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 USCash 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 AmericaSecurities
Mamoun Tazi - MS Global
Operator
Welcome to the third quarter NYSE Euronext earningsconference call. (Operator Instructions) I would now like to turn thepresentation over to your host for today's conference, Mr. Gary Stein. Please proceed.
Gary Stein
Good morning. I'm Gary Stein, Investor Relations Officer forNYSE Euronext. Welcome to our conference call for NYSE Euronext's third quarter2007 results, which were outlined in a press release issued earlier thismorning.
During this call, our comments may contain forward-lookingstatements within the meaning of the Private Securities Litigation ReformAct. These statements are based on NYSEEuronext's current expectations and involve risks and uncertainties that couldcause NYSE Euronext's actual results to differ materially from those in thestatements. Please refer to our SECfilings for a full discussion of the risk factors that may affect anyforward-looking statements.
You should not place undue reliance on forward-lookingstatements, which speaks only as of the date of this conference call. Except for any obligations to disclosematerial information under federal securities laws, NYSE Euronext undertakes noobligation to release publicly any revisions to any forward looking statementsto reflect events or circumstances after this conference call.
Please note that the results of operations of Euronext NVfor 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 captionEuropean Operations in the accompanying tables.
With me on today's call are Nelson Chai, Chief FinancialOfficer; Duncan Niederauer, President and Co-Chief Operating Officer; LarryLiebowitz, Chief Operating Officer for U.S. Cash Products; and Joost van derDoes de Willebois, Deputy Chief Financial Officer.
I will now turn the call over to Nelson. At the conclusion of Nelson's preparedremarks, we will take your questions.
Nelson Chai
Good morning. Thank you for joining our discussion on NYSEEuronext's third quarter earnings results. For the quarter ended September 30, 2007, NYSE Euronext achieved record financial results, drivenby strong performance across our diverse business lines in Europeand 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 netincome 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 mergerexpenses 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 thetransfer 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 UKcorporate tax rates from 30% to 28%.
Assuming that the Arca and Euronext transactions haveoccurred at the beginning of the earliest period presented, but excludingmerger expenses, exit costs and other nonrecurring items, NYSE Euronext's netincome on a non-GAAP basis for the third quarter would have been $202 millionor $0.76 per diluted share. Thisrepresents an $85 million or 72% increase as compared to net income of $117million 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 theyear-ago period. A constant U.S.dollar/euro exchange rate neutralizing the impact of acquisitions anddispositions of businesses and equity interest for the period, and on anon-GAAP basis, NYSE Euronext's revenues, net of activity assessment fees forthe three months ended September 30, 2007 increased 34%.
On the same basis, fixed operating expenses, defined asoperating expenses net of Section 31 fees, merger expenses, exit costs,liquidity payments, routing and clearing fees, decreased 8% compared to thethree months ended September 30, 2006.
Excluding the effect of activity assessment fees and Section31 fees and on a non-GAAP basis, NYSE Euronext's operating margin continued toexpand, increasing to 31% of total revenues for the third quarter of 2007, ascompared to 26% for the same period a year ago.
After distributing $133 million of dividends to shareholdersand repaying $1.1 billion of debt since the consummation of the NYSE Euronextmerger, NYSE Euronext had $1.4 billion of cash, cash equivalents and short-termfinancial instruments as of September 30, 2007.
These positive results are attributable to record tradingvolumes in our U.S.and European markets, as well as ongoing expense control. Moreover, these results highlight thetremendous benefits we derive from operating a globally diversified companywith a business model that will continue to serve us well as we make progresstowards realizing the synergies related to the NYSE Euronext merger.
LIFFE, our leading derivatives exchange, traded a record272.2 million contracts during the three months ended September 30, 2007, animpressive increase of 54% compared to the year-ago quarter. Year-to-date, LIFFE has traded 724 millioncontracts, 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 millioncontracts for the comparable period a year ago, up 168%. This strong growth is mainly due to LIFFE'sleadership position in Universal stock futures.
