartPool further enhances the competitiveness of Euronext's market centers and strengthens our inherent technological and structural advantages throughout Europe. MiFID opens the door to many new product and service opportunities for NYSE Euronext's customers.

Similarly in the U.S., earlier this week, we announced the formation of an innovative joint venture with BIDS Holdings that will improve execution of quality and access to liquidity and block trading, and further strengthen our position as an aggregator of liquidity for our largest customers.

Last month, we joined with Caisse des Dépôts to announce the launch of an international carbon trading market that will provide a full range of exchange-based services to the carbon emissions market on a global scale. On October 24, NYX was added to the S&P 500 and S&P 100 indexes and now holds the distinction of being the only exchange in the S&P 100.

This week, in support of our well-defined strategy to pursue geographic and product diversification, we initiated steps to acquire a 1% stake in BOVESPA, Brazil's leading stock exchange at BOVESPA’s IPO price. We are currently completing the paperwork required for foreign ownership of Brazilian shares. We continue to seek opportunities to contribute to our goals of global growth and value creation for customers and shareholders alike.

Now, I will open it up to questions. Thank you.

Question-and-Answer Session

Operator

Your first question comes from Roger Freeman - Lehman Brothers.

Roger Freeman - Lehman Brothers

A question on the expenses overall. It looks like if you back out the impact of FX, European costs were about flattish and U.S. down about $10 million. Should we just look at that as this really wasn't a quarter where there were any step functions in terms of costs coming out and that the next big thing is the technology, the trading integration you were talking about?

Nelson Chai

Yes, I think that's right, Roger. I think you're just seeing the tail impact on the NYSE side of the initiatives we took on the NYSE Arca deal, which is why you'll see a continual dribble out of costs on the NYSE side. I think on the NYSE Euronext side together, I think you'll start seeing it in the coming quarters.

As I mentioned in the prepared remarks, we have been working against the $25 million non-tech savings and you will start seeing the impact of that. But again, the bigger dollars will come as we integrate the platform and we execute Project X on our side here.

Roger Freeman - Lehman Brothers

On the Euronext side, it looks like pricing revenue per unit came up both in cash and derivatives. Is that an accurate read, and were there pricing changes?

Joost Van der Does de Willebois

I didn't really catch your question. If your question is, has there been a price decrease?

Roger Freeman - Lehman Brothers

No, it looks like there was an increase.

Joost Van der Does de Willebois

No, no. There was a slight price decrease, because we usually have let's say a digressive scale in our pricing, so as the volume goes up, the average price of it goes down. You should see that happen as well.

Roger Freeman - Lehman Brothers

Okay, we will go back and look at those. It just looked like it had gone the other way. Nelson, on the market share front, with respect to the pricing changes you put through on Arca and the floor at the beginning with October, what's been the customer reaction? It looks like you got a nice pick-up in NYSE-listed share on Arca, but on a month-over-month basis, the floor is down 4 percentage points or so.

Did you see any sort of large broker-dealer customers start to divert volume away as that price went up to $0.08?

Duncan Niederauer

I will give you the quick rundown on that. The September/October change of down 4% on the floor model is probably a little overstated, because you have to remember September included a big expiration. So, the way I look at it, if I try to do same-store sales, I would say the floor model is down around 2.5%, 2.7%. The Arca channel was up about 2%. So overall, I had it roughly at 0.5% decline in matched volume, and then on Tape C, Arca was up about 1.5% on the NASDAQ side.

So overall, it was in line with expectations. We are continuing to watch it. We didn't see any major broker-dealer really shift their volume or modify their behavior that dramatically. Remember, you still had the impact of some of the residuals from what [BAP] was doing in September and early October, so we are continuing to watch it pretty closely this month.

As Nelson said, look, a message really for all of you on the call, we are continually looking at pricing functionality and the market model, right? That's not going to change.

Roger Freeman - Lehman Brothers

To tie on that, the elimination of fees, the trade at the open, can you just put that in a strategic context?

Duncan Niederauer

Yes, the opening is 2% to 4% of our daily volume. We think that it's obviously an important part of the day for us. We've still got obviously a lot of market share that's tied to our opening. What we did is it is really part of an ongoing effort where we recognize that we are seeking to get the best price at the opening, so I don't think you'll ever see us open every stock at 9:30; that's just not our goal. We don't think that makes a lot of sense.

