Your humble blogger didn’t get to hear all of the NYSE Euronext earnings teleconference on 9 Feb., so to catch up I turned to the transcript and slides. In flipping through them it occurred to me that although the conference call is designed for the analysts who follow our stock, there’s a lot of good information here for our trading and listed customers, mixed in with the financial results. Specifically, there are updates on what’s happening in a broad range of the markets, products and services you use (and which, as always, I thank you for using).
So to bring out that information I decided to “customerize” the transcript by pulling out the financial language (as indicated by ellipsis), leaving only the information I thought would be of most interest to our trading and listed customers. Some of the information fell into both categories, such as trading volumes, and I erred on the side of leaving that in. I also added some sub-headlines for ease of reference, but otherwise the transcript is verbatim.
As this is my first time doing this, I’d be curious to know if you find it helpful. Comment box is yours. Here goes:
Duncan Niederauer - NYSE Euronext - CEO & Director
Four core objectives
. . . As we look ahead to 2010 and beyond, we have four core business objectives.
Number one, we want to operate the most important set of capital markets in the world. Number two, we want to be innovating across geographies and products with a focus on the customer. Number three, we want to use our infrastructure to build an open platform. And number four, we want to apply technology where possible to lower clients’ infrastructure and capital raising costs. . . .
Volumes up
Let me now touch on a few select business highlights for the quarter. First, our global derivatives business has performed particularly well in the fourth quarter, registering a 21% increase in net revenue, and 2010 is promising as well with the full-year addition of NYSE Liffe Clearing, the semi-mutualization of NYSE Liffe US, our AMEX Options business, and more favorable macro economic conditions for European derivatives. In our European derivatives business specifically, we experienced very strong January volume levels in our STIR complex, volumes we had not seen since the first quarter of 2008.
NYSE Liffe Clearing completed
One of our significant 2009 achievements was the completion of the NYSE Liffe Clearing project that gave us the opportunity to verticalize our derivatives business as our competitors have done. . . .
NYSE Liffe US update
At the end of the year, we closed the deal to semi-mutualize NYSE Liffe US with the sale of a significant minority stake. We are on track to launch interest rate futures coincident with the launch of our joint venture, NYPC, just pending regulatory approval, but we expect to close during the summer. Challenging an incumbent is certainly difficult, but with our new partners, we feel we are well positioned to compete.
Growth in US options
The US Options business is another great story. Many of you will remember at the time we bought the Amex in October of 2008, our Arca and Amex Options platforms had combined market share of 17% to 18%. The definitive agreement to semi-mutualize our Amex business is now signed by our partners and is awaiting regulatory approval. We were pleased to achieve almost 25% marketshare in Options at the end of 2009, and we ended January with nearly 28%, the biggest share of US single stock equity options.
US and European equities
Second, we have continued to focus on profitability and stabilization of the US business. We plan to begin trading Tape C stocks on NYSE Amex and modernize our floor to better reflect our high tech high touch approach in that market. On the European cash side, market share continued to be stable, and we are focused on positioning our business to capture the long-term growth potential of the overall market while diversifying our product and service offering. Clearly on both fronts regulatory issues are taking a front row seat, and I will provide our perspective on these issues on a later slide.
Listing services, advocacy
Turning to listings, we are very pleased with the efforts of our listings team. We continue to expand our service offering to listed clients, and we have taken a leadership role in terms of issuer advocacy. The fourth quarter was the strongest quarter of the year, and we are looking to build on that momentum in 2010.
Technology solutions
Lastly, on the technology solution side, we closed our acquisition of NYFIX, which gets us another source of revenue that is both stable and sticky. It gives us several hundred buy-side connections to integrate into our already strong global sell-side network. The NYFIX integration is going extremely well with most of the headcount reductions coming off in January. Over the next six months, we will be focused on integrating the NYFIX network into the SFTI network. The conclusion of the NYFIX network and SFTI integration should coincide with the lighting up of our data centers in Mahwah and Basildon. We also just recently crossed the 10,000 fixed channel milestone.
