Last week NYSE Euronext posted the transcript of our financial-results conference call for second-quarter 2010. The press release and slides are also posted. As I did for the first time last quarter, for the benefit of our trading and listed customers who might not have time for the entire transcript, in this post I’ve excerpted only the information that I think is of interest to those clients. So I’ve left in the updates on what’s happening in our broad range of markets, products and services, and I’ve omitted the financial results, as indicated by ellipsis. Some of the information such as trading volumes and new services is of interest to both customers and investors, so I’ve left that intact. I’ve also added some sub-headlines for ease of reference, but otherwise the transcript is verbatim.
Also, please note that these comments were made on 3 August; some of the initiatives discussed here progressed further since then.
As always, I welcome your thoughts. Here goes:
Duncan Niederauer - NYSE Euronext - CEO and Director
In General
…I’m going to start with slide 3 in the deck, and just hit a few highlights on that slide. I think you can see from the slide and from the press release this morning, we had a very strong second quarter. We’re growing our derivatives business. We’re stabilizing our Cash Equities business, and we are providing innovative technology solutions in that business. Our results, which reflect the continued trend of improving financial performance, were driven by stronger trading volumes, increased revenue generation from our new initiatives and continued cost discipline. …
Derivatives Volume
Firstly, our Derivatives segment benefited from record trading volumes as well as the addition of NYSE Liffe Clearing. During the month of May, we executed an average of 13 million contracts per day across our global Derivatives businesses, driving a 34% increase in net revenue, with an increase in our operating margin to 62%, up from 42% the prior year. We were the largest US equities options exchange for the second consecutive quarter.
Cash and Listings
Turning to Cash & Listings, in the first half of 2010, we continue to see strong demand for our listing venues, both in terms of transfers and new listings. On the execution side, we are continuing to focus on stability and profitability of this business. In the US, our market share in Tape A is at 37%, up from 35% in the first quarter, and our share in Europe is holding steady at 74%.
Additionally, on July 13, we launched trading on Tape C stocks on an Unlisted Trading Privilege basis over the NYSE Amex platform. Trading began with 10 issues, and now is expanded to approximately 675 NASDAQ-listed issues, and we’ve seen some positive market share developments.
Technology Services and Products
Lastly, our technology business benefited from the addition of NYFIX and improved software sales, driving a 29% increase in revenue and an increase in operating margin to 19%. I will walk you through the profiles of several deals that we’ve signed in the past few months later in the presentation. They are representative of the enterprise-level dialogs that we are having with market participants, encouraging them to leverage our technology to help them run their businesses more efficiently….
Before I move to slide 4, let me touch briefly on a few select business highlights for the quarter.
Clearinghouses
Building upon our success with the launch of NYSE Liffe Clearing last July, we have announced our intention to build two new clearinghouses in London and Paris for our European Derivatives and Cash businesses. The economics for clearing are very favorable, and it is our intention to have the new clearinghouses live by mid-to-late ‘12.
Semi-Mutualizations, NYPC
We continue to await regulatory approval of our NYSE Amex Options and NYPC semi-mutualizations.
In terms of NYPC, we now have a full management team in place. The intensive regulatory review and approval process for NYPC continues to make progress, and we appreciate all the regulatory agencies for the substantial resources they are committing to thoroughly analyze this innovative new clearing model. Given the recent focus on clearinghouses and risk in the newly enacted financial regulatory reform bill, regulators are being appropriately diligent in their analysis and we are still hoping for regulatory approvals later in the fall.
Consolidating Surveillance
Our agreement with FINRA, under which they assume responsibility for performing the market surveillance and enforcement functions previously conducted by NYSE regulation, is effective, and we believe this agreement is an important step toward consolidated market surveillance, the need for which was highlighted in the events of May 6.