But there are a lot of stocks we could certainly open more quickly, so the pricing was just part of an overarching strategy to get more information out around the opening, get more indications published, given the specialist tools to open the stocks more quickly and we thought that as an extra incentive, it made sense to just have the openings be free for the time being.

Roger Freeman - Lehman Brothers

Lastly on bids, can you talk a little bit about how the mechanics of that are going to work, as far as how the incoming orders will take a look at your liquidity pool bids and how orders are going to get filled there?

Duncan Niederauer

It's really too early to tell. We haven't gone over the market model with the SEC, but I will tell you where we would like to go with it is that any orders that are on the book in New York will have the opportunity to opt into the facility; any orders that are on bids will have the opportunity to opt into the facility. The facility will be completely dark, so there will be no information advantage that any broker or specialist or any other market participant will have. The facility will be completely dark.

What we ideally would like to do is if orders are going to be executed in the facility that would trade outside the NBBO, orders that are on the book at prices that should be protected, we envision that they will be protected. So if you are on the book and haven't opted into the facility, but the facility is going to put up a block $0.03 below the bid, let's say, if you are on the book in New York within $0.03 of the bid, you would get detected.

That's what we're going to be talking to the SEC about. Obviously, any market changes we want to make there, model changes we want to make are going to be subject to their approval.

Operator

Your next question comes from Rich Repetto - Sandler O'Neill.

Rich Repetto - Sandler O’Neill

First, I applaud the transparency on the regulation. What I didn't get was, can you talk about just overall how much expenses came out in the quarter for the FINRA?

Nelson Chai

You are saying, how much of the two months?

Rich Repetto - Sandler O’Neill

Exactly, yes. You've got two months. Like you said, I assume we just multiply…

Nelson Chai

It's roughly $10 million.

Rich Repetto - Sandler O’Neill

If you take out the regulatory and fine income and you take the $10 million out because that is certainly a help, but then fixed expenses actually went up quarter to quarter.

Nelson Chai

Well, you have to also take into account the forex impact, Rich, and also the M&A activity, particularly in Euronext. The combination of both of those would have offset the FINRA change.

Rich Repetto - Sandler O’Neill

To be fair, your revenues went up, too.

Nelson Chai

We could back that out, but you know the reality is the revenues did go up from the forex; on the M&A activity in Euronext, there wasn't really an increase on the revenue side, but we can obviously try to help you fine-tune that.

Rich Repetto - Sandler O’Neill

Duncan, I was just trying to see quarter to quarter how the specialist payments in total might have changed?

Duncan Niederauer

Remember, Rich, for the third quarter not much of a change. The only month that the new liquidity to payment plan was in place was for September. So July and August were the same as they were, so I think that was running at something around $8.5 million to $9 million a month in July and August.

The numbers in September were down slightly because it was a shorter month and our volumes were obviously not as high as they were in July and August. So remember, the new plan we have put in place aligns the interests more closely. So if we have a terrific month, there should be more money to distribute. If we have an average month, there's obviously less money to distribute.

I forget exactly what the number was in September, but it was $1 million or $2 million less than the $8.8 million a month we were running at. I think it's too early to tell, but October will be higher than September but less than the $8.5 million to $9 million a month we were running at prior to that.

Rich Repetto - Sandler O’Neill

So probably expenses, at least related to the fixed component in July and August, will come down there, it's fair to say?

Duncan Niederauer

In July and August, we were paying $8.5 million to $9 million, the number is probably closer to $7 million in September and October.

Rich Repetto - Sandler O’Neill

A quick follow-up on bids, Duncan. You see firms like ITG cutting off the dark pool aggregated, the algorithmic flow into the dark pool. I know BIDS, they've had a great start but small execution sizes. Is it a goal to try to get the block size up? How would you combat that or try to accomplish that if that is a true goal?

Duncan Niederauer

Look, that's absolutely the plan, because that was the biggest thing we were hearing about from the institutional clients. Remember, BIDS has had a great start but hasn't invited the buy side to the party yet. They've been making sure the technology works. It's only a sell-side tool right now, so I think it's a lot of the [debts] that are contributing from the sell side from what we can tell, if you look at the demographics of it, it is a lot of smaller stuff, so it might be a lot of PT flow, a lot of [stat ARC] flow, et cetera. I think, once you introduce the buy side into the equation, that is clearly the target market we're going after, Rich, is to get the average order size up to the 50,000 to 100,000 share level.