Additionally on the technology side, we recently received word from the Board of the Qatar Exchange, that we have the mandate to develop the technology for their derivatives exchange on top of the work we are already doing for their equities platform. Please turn to slide four.
Regulatory issues and advocacy
On slide four I would like to address a few of the regulatory issues that are currently under discussion and also comment on our issuer advocacy efforts. On this slide you see a number of issues where we are tackling different issues, participating in important discussions and demonstrating leadership. I will not go through each of these bullets individually this morning, but let me highlight a few important ones.
With regard to market structure issues, we believe we have been pragmatic in our approach. While regulators have a number of topics that they are wrestling with, we are focused on having a level playing field between ourselves and other pools of liquidity in terms of the pace of innovation, the rulemaking process and the cost of regulation to name a few. The SEC is currently engaged in a market structure review, and we are hopeful that any changes they enact will help even out the playing field and raise the regulatory bar for less regulated trading venues, which we would believe would be to the benefit of investors.
In Europe regulators are embarking on a review of MiFID two years after its implementation. I believe that the regulators in Europe will learn some important lessons from the market fragmentation that resulted from the USD regulation. And, as we endeavor to continue to keep our European business stabilized, I’m hopeful that the landscape there is not going to turn into
something like we have witnessed here in the United States. I’m also confident that the debate around critical market structure issues will resonate across the US and Europe.
With regard to advocacy, our efforts to advocate for our issuers and be an influencer of public policy continues to be an important effort of ours. You have undoubtedly seen the political rhetoric coming out of Washington recently, which has unsettled the markets a bit to say the least. Most of these proposals do not directly affect our business, but they do impact our clients. Our view is that we should not let politics and emotions get in the way of good policy. It is critically important that we learn the lessons of the past few years and close the gaps in financial regulation, but at the same time, we cannot let our policymakers get distracted by other issues that were not central to the crisis. And for any of you who listened to me from Davos, that was one of my key messages from there.
One specific proposal we have been aggressively leading from the front on is to oppose the idea of a stock transaction tax. We believe this would be harmful to average investors who would ultimately bear the cost of the tax, and we have been sharing that view with anyone who will listen on Capitol Hill. Please turn to slide five.
Progress in 2009
On slide five we highlight our 2009 areas of focus and our results. This list of accomplishments is tremendous, and I would like to thank all of my colleagues for their dedication and hard work that made it possible for us to hit all of these milestones.
There are two multiyear technology initiatives in particular that I would like to focus on because of their importance to establishing our seamless world class technology infrastructure. These are the migration to UTP [Universal Trading Platform] and the buildout of our two new data centers, which we have talked about with all of you for much of the last two to three years.
Universal Trading Platform rollout
First, on UTP. You will recall that just over two years ago we had multiple trading systems layered upon systems that could not talk to each other and required prolonged and intensive efforts to implement new functionality. The launch of UTP allowed us to create a single global architecture that will enable us to evolve, adapt, scale and remain competitive. For the first time in our history, we will have a single global platform. This saves us money, improves performance, and will allow us to integrate new platforms and functionalities quickly and efficiently.
In our European cash business, in Q4 of last year, we successfully migrated SmartPool to UTP, and the legacy access infrastructure for customer gateways and market data was decommissioned on December 31. So our European business is complete now with internal matching engine latency as low as 40 micro seconds on NYSE Arca Europe. More importantly, all of our European platforms are now on the new technology infrastructure.
On the US side, the UTP rollout to NYSE Arca was completed in mid-January, and the migration of NYSE Classic which began in Q3 will continue in early 2010 to further reduce client latency and optimize the trading infrastructure. On the derivatives side, development is well underway, and in order to minimize client disruption and ensure a smooth migration to the new data centers, client migration will begin in Q3. Arca Options and Amex Options UTP rollout will be complete in Q2.
So by the end of 2010, all of our products will either be on the UTP infrastructure or about to be on the UTP infrastructure, and we will enter 2011 for the first time as a company with one single trading infrastructure.
Data centers: trading platforms of the future
Now let’s turn to our data centers for a minute. Our data center buildout that we undertook last year was not optional. Our objective was not just to replace our existing data centers, but also to create the new trading platforms of the future that allows us to provide and develop state-of-the-art technology services and adjacent products. So this is why we have developed our data centers.
