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Nasdaq Inc
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Good day, ladies and gentlemen, and welcome to the Nasdaq Third Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's conference call is being recorded.
I would now like to turn the call over to Ed Ditmire, Vice President of Investor Relations. Sir, you may begin.
Good morning, everyone, and thank you for joining us today to discuss Nasdaq's third quarter 2018 financial results. On the line are Adena Friedman, our CEO; Michael Ptasznik, our CFO; John Zecca, General Counsel-North America and other members of the management team. After prepared remarks, we'll open up the Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material nonpublic information and complying with disclosure obligations under SEC regulation update.
I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC.
And now, I will turn the call over to Adena.
Thank you, Ed. Good morning, everyone, and thank you for joining us. I will focus my remarks today on Nasdaq's business performance and how that tracks to the progress we're making across on our execution goals for the year. Before I detail our strong results for the quarter, I want to take a few minutes to discuss how Nasdaq is addressing two important issues, the Nordic commodity clearing default event and the SEC regulatory developments largely focused on U.S. equity market data.
Turning first to the clearing event, on September 10, the markets in the German and Nordic Power experienced an extreme spread movement 17 times larger than the normal change in spread measured since 2011. As a result of the extreme price movement, a clearing member of our Nordic Commodities market incurred significant losses and failed to fully cover an intraday margin call within the prescribed time limit. Therefore, the member was declared in default. The default resulted in the loss to the clearinghouse net of the default member's collateral of €114 million. This loss was covered by the default waterfall, including €7 million from Nasdaq's Junior Capital or which is the first loss layer, and the remaining €107 million from the member default fund.
By September 17, the member default fund was 100% replenished and Nasdaq implemented temporary Junior Capital, a first loss layer, of an additional €19 million on a 90-day basis. Nasdaq also announced that this time, a comprehensive examination of the event, which includes a review of its causes, the membership requirements, margin requirements, risk management procedures, collateral management, and default management procedures in an effort to learn everything we can to ensure that we are best positioned to avoid this type of situations from occurring again.
This review has been conducted by a third party, Oliver Wyman, a global management consulting firm, with the support of our internal audit to ensure that we learn as much as possible with transparency and credibility. Once their review is complete, we plan to communicate our summary findings and recommended changes to the affected constituents.
Our objective is to find the best model that balances the need to facilitate a robust market while, at the same time, providing members with assuredness that they can securely commit capital. At the same time, we're also working with our members on recovering a portion of the losses they incurred from the defaulting member, including liquidating the defaulting member's assets.
We are grateful for the professional and constructive manner in which the market participants have worked with us throughout this difficult process and realize we have much to do to ensure their support going forward. We look forward to continuing to update everyone on a clear and timely basis as we work to reduce the financial impact of the default event on our members and enhance how the clearinghouse reduces risks in the future.
Now, I'd like to turn to the regulatory developments regarding our SEC-regulated businesses which are largely focused on U.S. equity data products. First, I want to make clear that the debate, discussion, and developments in this area are part of what has been an almost 20-year story with regard to the data business in the context of the broader U.S. equity market structure. Today, I'll discuss the latest turns that have been a winding and largely court-litigated debate on the dynamics of a U.S. equity data product landscape which we feel is an important contributor to how U.S. stock markets deliver the highest levels of global standards in terms of efficiency, transparency and resiliency. We expect that this debate and related litigation will continue for many years to come.
Let me talk first about last week's SEC actions and then discuss what we're doing to address them going forward and then how we're engaging with the industry as participants in the SEC market data and access roundtable later this week. Last Tuesday evening, the SEC rejected a 2016 decision by its own Chief Administrative Law Judge. The judge's original decision came after a one-week public administrative trial at the SEC. The administrative law judge ruled at the end of that trial that the price of exchange-created depth-of-book data is constrained by competition.
However, last week, the SEC found, despite the significant evidence to the contrary submitted at trial, that Nasdaq and New York had not met their burden of proof that the Nasdaq Level 2 distributor fee and the NYSE ArcaBook fees, respectively, at issue in the case were fair and reasonable. The impact of the decision on Nasdaq is limited to prospective application of its Level 2 distributor fee, which generates approximately $1 million per year. In their decision, the SEC made it clear that it is "not finding that the market is not competitive." Its focus was solely on the level of proof presented, which we of course dispute.