Our European cash markets had their best quarter ever withan average of 1.34 million trades per day, an increase of 86% compared to theyear-ago period. The average dailynumber of trades increased in every product category traded on Euronext duringthe quarter.
NSC, our European cash trading platform, has alreadyexecuted more trades this year through September than during all of 2006. During the first nine months of 2007, 236million 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 tradingwith a 60% of match trading volume in the third quarter of 2007. Total NYSE group volume for the quarterreached a new all-time record with over 195 billion shares handled, includingnew, all-time volume records for the most active day, week and month.
NYSE Arca continued to be the largest single displayedliquidity pool for ETF trading in the United States with 41% of handled trading volumefor the third quarter of 2007. It is worthnoting that NYSE Arca’s growing U.S.leadership in ETF, representing over 41% of all the ETF listings and 67% ofpublic 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 andadvanced systems architecture has solidified its status as an industry leaderand innovator of options trading. Transaction Auditing Group, an independentthird party, has recently reported that NYSE Arca Options consistently offerthe best price four times more often than any other market center for optionsthat are included in the SEC's penny pilot program. The superior market quality has led tomeaningful market share gains.
In the third quarter of 2007, NYSE Arca Options overallmarket share was 11.8%, up from 10.3% in the same period last year. During thesame period, market share in the 13 penny pilot issues was up to 13.5%, up 1.8percentage points from the prior quarter.
In October, NYSE Arca Options traded a record 38.2 milliontotal contracts, representing a 21.5% increase from the previous record of 31.4million contracts achieved in August of 2007. Average daily volume was at an all-time high with 1.66 million contractstraded per day, and NYSE Arca Options now trades 14.2% of all equity optioncontracts in the United States.
On the listing side, our business continues to grow. Today, there are nearly 3,900 listed issuerson NYSE Euronext's market with operating companies representing $29 trillion intotal global market capitalization, greater than the next four largest equitymarkets combined. This growth was led by88 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 NYSEArca achieved 199 new listings, including seven transfers from NASDAQ, eight transfersfrom AMEX and other markets, and 51 IPOs by operating companies.
Year-to-date, U.S. domestic IPO listings on the NYSErepresent approximately 90% of qualified IPO proceeds raised in connection withlistings, while non-U.S. listings represented nearly 100% of qualified proceedsraised.
Our Chinastory is particularly impressive. Withthe addition of WuXi PharmaTech and E-House in the third quarter, and withyesterday's listing of Giant Interactive Group, the NYSE has gained 14 newlistings from Greater China so far this year.
In the aggregate, there are 45 companies from Greater Chinalisted 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 gainapproval to open a representative office in Beijing.
Our European markets listed 37 new issuers during the thirdquarter of 2007, compared to 26 for the comparable period a year ago. Of those new listings, NYSE Alternext added nineIPOs for a total of 109 listings at the end of September. For the first ninemonths of 2007, NYSE Euronext European markets, including NYSE Alternext, havegained 107 new listings.
As you know, we completed the combination of NYSE and NASEmember firm regulation activities on July 31, leading to the creation ofFINRA. Approximately 427 NYSE regulationemployees transferred to FINRA, while approximately 250 remain at NYSERegulations, principally in market surveillance and listed company compliance.
To clarify the financial impact of this importanttransaction, please note that our third quarter results include one month ofNYSE regulation activities prior to the completion of the FINRAtransaction.
On a non-GAAP pro forma basis, as if the FINRA transactionhad completed at the beginning of the third quarter of 2007, our revenues wouldhave been $10 million lower; our compensation expenses would have been $5million lower; occupancy costs would have decreased by $1 million; Professionalservices, 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 continueto make solid progress and remain confident in our ability to deliver the $275million of annual run rate cost savings and $100 million in revenue synergiespromised in connection with the merger.