In the US we will begin the client migration project in June, and to ensure the smoothest process, we will work through the remainder of 2010. In September we will begin to close down our two other New York area data centers. In Europe we expect to begin the migration of clients in April with our European derivatives and cash businesses migrating beginning in September. . . .
Q U E S T I O N S A N D A N S W E R S
Limiting fragmentation in Europe
Roger Freeman - Barclays Capital - Analyst
Duncan, you made some comments about European regulators, I guess, reassessing MiFID. I was wondering if you could just expand on that a little bit. Because I mean clearly from your guidance you expect pricing to be stable in 2010. To what extent are there real initiatives being considered to limit the fragmentation we have seen here and ultimately that could drive the MTF volume a lot higher and push pricing down?
Duncan Niederauer
Yes, our general view is — and I don’t think we are being delusional here. I genuinely believe the European regulators two years post-MiFID are already doing what we really did not do here, which was re-examine what had happened, what did they anticipate, what did they not anticipate. So I think that alone is fairly healthy.
Secondly, in our meetings with them, they are quite aware that — and it is their firm belief that an outcome like we have had in the US is not what they are looking for. Now part of reason for that remember is there are nationalistic tendencies I think. Unlike the markets here where the SEC can decide to regulate the relatively unregulated pools more or less or the same, and whatever they do they have the ability to bring it all back under their regulatory umbrella. As I think, you are aware the European landscape is quite different. And when the volume migrates away to some of the MTFs, sometimes it also migrates out of that local regulator’s jurisdiction, which I think has got them very uneasy particularly in the wake of the crisis.
Our belief is that the minimum that will happen is that the playing field will get level. And, for example, it is a little bit confusing to us why we continue to be told that to operate in the markets we want to operate in, we must have a footprint and some infrastructure in each underlying market. Yet some of the people with whom we compete do not have that same requirement.
So I think consistent with what you have heard us argue for in the US, I think we are expecting that the regulators will even out the regulatory burdens that everybody has, I think make it a little more of a fair competition if you will, and I think because of the regional/national issues in Europe, it is a different ballgame than here. So I think that all leads us to be a lot more optimistic about what the regulators might do upon further review. We are not under any illusion that exchanges are going to be given back their monopoly rights. I think that is never going to happen. I do think it’s going to be much easier for us to compete there than it has been in the US. . . .
Volcker rule
Howard Chen - Credit Suisse - Analyst
Duncan, on the regulatory environment and specially the Volcker rule proposal, I know the data is not easy to parse through. But I was just hoping to get your views and some perspective from your current seat and maybe former life on how much volume you think the sales side proprietary desks are really contributing to the overall marketing of your business?
Duncan Niederauer
Right, I think a lot of that activity, Howard, that some of the rules are trying to get at is probably a lot more on the fixed income side where I think it is really hard to — my point, when I was interviewed a couple of times, is that it’s really hard to separate in a market that at its core is a principal market already. What is a proprietary trade, what is a principal trade, what is a facilitation trade, etc.? So I think a lot of the bank’s activity and a lot of, I believe, the source sores of profitability comes from the fixed income and currency businesses, not the regulated equity markets.
I actually think for the big banks the own account trading for a big bank in the equity markets is actually quite low, and having spent most of my career on that side of the business, the overwhelming majority of the business was in the customer facilitation category. Almost all the principal trading you did was on back of a customer inquiry.
So my point was twofold really. One, it is really hard to separate it, and two, what does it necessarily accomplish if we separate the small fraction of equity volume that these banks do for their own account, I don’t really think that had anything to do with the crisis that we just lived through. So part of my not-so-subtle message is an encouragement of the policymakers to focus on solutions that get at the root cause of the crisis, and I just don’t think this is one of them.
But to answer the more important part of your question, I think this is a de minimis part of equity trading volume that we get.