Two Republican commissioners underscored in a separate statement that they did not intend last week's decision to replace the SEC's market-based approach with cost-based rate-making and they suggested approaches that might meet the exchanges' burden of proof. Regardless, we have already appealed the SEC's decision to the federal court.
Separately in the decision last week, the SEC also asked the exchanges to create a process to consider 400 other rule filings that were approved by the SEC but then have been challenged by SIFMA and Bloomberg since 2013 and to consider the impact of those filings. Of the 400 rule filings remanded to the exchanges, approximately 130 relate to Nasdaq's markets with a few additional filings related to the shared tape plan fees.
These challenged filings and the associated fees will remain in place during any review process. This remand order was adopted by the SEC without the benefit of any briefing or argument by the parties and is contrary to the Exchange Act and the Administrative Procedures Act. We will seek reconsideration of this remand order by the SEC prior to any appeal or other proceedings.
The result of any process for reviewing these filings should be subject to further review by the commission – or would be subject to further review by the commission and thereafter subject to appeal at the federal court. In some, the SEC's decisions to establish an unworkable and unnecessary regulatory regime already in a competitive market is inconsistent with our operations and our expectations. We have confidence in the legal arguments of our appeal. Ultimately, the federal courts will decide on the validity of the SEC's unprecedented orders.
The list of 130 filings was clearly not reviewed by the SEC and represents an indiscriminate use of an objection procedure by the opposing parties. The disputed filings include fee decreases such as an enterprise license that allows our larger customers to reduce their fees by buying multiple products for a fixed price. They even include a filing where Nasdaq sets a fee for certain ports on its ISE market at zero. The filings covered by the objections also include the initial pricing rule for Nasdaq Basic, a last sale and top of book product that has reduced costs for our customers by over $200 million since its inception.
We are confident in the merits of our appeal, and in the meantime, we will continue to run our market data business as we always have with integrity and a relentless focus on our clients. At this time, we do not expect this decision to have a material impact on our growth outlook for the Information Services business.
As we discussed at our Investor Day, our growth plans are focused on our indexed and analytics businesses with the relatively modest growth expectations from our exchange data products across our U.S. and Nordic equities, options and fixed income businesses, deriving primarily from geographic expansion of our client base.
Let me turn to the SEC's roundtable discussions on U.S. equity data and access topic, which is taking place Thursday and Friday of this week. In contrast to the SEC's actions last week, which largely relate to U.S. equity proprietary data and connectivity offerings, the roundtable is also focused on the public data feeds also called the shared tape plans, which will be the subject of five of the seven roundtable sessions.
Issues core to the discussion of these industry utility products where the usage is, in some cases, mandated by regulation, are represented in sessions focused on governance, pricing, technology, and operational transparency. On governance, we've offered proposed reforms to include more of a voice and voting power on the operating committees of the SIP to users and customers. We look forward to working with other stockholders to evolve the governance in a more inclusive way.
On pricing, we've asked the SEC to clarify the Vendor Display Rule, which could give customers more comfort in using lower cost alternatives, such as Nasdaq Basic, in certain use cases where the consolidated tape's benefits are not critical. I mentioned earlier that Nasdaq Basic has saved the industry over $200 million since its inception nine years ago, and we'd like to do everything possible to expand adoption of lower cost alternative while reserving the SIP's comprehensive data for the most appropriate transactional use cases.
On technology and operational transparency relating to the performance of the SIP and the cost and investment to obtain that performance, I think there's a strong story to tell, and I'm disappointed when we see it mischaracterized. Let's focus on the UTP SIP, which is the consolidated tape for Nasdaq-listed securities, which we administer on behalf of the industry after winning a competitive selection process.