Our business units have already begun to leverage the uniquebenefits derived from the NYSE Euronext merger. For example, in listings, byworking closely with the U.S. and European regulators, our Global ListingsGroup has established an innovative fast path listing to facilitate Globalcross 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 Arcaduring the fourth quarter.
In addition, leveraging our NYSE Arca ETF activities inconjunction with the BGI iShares, two ETFs will be listed on LIFFE; the FTSE100 ETF in London and the EuroSTOXX 50 ETF in Amsterdam.
The technology road map we have previously outlined isexpected to produce significant cost savings and a unified technology tradinginfrastructure. As an example, we haveinitiated Project X, which involves the overhaul of our four trading systemsand the creation of a common customer gateway for trading. Tangible signs of our progress include theconsolidation of our U.S.ticker plant and the creation of a secured network gateway. With respect tonon-technology related annual cost savings, we expect to deliver beyond the $25million run rate savings we've already communicated.
There are a number of initiatives already underway that areexpected to positively impact our financial results over the next threequarters. For example, we haveconsolidated in the NYSE and Euronext insurance program, which representapproximately $5 million in annual run rate savings. In addition, streamlining of our Europeanreal estate portfolio will generate $4 million to $5 million of annual run ratesavings.
To support record volume growth and market reliability, wecontinue to invest in our technology infrastructure. This is resulting in faster, more reliabletrading and greater system capacity. NYSE Euronext exchanges have achieved a number of new volume and messagecapacity records, notably during the record volume days and weeks in August.
Additionally, the NYSE plans to upgrade message capacity to64,000 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 Equitiestransactions that strategically leverages the unique combination of the NYSE,NYSE Arca and improves our competitive position in trading for both NYSE andNASDAQ-listed securities.
On October 31, we announced free trading on orders on theNYSE opening options effective November 1. These initiatives reinforce NYSE Euronext's ongoing commitment toproviding customers with choice and the best trading experience possible.
In Europe, we are ready for MiFID andthe new competitive landscape. Europeis fully MiFID compliant and is very well positioned to compete in thisenvironment. For example, our recentannouncement of SmartPool in cooperation with BNP Paribas and HSBC is the firstEuropean exchange-led multilateral trade facility. SmartPool further enhances thecompetitiveness of Euronext's market centers and strengthens our inherenttechnological and structural advantages throughout Europe. MiFID opens the door to many new product andservice opportunities for NYSE Euronext's customers.
Similarly in the U.S., earlier this week, we announced theformation of an innovative joint venture with BIDS Holdings that will improveexecution of quality and access to liquidity and block trading, and furtherstrengthen our position as an aggregator of liquidity for our largestcustomers.
Last month, we joined with Caisse des Dépôts to announce the launchof an international carbon trading market that will provide a full range ofexchange-based services to the carbon emissions market on a global scale. On October 24, NYX was added to the S&P500 and S&P 100 indexes and now holds the distinction of being the onlyexchange in the S&P 100.
This week, in support of our well-defined strategy to pursuegeographic and product diversification, we initiated steps to acquire a 1%stake in BOVESPA, Brazil'sleading stock exchange at BOVESPA’s IPO price. We are currently completing the paperwork required for foreign ownershipof Brazilian shares. We continue to seekopportunities to contribute to our goals of global growth and value creationfor customers and shareholders alike.
Now, I will open it up to questions. Thank you.
Question-and-AnswerSession
Operator
Your first question comes from Roger Freeman - LehmanBrothers.
Roger Freeman -Lehman Brothers
A question on the expenses overall. It looks like if you back out the impact ofFX, European costs were about flattish and U.S.down about $10 million. Should we justlook at that as this really wasn't a quarter where there were any stepfunctions 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 onthe NYSE side of the initiatives we took on the NYSE Arca deal, which is whyyou'll see a continual dribble out of costs on the NYSE side. I think on theNYSE Euronext side together, I think you'll start seeing it in the comingquarters.
As I mentioned in the prepared remarks, we have been workingagainst the $25 million non-tech savings and you will start seeing the impactof that. But again, the bigger dollarswill come as we integrate the platform and we execute Project X on our sidehere.