Rich Repetto - Sandler O’Neill

Nelson, tax rate guidance, the tax rate was like 32.3%. You've mentioned 34.5% prior.

Nelson Chai

Rich, obviously it fluctuates depending on where the money comes in. So I think between 33% and 34% is probably a good guide, if you will, for now.

Operator

Your next question comes from Don Fandetti - Citigroup.

Don Fandetti - Citigroup

Obviously, derivatives have been a strong driver of growth for you. We are hearing some rumblings of increased competition around MiFID. Can you talk a little bit about how protected your position at LIFFE from that standpoint?

Joost van der Does de Willebois

We are pretty well protected, because you can already internalize in Europe on the derivatives side. We do not expect MiFID to affect our derivative business in Europe.

Don Fandetti - Citigroup

Duncan, I was wondering if you can comment on your acquisition strategy in general in the U.S?. I know you've talked about a U.S. futures exchange. Where are you in that thought process?

Nelson Chai

We've been clear in terms of outlining what our strategic priorities are in terms of expanding both our product portfolio and geographies. So, we continue executing them. We obviously continue to monitor the market and we continue to take looks at things, if you will, but there's nothing really more to report other than that at this point.

Certainly, there seems to be a lot of activity in our marketplace as you pick up the newspapers, and so you can be sure that we're taking looks at things, but from our standpoint, things have to make sense both strategically and financially and we've been pretty clear about outlining that. If something came across that would either expand our product lines or expand in the geographies that we're most interested in, I think you would see us move forward.

Operator

Your next question comes from Niamh Alexander - KBW.

Niamh Alexander - KBW

If I could move back to European cash equities, you are really hitting the ball out of the park in growth there and I expect some of it is volatility driven. But are there some other secular drivers here? Are you looking at a different group of faster trading customers? Is it a pick-up in cross-border trading? Can you just help me understand maybe the sustainability of the cash equities growth?

Joost van der Does de Willebois

You almost answered your own question. What we've seen Europe as well is an increase in algorithm trading, an increase in activity, also volatility in Europe. On your last point, is there an increase or pickup, in cross-border trading? Again, it can be affirmative. For example, if I look at the Dutch market a couple of years ago, I mean the level was below 40%. We are now almost at 70% cross-border trading, so your point is quite right.

Niamh Alexander - KBW

On the Dutch market, we've seen competitors [KYX] really moving from a very small base but getting some traction, taking some share from there in the Dutch market. Now with MiFID, they have the opportunity to go into other markets. Now, my understanding is their offering is based on very low-cost and it's because they can get more favorable clearing relationship and clearing costs. What can Euronext do to address this? What's your scope with regards to the ability to make it less expensive for the customers to clear there, as you don't own the clearing?

Joost van der Does de Willebois

Thanks for the question, because our perception is slightly different. We think it's primarily, arbitrage-driven, their volume, and they have a short-term advantage. It's a 3 decimal trading engine. We go to 2 decimals for the moment, and we will move to 3 and even 4 decimals, so we think that the volume or that their competitive edge will disappear, let's say, quite soon.

Niamh Alexander - KBW

About their clearing relationship, allowing them to charges so much less, is there not opportunity for you to go and do something there?

Joost van der Does de Willebois

No, our perception of it is primarily let's say arbitrage business driven by, let's say, the trading decimal, the 3 decimal business will sell there and the 2 decimal business, that business is currently in our NSE system. The moment we change that, I think their competitive edge will disappear.

Niamh Alexander - KBW

Just moving back to the U.S., Nelson, the listing franchise with the floor now matching less than 40% of trades, my understanding was a big part of the pitch before and the premium that you could charge for listing fees was because of the ability to manage volatility because so much of the volume traded on the floor. How has the pitch changed or how are the discussions with clients going? Is there any questions raised with regard to the premium now? What is your differentiation when you are making a pitch?

Nelson Chai

Well, certainly our marketing model is part of the pitch, and I would say that. I think if you look at the statistics this year, the fact that we've raised almost 90% of the qualified IPO dollars here in the U.S., if you look and how we are attracting issuers outside the U.S., particularly in China and our success there, I think I would say that our picture remains very much very strong and very competitive. I think certainly that's part of the pitch, and clients still like to come in here and like our market model.