In contrast to uninformed and inflammatory allegations by some critics that the performance suffers compared to proprietary data products, the UTP SIP delivers data with only 16 microseconds of latency, putting it at the same world-class performance as our fastest data feeds. At the same time, we've also invested to increase capacity and bolster resiliency. And note just last week, on October 11, the SIP processed a record of nearly 500 million messages without any degradation of latency performance. Of course, the upgrades required substantial direct investment and also benefit from Nasdaq's broader technology investments over many years, which we're happy to discuss at the roundtable.
We also believe that the roundtables provide an opportunity to highlight some other important misperceptions. Exchanges including Nasdaq have been integral to the automation of trading over the last 20 years. This has contributed to spreads falling by approximately 90% over this period, leading to cost reductions for all investors and better market liquidity for our issuers. In fact, the brokerage industry's own research shows that U.S. equities markets are the deepest and least expensive to trade on in the world.
The reality is that most main street investors pay nothing for quote and trade data, while the cost of retail commissions have been falling. According to a recent paper by Professor Jim Angel of Georgetown University, large online brokerages pay about $0.17 per month per customer for the cost of real-time nonprofessional market data. As an example of the falling costs of retail trading to customers, the base equity commission rate at one of the leading online brokers is approximately $5 today, a 75% reduction from the $20 pricing when it first was introduced in late 2004.
Thus, the debate is really a commercial dispute between exchanges and their large bank and HFT clients and competitors. According to an October 22 Financial Times article citing Autonomous Research, the five largest U.S. banks together generated over $25 billion in equity trading revenue through the first three quarters of this year. We estimate Nasdaq's data and connectivity sales to these customers would only sum to well under 0.5% of that figure.
Let me preview some of the messages we'll be communicating to the industry stakeholders at the roundtable later this week and beyond. First, we remain committed to a client-centric approach to innovating for the benefit of our clients, market participants and the broader investing public. Second, we are extremely supportive of the roundtables as there's always room for improvement as we outlined in the three reforms that Nasdaq recently proposed.
Third, the U.S. equity capital markets are the envy of the world with competition and innovation creating a world-class client experience and powering a vast array of investment products and services for the investing public. And fourth, therefore, the SEC should take a very careful and deliberate approach to considering the consequences of changing the structure that exists today and that clearly benefits millions of investors.
Okay. So now let's turn to focus on our business performance in the period. In the third quarter of 2018, we delivered solid organic growth of 5% across our businesses versus the prior year period. This was driven by a 6% organic revenue increase across our non-trading segments, in line with our long-term outlook, specifically Market Technology, Information Services, and Corporate Services, as well as a 3% organic revenue increase in Market Services versus the prior year period. Year-to-date, the company has delivered organic growth of 7% driven relatively equally from the combination of non-trading and trading segments.
Equally important, our results from this last quarter continue to track positively to the tactical execution priorities we laid out at the start of the year, which are to complete the initial actions of our strategic pivot, to develop and deploy our marketplace economy technology strategy, and to continue advancing our competitive position in our core businesses.
This is particularly evident in the areas where we've shifted more of our resources, particularly – specifically in technology, index, and analytics. We're seeing strong growth in these businesses, which reaffirms our new strategic direction. In addition, our core trading and Corporate Services businesses are operating consistently to support our vision as we continue to demonstrate our competitive position in both segments, resulting from consistently strong market share in U.S. equities and our 76% U.S. IPO win rate during the quarter.
I'm incredibly pleased to report that Nasdaq continues to deliver strong, solid organic revenue growth across each and every segment of our business. So, let's drill down into some of the factors underpinning that success. Our Market Technology segment continued to meet our long-term expectations and lead on organic revenue growth at 13% in the period and 11% year-to-date. Order intake in our Market Technology segment totaled $149 million during the first nine months of 2018, which matches the multiyear high set in the same period in 2017.
New deals signed during the period include providing Hong Kong Exchanges and Clearing Limited with their real-time risk solution across its cash and derivatives markets via the Nasdaq Financial Framework and a new SMARTS agreement with the London Metals Exchange for market surveillance.
We also continued to see strong growth in our SMARTS surveillance business, which increased 20% in the third quarter versus the prior year period. This continued momentum brought in new surveillance customers across a variety of customer classes including regulators, exchanges, broker-dealers and asset managers.