New York Portfolio Clearing update
Howard Chen - Credit Suisse - Analyst
Thanks, Duncan. Makes sense to me. And my follow-up, I was hoping to get an update on your Portfolio Clearing, maybe where you stand with the DTCC relationship? It does not sound like it is built within the 2010 expectations, but I know this one has a little bit more of a longer timeframe to it.
Duncan Niederauer
I think I would say it’s not really in the 2010 plan as a real contributor to profits. But I think we would be disappointed if we have not gotten all the requisite approvals, and we are not up and running and actually operating the clearinghouse of DTCC by, I guess, if July and August are technically Q3, I think I would be disappointed if it slipped much beyond Q3.
Obviously you can never really predict the pace of regulatory approvals, and because of the nature of this effort, we do have to get approval from the Fed, the SEC and the CFTC, and there’s varying degrees of ease or difficulty with each of those hurdles we have to clear.
I think the customers are quite supportive of us doing it for obvious reasons because not only does it create competition, but it is also a more capitally-efficient clearing model. I think because it is new, it is just, as you would expect, it takes a little longer to outline it for the regulators. The technology work that we are collaborating on with DTCC is already well underway. We are in the process of searching for a CEO for that enterprise, so we have embarked on a search to do that. So we are working behind the scenes. I think the gating issue is whether we get all the regulatory approvals in time for launch by July. . . .
Derivatives growth
Mike Vinciquerra - BMO Capital Markets - Analyst
Congratulations on hitting all the milestones, guys. Things are moving along nicely. I just want to ask you about the derivatives side in Europe, you mentioned the January activity being very strong. Of course, we noted that, but what do you attribute the growth in the rate side of the business? Is it the issues around Greece and just questions in that regard, or is there something else you can point to? And kind of related, something you said in the prepared remarks about expanding your clearing efforts in European derivatives caught my ear, and I was not sure what you were referring to with that.
Duncan Niederauer
Right. So a couple of observations there. I mean, one, January was a very good month for us. Remember, our primary product is the short end of the rate curve in Europe, and I think you are correct. The combination of we are off the deleveraging lows of a year ago during the crisis and the combination of some of the other event-driven stuff that has been going on in Europe, specifically some of the jurisdictions you mentioned, has certainly been a factor. But our equity business has been strong, and our much smaller commodity business has also been strong. So I think we are benefiting from having the right kind of portfolio right now.
The NYSE Liffe US business on the gold and silver side and on the index side is also contributing a little bit, and that volume continues to grow. I would not say it is moving the needle hugely yet, but those volumes are certainly giving us reason to think that we’re on to something there, especially if we can add an interest rate complex over here.
I also think the other thing that has happened is, due to the good efforts of our team, our client base has gotten more diversified and more global in the last year. I think we have gotten better at going to and recognizing that the client opportunities are really around the world. And as we have learned in the equities business, they may not — your big volume providers and your big customers may not look like they looked like five or 10 years ago. And I think the derivatives team here deserves a lot of credit for having traveled to Asia and other parts of Europe and Latin America and around the US to make sure that we are making our products available to more and more clients around the world. So I think that has also helped us.
On the clearing side, part of it is this is the first year that we are going to have the clearing revenues from NYSE Liffe Clearing for the whole year. So that in and of itself is quite an uptick for us.
To go back to Howard’s question, we are pretty optimistic that at least in the second half of this year, we are going to be clearing some instruments in a jointly-owned clearinghouse with DTCC. And we have got two or three other conversations going on about other potential clearing initiatives, some with other clearing venues, some with other partners, etc. So I think it is anyone’s guess as to where that leads. But I think that is going to be a pretty important focus for us going forward.
Obviously the CDS opportunity for us did not turn out to be successful. I do not think we had the right value chain set up, and I don’t think we had the right partnership, quality organizational constructs set up. So I think we have learned from that, and we have a couple of other conversations going on that make me believe that NYSE Liffe Clearing is sort of a growth opportunity in and of itself. But I think we can extend that and NYPC into other realms as well. So that was what that comment was really alluding to. . . .