Roger Freeman -Lehman Brothers
On the Euronext side, it looks like pricing revenue per unitcame up both in cash and derivatives. Isthat an accurate read, and were there pricing changes?
Joost Van der Does deWillebois
I didn't really catch your question. If your question is, has there been a pricedecrease?
Roger Freeman -Lehman Brothers
No, it looks like there was an increase.
Joost Van der Does deWillebois
No, no. There was aslight price decrease, because we usually have let's say a digressive scale inour pricing, so as the volume goes up, the average price of it goes down. Youshould see that happen as well.
Roger Freeman -Lehman Brothers
Okay, we will go back and look at those. It just looked likeit had gone the other way. Nelson, on the market share front, with respect tothe pricing changes you put through on Arca and the floor at the beginning withOctober, what's been the customer reaction? It looks like you got a nice pick-up in NYSE-listed share on Arca, buton a month-over-month basis, the floor is down 4 percentage points or so.
Did you see any sort of large broker-dealer customers startto 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% onthe floor model is probably a little overstated, because you have to remember Septemberincluded a big expiration. So, the way Ilook at it, if I try to do same-store sales, I would say the floor model isdown around 2.5%, 2.7%. The Arca channelwas up about 2%. So overall, I had itroughly at 0.5% decline in matched volume, and then on Tape C, Arca was upabout 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 reallyshift their volume or modify their behavior that dramatically. Remember, you still had the impact of some ofthe residuals from what [BAP] was doing in September and early October, so weare continuing to watch it pretty closely this month.
As Nelson said, look, a message really for all of you on thecall, 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 theopen, 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 importantpart of the day for us. We've still got obviously a lot of market share that'stied to our opening. What we did is itis really part of an ongoing effort where we recognize that we are seeking toget the best price at the opening, so I don't think you'll ever see us openevery stock at 9:30; that's just notour goal. We don't think that makes alot of sense.
But there are a lot of stocks we could certainly open morequickly, so the pricing was just part of an overarching strategy to get moreinformation out around the opening, get more indications published, given thespecialist tools to open the stocks more quickly and we thought that as anextra incentive, it made sense to just have the openings be free for the timebeing.
Roger Freeman -Lehman Brothers
Lastly on bids, can you talk a little bit about how themechanics of that are going to work, as far as how the incoming orders willtake a look at your liquidity pool bids and how orders are going to get filledthere?
Duncan Niederauer
It's really too early to tell. We haven't gone over the market model withthe SEC, but I will tell you where we would like to go with it is that anyorders that are on the book in New Yorkwill have the opportunity to opt into the facility; any orders that are on bidswill have the opportunity to opt into the facility. The facility will be completely dark, sothere will be no information advantage that any broker or specialist or anyother market participant will have. Thefacility will be completely dark.
What we ideally would like to do is if orders are going tobe executed in the facility that would trade outside the NBBO, orders that areon the book at prices that should be protected, we envision that they will beprotected. So if you are on the book andhaven'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 makethere, model changes we want to make are going to be subject to their approval.
Operator
Your next question comes from Rich Repetto - SandlerO'Neill.
Rich Repetto -Sandler O’Neill
First, I applaud the transparency on the regulation. What I didn't get was, can you talk aboutjust 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'vegot two months. Like you said, I assumewe 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 takethe $10 million out because that is certainly a help, but then fixed expensesactually 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 haveoffset 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 therevenues did go up from the forex; onthe M&A activity in Euronext, there wasn't really an increase on therevenue side, but we can obviously try to help you fine-tune that.
Rich Repetto -Sandler O’Neill
Duncan, I wasjust trying to see quarter to quarter how the specialist payments in totalmight have changed?
Duncan Niederauer
Remember, Rich, for the third quarter not much of achange. The only month that the newliquidity to payment plan was in place was for September. So July and August were the same as theywere, so I think that was running at something around $8.5 million to $9million a month in July and August.