We were also excited to announce a public offer to the shareholders and warrant holders of Cinnober, a Swedish financial technology provider to brokers, exchanges and clearinghouses worldwide. This proposed transaction is intended to accelerate how we can grow as a technology provider, unlock significant synergies and advance our progress towards the long-term potential for the Nasdaq Financial Framework, our next-generation technology platform. Cinnober would bring to Nasdaq respected technology and talent, complementary offerings to ours in the banks and brokers and insurance customer segments, and a quality client base, some of which we don't already serve.
Moving to our Information Services segment, we delivered strong revenue growth in large part due to a year-over-year increase of 21% in index revenues as well as strong contributions in our Investment Data and Analytics business. We achieved another record quarter of assets under management licensed to Nasdaq indexes, up 34% year-over-year, moving above the $200 billion mark for the first time. Elsewhere in index licensing, we're building upon a very strong year for Nasdaq-licensed index derivative volumes by signing an extension of the exclusive Nasdaq-100 futures and options on futures partnership with CME lasting through 2029.
In Investment Data and Analytics, our eVestment business continues to deliver on our high expectations. September marked one year since we first announced our agreement to acquire eVestment. We remain encouraged by the team's progress and results to date. Adjusting for the temporary impact of the purchase price adjustment on deferred revenues, eVestment revenues surpassed the $100 million annualized run rate for the first time in the third quarter, up from $81 million in the trailing 12-month period when we announced the transaction a little more than a year ago.
Turning to our Corporate Services segment, Nasdaq led U.S. exchanges for IPOs in the third quarter with a 76% win rate and a 71% win rate year-to-date. Specific listings highlights for the quarter include the successful IPO launches of Focus Financial, Pinduoduo, Sonos, and SurveyMonkey. Additionally, so far this year, approximately $70 billion in market cap has switched to Nasdaq from the New York Stock Exchange via exchange listing transfers. In the quarter, we welcomed three new corporate switches including United Continental Holdings and Intrexon.
Rounding out our Corporate Services' highlights, our Nasdaq Private Market completed its 200th secondary tender transaction during the quarter. This milestone represents $18.5 billion in total company-sponsored liquidity programs completed on our platform since it's launched in 2013. Nasdaq Private Market has supported over 160 private companies, including 63 unicorns, and remains committed to enabling a new era of private market standards and liquidity solutions.
And finally, our Market Services business delivered revenue growth in our equity derivative trading and clearing and cash equities trading businesses, reflecting in part higher industry trading volumes in both categories, as well as higher U.S. equities market share.
As I wrap up, I will summarize by saying that while we have important issues that we're working to address with regard to the CCP default event as well as our efforts to engage effectively in the U.S. equity data debate and discussion, we continue to deliver strong results in the third quarter with particular focus on our organic revenue growth. Going forward, we remain relentlessly focused on our strategic realignment to maximize opportunities as a technology and analytics provider and continue our mission of achieving the highest possible effectiveness in our foundational marketplace businesses.
With that, I'll turn it over to Michael to review the financial details.
Thank you, Adena, and good morning, everyone. My commentary will primarily focus on our non-GAAP results and all comparisons will be to the prior year period, unless otherwise noted. Reconciliations of U.S. GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website at ir.nasdaq.com. I will start by reviewing third quarter revenue performance as shown on page 3 of the presentation and organic growth on pages 4 and 14.
The $3 million decrease in reported net revenue of $600 million consisted of: organic growth of $28 million, including 6% organic growth in the non-trading segments, and 3% organic growth in Market Services; a $22 million positive impact from the inclusion of revenues from the acquisition of eVestment; a $46 million negative impact from the divestiture of Public Relations Solutions and Digital Media Services businesses; and a $7 million unfavorable impact from the changes in foreign exchange rates.