Competition in European equities
Daniel Harris - Goldman Sachs - Analyst
I want to shift — continue to focus over there in Europe and talk about the — you have had a maturation of the MTFs over the last few years, quite a few [market] structure and pricing changes. So I was wondering at this stage if you guys can give us an update of how you see the impact of the new traders that have come online in high frequency, and it all goes if the year transactions were up 4%, even amid all the increasing competition. So when you think about a going forward view, do you still see a lot more room for growth from high frequency trading or other types of participants, and how that would potentially impact the pricing?
Larry Leibowitz - NYSE Euronext - Group EVP & Head of US Execution & Global Technology
Well, through the course of the year, first, I think we were responsive to the competitive pressures, but also to the needs of these developing clients like higher frequency traders and also the changing trading characteristics even of our more traditional customers as they more heavily developed algorithms and other ways of taking advantage of the interlinked markets. I just think it has been a slower process in Europe, partly because of the regulatory framework, partly because of the clearing framework, and partly because there is no consolidated tenure. There’s a lot of reasons why it just has not gone as full and fast as the US.
On the other hand, it is clear that there is more high frequency trading than there was. It is clear that pricing has come down, and we understand that, and we have responded. We have had to add to our offerings, and we continue to respond to that. There is still some room for growth obviously both in terms of overall market volume and in terms of high frequency trading as a percentage of the market. But to be honest, some of the MTFs have been entirely unsuccessful at getting a foothold.
There have been a couple of them that have done a good job, partly against us, but to be honest, a lot of it has been against some of the weaker competitors who were in more of the same shape as we were in New York two years ago when our technology platform was not up to competitive standards, when we were not as responsive on the pricing front and so on that allowed more incursion into their markets. Nonetheless, we are not complacent. It is a developing story, and we are in constant contact with our customers. I think the biggest lesson there is, we have got to be in discussion with our customers, responsive to their needs both on the technology and the pricing front.
Listings, IPO outlook
Niamh Alexander - KBW - Analyst
My question is the listings business and congrats, by the way. It is a really interesting kind of turning quarter. The listings business was very strong. Was it — we have had some pickup in activities in IPOs, but was there some kind of benefit in the valuation pickup as well as Europe? Because I am just wondering with the market seeing a lot more IPOs and things like that, should we expect to see more strong sequential improvements like this, or is there maybe some unusuals in the fourth quarter?
Duncan Niederauer
Well, I think you have to keep one thing in mind on the listing side. Yes, the calendar is quite strong. Yes, we really like our competitive position. We have got lots of companies in the pipeline, and we are very confident that although it is a competitive environment we are going to win more than our fair share. I think the recent record kind of displays that pretty clearly.
I think whether those IPOs are coming from the US, whether there are some other private equity deals that are coming back to market, the ones that were taken private a few years ago, whether they are coming from places like China or Latin America, we are very well positioned in all of those arenas, and I think it goes back to Larry’s customer focus point, too. We are recognizing that there is a lot of constituents here that we have to stay close to and make sure they understand what services we are providing.
So that is all good news. I like the momentum. But you have to remember that — and Mike can correct me if I’m wrong on this because I don’t understand it — but the good news when you get a lot of new IPOs is obviously they trade, you get more volume, and that is the revenue that accrues to you immediately. All the other fees from a new IPO that are around the listing are amortized over a fairly lengthy period of time. So even though we will have a more normal IPO market in 2010 than I think we had in all of ‘08 and the first half of ‘09, it is not like that you will notice that in the listings numbers right away. Where you might see it is in an uptick in some of the transaction revenue because it does create volume obviously.
So what did I leave out there, Mike?
Michael Geltzeiler - NYSE Euronext - Group EVP & CFO
I think you nailed it. I think the other part of her question, we are seeing some revenue growth this particular quarter, and we did receive some benefits from some structured products in the US, some balance sheet repairs in Europe that probably are not going to repeat themselves into next year. (multiple speakers)
Larry Leibowitz
You know, like the Citigroup deal and so on.
Duncan Niederauer
Yes. So Mike is right. A lot of those one-time deals that were done, the secondaries and all these various things, it has some nice fees attached to them that I think we have to assume and we should all hope are nonrecurring. Right? We hope we are kind of through the balance sheet repair.