The numbers in September were down slightly because it was ashorter month and our volumes were obviously not as high as they were in Julyand August. So remember, the new plan wehave put in place aligns the interests more closely. So if we have a terrific month, there shouldbe more money to distribute. If we havean average month, there's obviously less money to distribute.
I forget exactly what the number was in September, but itwas $1 million or $2 million less than the $8.8 million a month we were runningat. I think it's too early to tell, but October will be higher than Septemberbut less than the $8.5 million to $9 million a month we were running at priorto that.
Rich Repetto -Sandler O’Neill
So probably expenses, at least related to the fixedcomponent 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 $9million, 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 algorithmicflow 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 sizeup? How would you combat that or try toaccomplish that if that is a true goal?
Duncan Niederauer
Look, that'sabsolutely the plan, because that was the biggest thing we were hearing aboutfrom the institutional clients. Remember, BIDS has had a great start but hasn'tinvited the buy side to the party yet. They've been making sure the technologyworks. 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 youlook at the demographics of it, it is a lot of smaller stuff, so it might be alot of PT flow, a lot of [stat ARC] flow, et cetera. I think, once youintroduce the buy side into the equation, that is clearly the target marketwe're going after, Rich, is to get the average order size up to the 50,000 to100,000 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 moneycomes 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 growthfor 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 thatstandpoint?
Joost van der Does deWillebois
We are pretty well protected, because you can alreadyinternalize in Europe on the derivatives side. We do notexpect MiFID to affect our derivative business in Europe.
Don Fandetti - Citigroup
Duncan, I waswondering if you can comment on your acquisition strategy in general in theU.S?. I know you've talked about a U.S. futures exchange. Where are you in thatthought process?
Nelson Chai
We've been clear in terms of outlining what our strategicpriorities are in terms of expanding both our product portfolio andgeographies. So, we continue executing them. We obviously continue to monitorthe market and we continue to take looks at things, if you will, but there'snothing really more to report other than that at this point.
Certainly, there seems to be a lot of activity in ourmarketplace as you pick up the newspapers, and so you can be sure that we'retaking looks at things, but from our standpoint, things have to make sense bothstrategically and financially and we've been pretty clear about outlining that.If something came across that would either expand our product lines or expandin the geographies that we're most interested in, I think you would see us moveforward.
Operator
Your next question comes from Niamh Alexander - KBW.
Niamh Alexander - KBW
If I could move backto European cash equities, you are really hitting the ball out of the park ingrowth there and I expect some of it is volatility driven. But are there someother secular drivers here? Are you looking at a different group of fastertrading customers? Is it a pick-up in cross-border trading? Can you just helpme understand maybe the sustainability of the cash equities growth?
Joost van der Does deWillebois
You almost answered your own question. What we've seen Europeas well is an increase in algorithm trading, an increase in activity, alsovolatility in Europe. On your last point, is there anincrease or pickup, in cross-border trading? Again, it can be affirmative. Forexample, if I look at the Dutch market a couple of years ago, I mean the levelwas 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] reallymoving from a very small base but getting some traction, taking some share fromthere in the Dutch market. Now with MiFID, they have the opportunity to go intoother markets. Now, my understanding is their offering is based on verylow-cost and it's because they can get more favorable clearing relationship andclearing costs. What can Euronext do to address this? What's your scope withregards to the ability to make it less expensive for the customers to clearthere, as you don't own the clearing?
Joost van der Does deWillebois
Thanks for the question, because our perception is slightlydifferent. We think it's primarily, arbitrage-driven, their volume, and theyhave a short-term advantage. It's a 3 decimal trading engine. We go to 2decimals for the moment, and we will move to 3 and even 4 decimals, so we thinkthat the volume or that their competitive edge will disappear, let's say, quitesoon.
Niamh Alexander - KBW
About their clearingrelationship, allowing them to charges so much less, is there not opportunityfor you to go and do something there?