I will now review quarterly highlights within each of our reporting segments. I will start with Information Services, which is, as reflected on pages 5 and 14, saw a $29 million or a 19% increase in revenue consisting of $7 million or 5% organic growth. Index revenues were up 21% in the third quarter of 2018, primarily due to higher assets under management and exchange traded products linked to Nasdaq indexes. Market data revenues decreased 2% primarily due to lower collections related to previously underreported usage.
Investment Data and Analytics revenues increased due to the inclusion of $22 million revenues from our acquisition of eVestment, which is net of a $4 million negative impact from the deferred revenue purchase price adjustment. This impact will be reduced to $1 million in the fourth quarter of 2018, the last period in which it impacts.
Market Technology revenue as shown on pages 6 and 14 increased $6 million or 10% consisting of $8 million or 13% organic growth. The increase primarily reflects higher delivery and support revenues and higher software as a service revenues, partially offset by lower change requests and advisory revenues.
In the third quarter, the operating income margin for Market Technology was 13% versus 23% in the year ago quarter. As we said over the last two quarterly calls and during Investor Day, on a year-over-year basis, we are seeing the impact of the investments we are making to upgrade our technology for the next-generation Nasdaq Financial Framework as well as increased customer deliveries.
We continue to expect the technology investments to depress margins in 2018 and 2019 versus the mid- to high-20s levels seen in 2016 and 2017. However, over the medium- to longer-term, we expect to unlock both higher revenue and higher margin potential in the business as we move clients to a managed solutions model.
Turning to Corporate Services on pages 7 and 14, revenues increased $5 million or 4%. The increase was in our listing segment where revenues were up $5 million or 7%, primarily due to higher U.S. listings revenue from the all-inclusive offering becoming effective for all U.S. issuers on January 1, 2018, and increase in the number and size of IPOs partially offset by the run-off of revenue recognized from previously deferred listings of additional share fees.
Market Services' net revenues on pages 8 and 14 saw a $3 million or 1% increase including a $7 million or 3% organic increase and a $4 million negative impact from changes in foreign exchange. The organic increase was due to higher revenues in U.S. options and U.S. equities, partially offset by a decline in trade management services and fixed income and commodities trading and clearing.
Turning to pages 9 and 14 to review expenses, non-GAAP operating expenses decreased $4 million to $311 million with a $19 million expense increase from acquisitions, a $15 million organic increase partially offset by a $32 million decrease due to the divestiture of the Public Relations Solutions and Digital Media Services businesses and a $6 million favorable impact from the changes in foreign exchange rates. On an organic basis, expenses increased 5%, approximately in line with increases in each of the first three quarters of 2018. As a reminder, we expect that during periods of higher revenue growth, such as the 7% organic revenue growth we've experienced year-to-date 2018, the company's organic expense growth will likely be above our longer term 3% (00:25:03) expectation in those periods.
Turning to slide 10, we are lowering the high end of our 2018 non-GAAP operating expense guidance by $10 million for revised range up $1,310 million to $1,325 million. Embedded in the updated 2018 expense guidance is a sequential pickup in expenses in the fourth quarter versus the third quarter. The sequential increase reflects approximately $8 million in anticipated increases due to the impact of recent hires and promotions, seasonal compensation and higher fourth quarter marketing spend. In addition, typically higher fourth quarter revenue seasonality is likely to impact other variable expenses above 3Q levels.
Moving to operating profit and margins, non-GAAP operating income increased $1 million in the third quarter of 2018 and the non-GAAP operating margin totaled 48%, unchanged versus the prior year period. The current period operating income and operating margin reflect the $4 million noncash impact from the eVestment purchase price adjustment on deferred revenue as well as certain residual expenses from the divestiture, both of which will be behind us in the 2019 and beyond.
Net interest expense was $35 million in the third quarter of 2018, an increase of $3 million versus the prior year period, primarily due to debt issued in connection with the eVestment acquisition. The non-GAAP effective tax rate for the third quarter of 2018 was 26%. For the full year 2018, our non-GAAP tax rate guidance is a range of 24.5% to 26.5%. Non-GAAP net income attributable to Nasdaq for the third quarter of 2018 was $193 million or $1.15 per diluted share compared to $172 million or $1.01 per diluted share in the prior year period.