I think a big part of it also has to do with brand and who we are, and I think people view NYSE Euronext as by far the global market leader. In my prepared remarks, you heard the fact that the market capitalization, the operating companies listed here, is $29 trillion, which is more than the next four exchanges combined. It actually means something to a company that wants to go public.

So I think it's a combination. It's part of the pitch. I think if you look at our results this year, I would say our pitch is very much intact. Again, we feel very good about where our position is on listings.

Niamh Alexander - KBW

Do I understand that you are not seeing any pricing pressure there either?

Nelson Chai

No.

Operator

Your next question comes from Ken Worthington – JP Morgan.

Ken Worthington - JP Morgan

NASDAQ bought a clearing license with the acquisition of the Boston Stock Exchange. How important are clearing capabilities in U.S. equities?

Larry Liebowitz

I think that in the U.S., unlike Europe, it is a relatively commodity product, but I think the idea of someone competing with BTT and SIC is always a good thing to have in the market. I don't think that is a competitive advantage. In fact, I think the regulators might not allow a closed system. So, it might be that while they have this, they might have to open the system for all.

Ken Worthington - JP Morgan

Okay, so no desires to replicate that and obtain one of the remaining clearing licenses?

Nelson Chai

Well, I guess the question becomes wish list versus what we think is practical, is I think what Larry tried to address in his comments. Certainly, if you could get it right, it would be interesting. We're just not sure how tangible or feasible that is. So if something came across we thought was interesting or attractive, we might do it as well but I think you would have to look at it more as option value than actually buying it outright.

Operator

Your next question comes from Rob Rutschow - Deutsche Bank.

Rob Rutschow - Deutsche Bank

The first question I have relates to market structure in the cash equities market in the U.S. You've talked about moving to a single platform. Can you tell us when that will occur and exactly what the market structure will look like?

Larry Liebowitz

We're doing a lot of different things in parallel. If you think about the New York Stock Exchange, what we call classic, versus the Arca platform, we've already rolled out a consolidated ticker plant in New York. We've got more major systems that constitute the New York technology platform. That's CMS, SuperDOT, and then PSS and Display Book.

So the first major phase of that is this common customer gateway that's going to replace CMS and ultimately SuperDOT. That's going to start rolling out at the end of this year. It's a phased-in approach. You'll start to see these systems go away. We have roughly 400 of these nonstop servers, meaning expensive equipment that will be replaced as we start to do this.

The second phase of that we will be replacing the actual layer of Display Book. When those things are done, technically we will have common platforms with differentiation that allows the market models to adapt to where they need to be, but they will share in the same common software base. Customers will access both systems the same way meaning through the same type of gateway. In fact, anyone can come into NYSE Euronext and access any product in any geography, ultimately, when it the CCG is rolled out everywhere. So that's one of the first legs into the whole integration.

Following those and sort of working in parallel is figuring out how to get the European platforms consolidated and decide what the universal code will be for cash and derivatives.

Rob Rutschow - Deutsche Bank

The $100 million in cost savings that you laid out for next year in the previous presentations, can you give us more details on exactly where those are going to come from on the technology side?

Nelson Chai

Well, I think you are probably referring to things that were presented earlier. Most of it is coming from technology. As I mentioned earlier in our prepared remarks, we had about $25 million coming out of non-IT, and we will see those next year, the balance of which is really targeted towards IT.

I think Larry kind of gave an update on where we are in that progress, so that's the split between the two buckets.

Larry Liebowitz

The only thing I would say is, when we say we're going to roll out CCG, that is a phased roll out. So you'll see costs come out but they are not in huge chunks. But then when you look back, you'll see that it has accumulated, you know; it's not in step functions of $25 million.

You'll also see savings come out as we start to integrate the European platform, which we hope to see start happening in the first quarter of next year as we start to determine what to do with the AIM joint venture.

Rob Rutschow - Deutsche Bank

On the market data side, there was a slight decline there this quarter. I was wondering if you could reconcile that with a higher number of subscribers and higher volumes?

Nelson Chai

I think it probably just ties into our share, and then the way the tape calculations roll. So what we can do is we can work with you offline to help you understand the calculations, but I think it has to do with our share of the tape and the way the calculation is done. It's less about the subscribers amount in that one. It contributes to the overall pool.

Rob Rutschow - Deutsche Bank

If I could just revisit the pricing at Euronext and also for the U.S. derivatives business, it looked like, based on the calculations I did, revenues to volume were up for both of those. Could you just talk about the pricing trends there?