Joost van der Does deWillebois
No, our perception of it is primarily let's say arbitrage businessdriven by, let's say, the trading decimal, the 3 decimal business will sell thereand the 2 decimal business, that business is currently in our NSE system. Themoment 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 youcould charge for listing fees was because of the ability to manage volatilitybecause so much of the volume traded on the floor. How has the pitch changed orhow are the discussions with clients going? Is there any questions raised withregard to the premium now? What is your differentiation when you are making apitch?
Nelson Chai
Well, certainly our marketing model is part of the pitch,and I would say that. I think if youlook at the statistics this year, the fact that we've raised almost 90% of thequalified IPO dollars here in the U.S., if you look and how we are attracting issuersoutside the U.S., particularly in China and our success there, I think I wouldsay that our picture remains very much very strong and very competitive. Ithink certainly that's part of the pitch, and clients still like to come inhere and like our market model.
I think a big part of it also has to do with brand and whowe are, and I think people view NYSE Euronext as by far the global marketleader. In my prepared remarks, you heard the fact that the marketcapitalization, the operating companies listed here, is $29 trillion, which ismore than the next four exchanges combined. It actually means something to acompany that wants to go public.
So I think it's a combination. It's part of the pitch. Ithink if you look at our results this year, I would say our pitch is very muchintact. 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 pressurethere 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 theBoston 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 competingwith BTT and SIC is always a good thing to have in the market. I don't thinkthat is a competitive advantage. In fact, I think the regulators might notallow a closed system. So, it might be that while they have this, they mighthave to open the system for all.
Ken Worthington - JP Morgan
Okay, so no desiresto replicate that and obtain one of the remaining clearing licenses?
Nelson Chai
Well, I guess thequestion becomes wish list versus what we think is practical, is I think whatLarry 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 mightdo it as well but I think you would have to look at it more as option valuethan 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 thecash equities market in the U.S.You've talked about moving to a single platform. Can you tell us when that willoccur and exactly what the market structure will look like?
Larry Liebowitz
We're doing a lot of different things in parallel. If youthink about the New York Stock Exchange, what we call classic, versus the Arcaplatform, we've already rolled out a consolidated ticker plant in New York. We've got more major systems that constitutethe 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 gatewaythat's going to replace CMS and ultimately SuperDOT. That's going to startrolling out at the end of this year. It's a phased-in approach. You'll start tosee 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 actuallayer of Display Book. When those things are done, technically we will havecommon platforms with differentiation that allows the market models to adapt towhere 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 typeof gateway. In fact, anyone can come into NYSE Euronext and access any productin any geography, ultimately, when it the CCG is rolled out everywhere. Sothat's one of the first legs into the whole integration.
Following those and sort of working in parallel is figuringout how to get the European platforms consolidated and decide what the universalcode will be for cash and derivatives.
Rob Rutschow - Deutsche Bank
The $100 million in cost savings that you laid out for nextyear in the previous presentations, can you give us more details on exactlywhere those are going to come from on the technology side?
Nelson Chai
Well, I think you are probably referring to things that werepresented earlier. Most of it is coming from technology. As I mentioned earlierin our prepared remarks, we had about $25 million coming out of non-IT, and wewill 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 thatprogress, so that's the split between the two buckets.
Larry Liebowitz
The only thing I would say is, when we say we're going toroll out CCG, that is a phased roll out. So you'll see costs come out but theyare not in huge chunks. But then when you look back, you'll see that it hasaccumulated, you know; it's not in step functions of $25 million.
You'll also see savings come out as we start to integratethe European platform, which we hope to see start happening in the firstquarter of next year as we start to determine what to do with the AIM jointventure.
Rob Rutschow - Deutsche Bank
On the market data side, there was a slight decline therethis quarter. I was wondering if you could reconcile that with a higher numberof subscribers and higher volumes?