Turning to capital on slide 11, debt increased by $33 million versus Q2 2018 primarily due to $40 million increase in outstanding commercial paper partially offset by an $8 million decreased in Eurobond book values caused by a weaker euro. Share repurchases in the third quarter totaled $54 million, as you return the final amount of the after-tax proceeds from the divestiture. Together with dividend payments, we returned $602 million to shareholders through the first nine months of 2018. Our total debt to EBITDA ratio ended the period at an unchanged 3.1 times. As mentioned previously, we continue to plan to delever to a mid-two times leverage ratio by mid-2019.
Subsequent to the third quarter, in October, Nasdaq announced an agreement to sell our 5% equity stake in LCH Group Holdings Limited for approximately €150 million, with the proceeds expected to be used to partially fund our public tender offer to the shareholders of Cinnober, a good example of our efforts to free up capital from less core areas to allocate it, to more deliberately, to further our strategic direction.
Thank you for your time and I'll turn it back to the operator for the Q&A.
Thank you. And our first question will come from the line of Rich Repetto with Sandler O'Neill. Your line is open.
Yeah. Good morning, Adena. Good morning, Michael. I guess the first question on Market Technology and we've seen the lower margin. And as you've taken Cinnober, I guess the question would be, where would the margins go because that looks breakeven? And how quickly can you take out expenses there because the guidance is accretion in the first non-GAAP accretion in the first 12 months?
Hey, Rich. Thanks very much for the question. So we are in the middle of a tender offer for Cinnober. So at this point, what we can tell you is that we do anticipate that we will achieve synergies within the combination, the combined group. I think that we also are excited to have the team within Cinnober be part of our technology team so that we can actually catalyze even more growth within the business. But in terms of very specific plans on the timing of those synergies, I think we'll have to wait until we see the outcome of the tender offer before we can provide a lot of specifics just based on the way that the process works in Sweden.
Okay. Thanks on that.
Sure. And actually, I would just say one other thing. So we are – the one thing we haven't been able to communicate is that we anticipate that this acquisition obviously will be accretive to us but also that it will meet our 10% hurdle that we've established for ourselves in terms of a three- to five-year timeframe for return on invested capital. And so that is something that we've been very, very clear about in terms of the benefit of this deal to our shareholders.
Got it. Thank you. And then my "related" question is on market data and the follow-up and that would – I guess the question is on the 130 remanded reviews. I guess can you give us the exposure of revenue on that? And then I know there's been issues on, I guess, maybe that's just the best question. I know you've asked that the Division of Trading and Markets recluse himself or recuse himself from some of the issues here. I'm just trying to see whether there was any progress on that.
So with regard to the 130 filings, I think it's important to note that, first of all as I mentioned before, that it was kind of an indiscriminate use of an objection proceeding. So each one of those filings is going to be individually reviewed, and there's going to be a process around that that's established, that it's going to take a long time to establish. And every single one of those filings, each and every one of them will be reviewed individually to identify the justification for the fees and kind of what they do to support and the value they create to the marketplace.
We feel highly confident in our ability to justify the fees that we've charged over the years. We feel that, in fact, every single one of those filings was already reviewed and approved by the SEC. So therefore, we will be, I would say, objecting to this entire procedure. But we feel that it's just a matter of making sure that the documentation supports the marketplace that we already are supporting.
And I would point out that this market is incredibly competitive, that the pricing for these services is based on these competitive pressures, that it is – we look at these on the basis of the value they provide to the industry, and including something like Nasdaq Basic which has saved the industry a lot of money over the years, even that's subject to this review. So it is going to be a very long process of reviewing 130 filings with the opportunity to appeal any decision on each and every one of them. So you can imagine it will take a very long time.
So, therefore, it's not really a matter of exposure because we feel entirely confident that we have put our fees together and based our fees on a competitive environment that we operate in and that we'll continue to be able to charge them. So, I would say that's kind of how we're taking a look at it at this point, Rich, and how we're approaching it.
I can't answer the question or respond to your question regarding the recusal. That's something that we specifically put in writing and we submitted to the SEC, and we'll have to determine how that's being handled as we go forward.