Joost van der Does de Willebois

I will join Nelson in taking this item offline. What you'll see, which has been difficult, let's say from before, the huge impact of declared volumes because that volume it's kept as fee business. So if you calculate it back, you might get a loss in your average fee per trade, so you should separate let's say the declared volume and its income from the other income. That might help you calculate what is the average fee.

Larry Liebowitz

Put a different way, we don't think that we had any major pricing differences. What you're seeing is a difference in mix.

Joost van der Does de Willebois

Yes.

Rob Rutschow - Deutsche Bank

Are you able to reiterate any guidance that you've given previously for EPS for 2008?

Duncan Niederauer

No. You know we don't actually give guidance, so we can reiterate that we don't give guidance.

Operator

Your next question comes from Mike Vinciquerra - BMO Capital Markets.

Mike Vinciquerra - BMO Capital Markets

Just a hypothetical question; there's been some rumors of course about a northeast exchange being up for sale here and some people bidding on it; potentially you guys. From a bigger picture perspective, what would be the benefits from your perspective of adding, (a) either a regional exchange, (b) another options business? Are there advantages there in terms of what you can do in terms of creative pricing, or certain different market structures you might want to offer?

Duncan Niederauer

We think there might be some advantages if we were to have it hypothetically something different, but it's a matter of what you paid for it and what you got for it. I guess the only thing I would point to is that there was an article in the Journal a week ago about what may be happening at a northeast exchange and about one of our domestic market competitors, the over-the-counter market, taking a look and having an exclusive with them.

All we would say is that we can't comment on what we are doing but to the extent there was truth in those rumors, you would want to make sure that given the price levels that were discussed in the article, because of the way the market structure works there, that you would really lock-in the participants because of the way that one works.

So I guess my point is that not all the exchanges have the same market structure, have the same stickiness. So depending on what you did, you certainly would want to make sure that you thought through all of that if you're going to be judicious in your investment strategy.

Mike Vinciquerra - BMO Capital Markets

Understood. Then when we look at the options side, I presume part of your gains in market share come from the market structure, the make-or-take you decided to jump into. It seems like you may have some company coming in the form of BOX and eventually if NASDAQ gets their market up and running here this quarter.

First of all, is there any interest in expanding the make-or-taker to non-penny names, and why wouldn't you do that? Is there any concern about some other people coming in and taking away your differentiating factor?

Duncan Niederauer

Well, first of all, I think BOX does operate on that model. Secondarily, the make-or-take is across all the options listed on NYSE Arca. In terms of expanding the pennies, we certainly would love to see the rollout of the penny pilot program. You heard in my prepared remarks and you see in our statistics how well we are doing, and we think that we've been the biggest beneficiary of that model if you look at both our market share in that business.

We think our technology and our market structure is conducive towards it. So we would fully applaud a move towards more stocks being in the penny program or expanding the program.

In terms of other people entering the market, I'm sure they will and I think that's out there. I would just caution headlines about what people are doing in pricing and try to make sure both rules are approved and things are tested before you start moving too quickly about them coming in.

But again, we are not opposed to competition. We are very comfortable with our market structure and our market model there, and so we are okay with competing.

Mike Vinciquerra - BMO Capital Markets

Fair enough. You guys have mentioned, you mentioned in this call as well, the carbon market that you are looking at. Now, we've also heard from the CME and NYMEX and of course there's already a venture that trades some carbon products. Is this a race to get the product out there first so that you can capture the open interest, or what are you guys doing going to do in terms of trying to get ahead of the market? Because it seems like everyone is heading in the same direction.

Nelson Chai

Well, I think everybody in the derivatives space, there is a little bit of a race, right? And so there seems to be a bigger first-mover advantage of getting the liquidity in a particular contract, particularly in those businesses. I'm sure that every single business that participates in the derivatives space is looking at not just carbon but any other product they think would be interesting, and so we should be no different.

Mike Vinciquerra - BMO Capital Markets

Would it make sense to potentially make an acquisition of the existing marketplace there?

Nelson Chai

I think it's just a matter of resource allocation and where it would be on the priority list, and how much it would cost to get it. I think that probably answers the question.

Operator

Your next question comes from Chris Allen - Banc of America Securities.

Chris Allen - Banc of America Securities

If you could touch a little bit on the BOVESPA investment, I'm just not sure what the thinking is in terms of taking such a small stake, if you're thinking about potentially doing something longer term?