Data Centers
I’m pleased to report that our data center migration is on track. We’re establishing the liquidity hubs of the future, and Mike will address the timing of the incremental depreciation and amortization for the second half of 2010. …
Summary of Business Highlights
In summary, while we’re pleased with our strong results for the quarter, driven by higher volumes across most of our venues and a growing base of recurring Technology Services revenue, we still have much to do. We are focused on executing against our long-term strategy of operating the most meaningful capital markets, creating even broader and deeper networks of
connectivity and delivering innovative products to our expanding client base. We have and will continue to redefine what an exchange is in the 21st century. Now please turn to slide 4.
Priorities
The priorities on this slide highlight our goal of creating a community premium, using our scale and scope to benefit not only our own business, but our customers’ businesses as well. We can achieve this through initiatives and offerings like co-location, co-branding, advocacy, and our global distribution network.
At the center of the company and in support of our three businesses is UTP, our globally integrated and scalable trading platform; an unrivaled global connectivity network and customer gateway; a focus on clearing, which will take on an even greater importance in ‘11 and ‘12; and two brand-new world-class data centers set for launch in September and October of this year.
Technology Wins
Turning to slide 5, we have several recent NYSE technology wins which reflect the growing interest in our full managed solutions capabilities. The technology business, as I alluded to earlier, has performed well to date, and approximately 80% of the revenues in this business are recurring.
On the exchange partnership side of the business, we continue to land large client deals. As you will recall, last year, we signed a partnership with the Qatar Exchange to build their Cash and Derivatives platforms. And just a few weeks ago, we signed a multiyear eight-figure deal with the Warsaw Stock Exchange to migrate WSE’s Cash and Derivatives markets to NYSE Technologies Universal Trading Platform. In addition, we plan to collaborate with the WSE on other mutually beneficial business initiatives.
Regarding the more traditional client side, you will note on the chart a few examples of deals that we have recently signed. Despite reports of slowing technologyspend, we are seeing strong interest from the broker dealer community investing in leading-edge trading technology. This is a welcome sign, especially after a slow 2009 that saw a decent pullback in technology
spend.
Our customers are looking to leverage our full solution set. We believe the deals shown on this slide represent just the beginning of our ability to deliver innovative products, and these opportunities will only get larger as we deliver.
Supporting many of these deals are our data centers. There is a lot of customer focus on the upcoming Mahwah and Basildon go-live dates, set for later this year.
Strategy
On slide 6, we’ve included a simple strategy statement to help you better understand where we are going. Our aspiration is to lead our industry and redefine what it means to be an exchange in the 21st century.
To achieve this, our mission will be simply to empower the world’s capital markets community to innovate and collaborate. To achieve this, our core objectives will be to operate the most important capital markets, connect the members of the community through our ever-growing network, deliver innovative products to our continually expanding client base, and to enable customers to run their businesses more profitably by using our technology and the scale that UTP and the data centers deliver.
We have already gone a long way toward redefining what an exchange is, and we’ve moved from being just an operator of markets to much more. As many companies in other industries have done, we’re moving across the value chain to improve our competitive position. The more customers and partners we have, the greater the network effect, which further validates the relevance of our community. In short, it is about getting more customers for our products and services and more products and services for our customers.
From our perspective, we think the sum of the parts is being undervalued because we believe that our unique collection of assets and global reach offers us great revenue and cost synergies, which will ultimately yield the community premium that I mentioned earlier.
Advocacy on Market and Regulatory Reforms
Finally, for me on slide 7, you will see a number of current issues where we are doing our best to demonstrate leadership. We will not go through each of these bullets individually this morning, but will highlight a few important ones.
While Congress considered financial regulatory reform registration, we were very active in advocating for ourselves, and more importantly, on behalf of our listed companies. We believe that the Dodd-Frank Act will solidify and bolster our opportunities for future growth, particularly in derivatives.
Going forward, the Act mandates hundreds of agency rulemakings, and we are already analyzing and prioritizing these rules and expect to play an active advocacy role on behalf of our clients, but also are committed to being an active participant with the regulators who are going to have to write all these rules.