Nelson Chai
I think it probablyjust ties into our share, and then the way the tape calculations roll. So whatwe can do is we can work with you offline to help you understand thecalculations, but I think it has to do with our share of the tape and the waythe calculation is done. It's less about the subscribers amount in that one. Itcontributes to the overall pool.
Rob Rutschow - Deutsche Bank
If I could justrevisit the pricing at Euronext and also for the U.S.derivatives business, it looked like, based on the calculations I did, revenuesto volume were up for both of those. Could you just talk about the pricingtrends there?
Joost van der Does deWillebois
I will join Nelson in taking this item offline. What you'llsee, which has been difficult, let's say from before, the huge impact of declaredvolumes because that volume it's kept as fee business. So if you calculate itback, you might get a loss in your average fee per trade, so you shouldseparate 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 majorpricing differences. What you're seeing is a difference in mix.
Joost van der Does deWillebois
Yes.
Rob Rutschow - Deutsche Bank
Are you able to reiterate any guidance that you've givenpreviously for EPS for 2008?
Duncan Niederauer
No. You know we don't actually give guidance, so we canreiterate that we don't give guidance.
Operator
Your next question comes from Mike Vinciquerra - BMO CapitalMarkets.
Mike Vinciquerra - BMO Capital Markets
Just a hypothetical question; there's been some rumors ofcourse about a northeast exchange being up for sale here and some peoplebidding on it; potentially you guys. From a bigger picture perspective, whatwould be the benefits from your perspective of adding, (a) either a regionalexchange, (b) another options business? Are there advantages there in terms ofwhat you can do in terms of creative pricing, or certain different marketstructures you might want to offer?
Duncan Niederauer
We think there might be some advantages if we were to haveit hypothetically something different, but it's a matter of what you paid forit and what you got for it. I guess theonly thing I would point to is that there was an article in the Journal a weekago about what may be happening at a northeast exchange and about one of ourdomestic market competitors, the over-the-counter market, taking a look andhaving an exclusive with them.
All we would say is that we can't comment on what we aredoing but to the extent there was truth in those rumors, you would want to makesure that given the price levels that were discussed in the article, because ofthe way the market structure works there, that you would really lock-in theparticipants because of the way that one works.
So I guess my point is that not all the exchanges have thesame 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 ifyou're going to be judicious in your investment strategy.
Mike Vinciquerra - BMO Capital Markets
Understood. Then when we look at the options side, I presumepart of your gains in market share come from the market structure, themake-or-take you decided to jump into. It seems like you may have some companycoming in the form of BOX and eventually if NASDAQ gets their market up andrunning here this quarter.
First of all, is there any interest in expanding themake-or-taker to non-penny names, and why wouldn't you do that? Is there any concern about some other peoplecoming in and taking away your differentiating factor?
Duncan Niederauer
Well, first of all, Ithink BOX does operate on that model. Secondarily, the make-or-take is acrossall the options listed on NYSE Arca. In terms of expanding the pennies, wecertainly would love to see the rollout of the penny pilot program. You heardin my prepared remarks and you see in our statistics how well we are doing, andwe think that we've been the biggest beneficiary of that model if you look atboth our market share in that business.
We think our technology and our market structure isconducive towards it. So we would fully applaud a move towards more stocksbeing in the penny program or expanding the program.
In terms of other people entering the market, I'm sure theywill and I think that's out there. I would just caution headlines about whatpeople are doing in pricing and try to make sure both rules are approved andthings are tested before you start moving too quickly about them coming in.
But again, we are not opposed to competition. We are verycomfortable with our market structure and our market model there, and so we areokay with competing.
Mike Vinciquerra - BMO Capital Markets
Fair enough. You guys have mentioned, you mentioned in thiscall as well, the carbon market that you are looking at. Now, we've also heardfrom the CME and NYMEX and of course there's already a venture that trades somecarbon products. Is this a race to get the product out there first so that youcan capture the open interest, or what are you guys doing going to do in termsof trying to get ahead of the market? Because it seems like everyone is headingin the same direction.