Nelson Chai

Well first of all, what I would suggest to your is that we have actually had a long-standing relationship, both prior to the merger, both Euronext as well as NYSE. On the NYSE side, the 32 companies from Brazil listed here, we are by far the place where Brazilian companies look to go raise capital.

On the Euronext side, there's about a ten-year relationship that's occurred between the businesses. NSC is the provider of technology to BOVESPA, and so there is very close relationship.

As the business decided to go through the public process, we know them very well, we think there are some things we might be able to have discussions about. I can't talk much beyond that but again, it was just a situation where they were going public, there's a long-standing relationship, particularly on the Euronext side with Jean-Francois Theodore and the senior management of BOVESPA, and so it was a little bit of support and hopefully a start of some more dialogue.

Chris Allen - Banc of America Securities

If you just turn to the BIDS joint venture, Duncan, I'm just trying to think about how you guys plan to attract the buy side order flow? The buy side already has three options in terms of block trading in the U.S. I'm not sure they necessarily want to trade with the smaller order flow that may be on BIDS initially in the joint venture. So if you could just give us some color in terms of how you plan to attract order flow there?

Duncan Niederauer

I think that's actually one of the reasons we did it as a joint venture, because we like the BIDS sponsorship model. It's a broker-sponsored model, which is obviously very consistent with our model. We also like the ownership structure of BIDS because all the buy side clients that Larry and I have spent our lives covering were continually telling us that they like the block trading experience but they would rather be in a position where they can reward brokers who provide a lot of other services to them. I think they also like the BIDS ownership structure.

We actually did this with the encouragement of the buy side, probably more than any other constituency out there. Their view was that the block liquidity market was too fragmented. They realized that what BIDS has right now is smaller order flow, but you know, Liquidnet for example only has buy side flows. I think you can expect the BIDS consortium, probably more than us, to be encouraging the buy side to use the platform, not only to be able to trade with each other in the platform but if we re-aggregate it correctly, also be able to tap into some order flow that what be resident on our books here as well, which doesn't exist today.

So I think, if we get it right and the buy side starts to come into BIDS, they are very eager to see some of this block liquidity get aggregated somewhere, and they were telling us they thought we were the right umbrella under which to put that.

Chris Allen - Banc of America Securities

Are there any regulatory hurdles to your ownership of the JV?

Duncan Niederauer

It is a fairly innovative strategy, so we've talked to the SEC about it in principle. We gave them a heads-up before we made the announcement of where we were headed, that we thought it would the a jointly-owned facility. I think it was very important to the SEC that it be an NYSE facility rather than something outside of our SRO. But I think that's going to make the market structure conversations actually easier, not harder.

Larry Liebowitz

I think it's really, regulatory issues are more around how all the orders interact and how the books interact, rather than joint ownership of it, per se.

Duncan Niederauer

Correct.

Operator

Your next question comes from Mamoun Tazi - MS Global.

Mamoun Tazi - MS Global

A very quick question on the carbon contracts and carbon trading. Is there an issue of intellectual property rights, or those are not an issue at all?

Nelson Chai

Mamoun, the answer to that is I don't know the specific answer, depending on the specific product, right? So, if you think about some other industries regarding energy and some of the oil contracts, you can skin the cat on carbon coming up with different things but I think you would have to look a little bit more specific at the specific product you would do.

Mamoun Tazi - MS Global

Basically the virtual monopoly that the carbon exchange has in the U.S. could be broken if you find a way of putting together similar products that would be accepted by your client base?

Duncan Niederauer

I can't answer that question.

Gary Stein

I would just add, clearly that one of the ventures announced was the venture with Caisse des Dépôts is really obviously focused on Europe initially. I would just note that Caisse des Dépôts handles essentially the books, the allocation of the carbon credits from the Kyoto Accord, so it's a really interesting partner that we've got in terms of intellectual property and so forth. Obviously, we feel good in the places where we will play, with respect to what we do have intellectual property rights to.

Mamoun Tazi - MS Global

The reason why I'm asking is it's an exciting area that has a lot of growth, so I just wanted to know how you were approaching it. Thank you very much.

Operator

There are no more questions at this time. I'd like to turn the call back over to Nelson Chai for closing remarks.

Nelson Chai

Thank you, everybody. Thanks for dialing in.

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