In terms of market structure, the events of May 6 put a spotlight on the need for improvements to our equity markets. This has created opportunities for us to demonstrate the benefits that the NYSE model brings to issuers, investors, and the markets. We testified twice before Congress on market structure matters, and we’ve spent considerable time with the SEC, the CFTC and the joint advisory committee. We believe these opportunities have enhanced our standing with legislative and regulatory policy makers.
More broadly, our efforts to advocate on behalf of our issuers and to be an influencer of public policy continue to be an important part of our value proposition. We’re working hard to represent our listed companies on issues like corporate governance, proxy access, and Sarbanes-Oxley reform, as well as our continued opposition on a tax on transactions to ensure that investors’ interests are protected as well.
Turning to Europe, regulators are also embarking on a plethora of legislative initiatives on both market structure and financial regulation. Two years after its implementation, European policy makers are working on a comprehensive review of MiFID, although we don’t expect firm proposals until early next year. We are hopeful that officials in Europe will learn some important lessons from the market fragmentation that has occurred in the US and we’ll avoid heading down the same path. We will also be working with European legislators to ensure an adequate assessment of the increasingly high level of nontransparent trading. We believe that a proper analysis of this issue calls for priority to be given to a more transparent process and increased investor protection.
Derivatives regulation is also a key issue in Europe as has been the case in the US. The European Commission will publish legislative proposals in September in keeping with the G-20 commitments before central clearing of OTC derivatives trades. It is our understanding that the Commission will present proposals next year as part of MiFID revision to bring more OTC derivatives onto central lit platforms. …
QUESTIONS AND ANSWERS
May 6
Roger Freeman - Barclays Capital - Analyst
…I guess going back to…May 6, what role — maybe Duncan and/or Larry, did market data sort of — would you say play in the whole thing, in terms of any lag in that? Because it seems like pretty much all the other exchanges declared self-help against Arca, and it sounded like maybe there were some delays in Wombat. I’m guessing — my question is, do you have spending to do to enhance capacity there? Or does that get taken care of with the new data center?
Larry Leibowitz - NYSE Euronext - COO
Well first, not all the exchanges declared self-help against Arca. I think that’s just flat out wrong. What happened was NASDAQ declared self-help against Arca, which lasted 20 minutes. We believe that was due to a server latency on about 20 symbols that lasted five minutes in Tape C. The other exchanges didn’t — they declared self-help for about seven minutes. That was due to the fact that some of the prices they were sending us violated our price bands. And when we spoke to them on the phone, they cleared that up relatively quickly.
Our direct feeds did not experience latency as far as we know in terms of market data. There were some issues potentially on the SIP, meaning the consolidated feed, but probably that 85% or 90% of our volume actually comes from direct feeds. That’s another misinformation that is generally in the market, which is that, in general, consolidated feeds go to retail customers, and people who are doing it with their eyeballs, most volume actually is generated from direct feeds.
That said, that period, we experienced a tripling of quotes and trades during that burst of about five minutes when the May 6 event occurred. Those were record volumes of traffic. And I think that we always keep an eye on capacity. It has made — we were actually in the process of some capacity expansion on the May 6 date that has subsequently been completed. I think it’s something that we are always careful about. Volumes are down a bit again after the second quarter; I think everybody has seen July, but that’s partly seasonally. But I think it’s something that we are just always cognizant of and always reviewing. …
NYPC
Celeste Brown - Morgan Stanley - Analyst
Good morning. Once you get regulatory approval for NYPC, how long will it take you to launch the service?
Duncan Niederauer
I don’t think it will take that long; just to manage your expectations, two or three threads here. One is, obviously, the technology build that had to be done, that’s been going at pace; that’s ahead of schedule now that the regulatory approval has been a little bit slower than we would have anticipated a few months ago. So the technology work for this is well underway and will be delivered I would say now comfortably ahead of any approval we would get because remember the comment period will be roughly 90 days.