Nelson Chai
Well, I thinkeverybody in the derivatives space, there is a little bit of a race, right? Andso there seems to be a bigger first-mover advantage of getting the liquidity ina particular contract, particularly in those businesses. I'm sure that every single business thatparticipates in the derivatives space is looking at not just carbon but anyother product they think would be interesting, and so we should be nodifferent.
Mike Vinciquerra - BMO Capital Markets
Would it make sense to potentially make an acquisition ofthe existing marketplace there?
Nelson Chai
I think it's just a matter of resource allocation and whereit 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 AmericaSecurities.
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-standingrelationship, both prior to the merger, both Euronext as well as NYSE. On theNYSE side, the 32 companies from Brazillisted here, we are by far the place where Brazilian companies look to go raisecapital.
On the Euronext side, there's about a ten-year relationshipthat'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, weknow them very well, we think there are some things we might be able to havediscussions about. I can't talk much beyond that but again, it was just asituation where they were going public, there's a long-standing relationship,particularly on the Euronext side with Jean-Francois Theodore and the seniormanagement of BOVESPA, and so it was a little bit of support and hopefully astart 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 orderflow? 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 thatmay be on BIDS initially in the joint venture. So if you could just give ussome color in terms of how you plan to attract order flow there?
Duncan Niederauer
I think that'sactually one of the reasons we did it as a joint venture, because we like the BIDSsponsorship model. It's a broker-sponsored model, which is obviously veryconsistent with our model. We also like the ownership structure of BIDS becauseall the buy side clients that Larry and I have spent our lives covering werecontinually telling us that they like the block trading experience but theywould rather be in a position where they can reward brokers who provide a lotof 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 theblock liquidity market was too fragmented. They realized that what BIDS hasright now is smaller order flow, but you know, Liquidnet for example only hasbuy side flows. I think you can expect the BIDS consortium, probably more thanus, to be encouraging the buy side to use the platform, not only to be able totrade with each other in the platform but if we re-aggregate it correctly, alsobe able to tap into some order flow that what be resident on our books here aswell, which doesn't exist today.
So I think, if we get it right and the buy side starts tocome into BIDS, they are very eager to see some of this block liquidity getaggregated somewhere, and they were telling us they thought we were the rightumbrella under which to put that.
Chris Allen - Banc of America Securities
Are there any regulatory hurdles to your ownership of theJV?
Duncan Niederauer
It is a fairly innovative strategy, so we've talked to theSEC about it in principle. We gave them a heads-up before we made theannouncement of where we were headed, that we thought it would the ajointly-owned facility. I think it was very important to the SEC that it be anNYSE facility rather than something outside of our SRO. But I think that'sgoing 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 booksinteract, 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 carbontrading. Is there an issue of intellectual property rights, or those are not anissue at all?
Nelson Chai
Mamoun, the answer to that is I don't know the specificanswer, depending on the specific product, right? So, if you think about someother industries regarding energy and some of the oil contracts, you can skinthe cat on carbon coming up with different things but I think you would have tolook a little bit more specific at the specific product you would do.
Mamoun Tazi - MS Global
Basically the virtual monopoly that the carbon exchange hasin the U.S.could be broken if you find a way of putting together similar products thatwould 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 announcedwas the venture with Caisse des Dépôts isreally obviously focused on Europe initially. I wouldjust note that Caissedes Dépôts handles essentially the books, the allocation of the carbon creditsfrom the Kyoto Accord, so it's a really interesting partner that we've got interms of intellectual property and so forth. Obviously, we feel good in theplaces where we will play, with respect to what we do have intellectualproperty rights to.
Mamoun Tazi - MS Global
The reason why I'm asking is it's an exciting area that hasa lot of growth, so I just wanted to know how you were approaching it. Thankyou very much.
Operator
There are no more questions at this time. I'd like to turnthe call back over to Nelson Chai for closing remarks.
Nelson Chai
Thank you, everybody. Thanks for dialing in.
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