So, assuming that there is no glitches there, which we don’t anticipate, and that the clients we want connected or who are already in the process of connecting, are connecting, we would be able to turn this on very, very quickly after approval.
Realistically, I think we have to start thinking about this in our own minds as a January of 2011 event, because even if we went out for comment this month and got all the requisite approvals by the end of the year, I wouldn’t anticipate that we would launch something like this the first or second week of December. I think we would probably get advice from our clients that would say let’s come out of the gate after the new year, ready to go. So we would suggest that, other than the kind of calendar stuff I just talked about, the technology and connectivity, which would be the other two things you would want to have ready, will absolutely be ready by the time we get the approval. …
Over-the-Counter Derivatives
Alex Kramm - UBS - Analyst
…I want to shift gears quickly to maybe your over-the-counter strategy. You mentioned the Dodd-Frank Act earlier. So I’m wondering how you could really fit in here if I look at maybe the short-term opportunities clearing; you don’t really have any sort of real assets at this point. So maybe that leaves trading or new listed products.
And then perhaps, and maybe this is like a real potential for you as well here, is the technology side. Is there maybe an opportunity to run some of these swap execution facilities or host some of the data centers. So maybe in general, how are you thinking about your way to participate in the over-the-counter to exchange migration?
Duncan Niederauer
…I think you’ve got three interesting topics probably in there and I would put them in the reverse order in terms of near-term relevance for us. I think given the success we’re having, hosting various facilities and components of other firms’ infrastructure in the liquidity centers, I would say there’s a good near-term opportunity for us to at least be a provider of some technology services there.
On the listing side, I suppose there’s an interesting near-term opportunity to list some of these products. I don’t know how near-term it’s going to be because I think it’s going to take a while for all this to be codified. But also, I continue to be of the belief that there’s opportunities in clearing and market data before there are opportunities in trading. So I think there might be some kind of a data opportunity for us, but I don’t know how much of an opportunity there’s going to be for listing these various products because I don’t think they’re going to be that actively traded in the near term.
Lastly, you’re absolutely right. I think our view is to be a force in OTC derivative clearing, you need to own the assets. I think we are on the way to owning potential assets with the clearinghouse build-outs in Europe and the NYPC buildout here in the US. But we said publicly before, short of actually owning those assets, it’s difficult to play a role if you don’t have the clearinghouse asset. So, as you would correctly expect, that’s part of the reason behind us trying to build out some of these clearing assets because it’s then limitless, the products we can clear in those houses.
Cash Equities Market Share
Ken Worthington - JPMorgan Chase & Co. - Analyst
Good morning. I know this is a small business for you, but market share and Cash Equities has stabilized in the US. Do you think you are generally at equilibrium? And if so, what does it take to see market share shifts from here? And in Europe, how close are the cash markets to price and market share equilibrium?
Larry Leibowitz
Yes, that’s a good question. You know, I think that we’re at a temporary equilibrium where you sort of swing a couple percentage points in either direction in the US. But there are new entrants coming in, in terms of models. NASDAQ just announced another strategy with their Philly model. There are going to be innovations around here. This is a competitive business, and we don’t sit here and assume that we are where we are. We know this is just going to be a fight that doesn’t end.
I think in Europe it’s much more of a developing situation. It will depend partly on the results of the MiFID review. It will partly depend on developments in clearing, whether that’s consolidation or interoperability. And so we’re earlier in the game there. So, I think that that’s how we view both of those markets.
Duncan Niederauer
Right. And the only thing I might add on the US side to what Larry said is I suppose there’s a greater than zero chance that with the concept release out for comment and everyone still assessing what happened in the wake of May 6, it’s possible, Ken, that you could see a couple of — I don’t think they would be monumental changes, but I think you could see a couple of incremental changes that certainly would help change that equilibrium a little bit, potentially, in our favor. But we’re not sitting here expecting any major changes that would kind of create a new order. …