I'm just reading though on that I thought there was a year deadline for the 130 rule challenges.
So the SEC has proposed something without talking to a single individual in the industry. In terms of the process, we will obviously be – we will be objecting to what they suggested and going back and asking for a further review. I think that in terms of establishing a process, that's potentially something that – establishing a process is one thing, reviewing 400 individual filings, having it be discussed and debated amongst the participants and with the SEC, then going back to the SEC for a decision and then going for an appeal on any decision that we don't agree with, I think it's going to take a lot longer than a year.
Understood. Thanks, Adena. That's helpful.
Sure.
Thank you. And our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Your line is open.
Good morning. Thanks a lot. Adena, thanks for all the color upfront on both the clearing and the market data. I guess just one question on the clearing side. In the whole scheme of things for you guys, the business is relatively small. So I guess in terms of like the – when I think about downside or like what the risk is, just wanted to get some sense. Do you guys have any insurance in place when you have operational issues like this? That whatever the outcome ends up being, is there anything that can potentially offset any of the related costs?
Sure. So I'd say certainly, we have insurance, absolutely. But I would say also that, at this stage, there are a couple of things to note. You are right that this is a relatively small business within Nasdaq. It generates in the range of $30 million to $35 million of revenue and its margin is actually below the average for the company. So it is a small business.
I think that in terms of the activity levels and the way that the members have been working with us through the situation, it's actually been quite productive and constructive. The activity levels in the market remain pretty much on average of what we've been seeing. And the members have been very constructive and productive in working with us to try to make sure that we work with them on how we can continue to improve the operation, but also in terms of getting recovery from the defaulting member on the loss.
So I think that, at this stage, we feel that that has been a collaborative and cooperative process. But, of course, as we look at ways that we can improve the market, we might have to incur some costs associated with just making sure that we make the improvements that we're going to be recommending. I'd say – but definitely, to the extent that there's any sort of downside risk that you're mentioning, we most certainly have insurance.
Okay. That's helpful. And then, maybe on the core business, two areas, on the analytics with eVestment, just wanted to get a sense over the past year, how has the traction been with that business maybe relative to expectations? And then a smaller area, but on the index side, obviously, you're seeing great growth, but just wanted to get some context when you get market volatility and a little weakness like we're seeing now, how much of it is on the AUM versus any other types of fees in that line?
Sure. Yeah. With eVestment, it actually has been tracking very well and as we mentioned, on a run rate basis in the quarter, we've gotten to the point where we're at $100 million of revenue. So it's definitely showing significant growth over prior year period. I think that we also – they just launched a new product within their franchise, and it's very exciting to see continued innovation and offering additional services to the asset managers and asset owners that will make it so that we can continue to grow that business in a significant way. So, we're extremely pleased with how that business is going and tracking.
I think within the index business, as we've mentioned before, there is certainly is a beta component to the index business related to AUM. So AUM is a combination, of course, market performance and the number of, what we say, kind of the number of shares outstanding within the index products that are created. So our view right now is that there is some beta dependency and the growth has been a combination of more investors coming in and taking advantage of the products we have in addition to the market performance against those products. But I think that, as you said, there is some beta dependency within that business.
Okay. Thanks a lot.
Thank you. Our next question comes from the line of Ken Worthington with JPMorgan. Your line is open.
Hi. Good morning. Following up on default fund, there is rule creation that's in progress in the EU with regard to CCPs and it's expected to conclude next year. Maybe what are your thoughts on how the default fund breach could influence European regulation? I think when the Korean CCP was breached we saw an increase in calls for skin in the game. So, I guess what do you expect here? And then I guess, as the related follow-up, what is your assessment of the reputational damage done to Nasdaq and are there any implications or consequences that you think result?
So I think with regards to the EU, I think that we really can't comment specifically on the impact of this event on any sort of upcoming potential EU regulation. I think we're focused very specifically, Ken, on managing through this issue with our clients and on our own regulators. And so I would say that we don't have any sort of opinion about how this might impact other things that might be going on in the regulatory space.
I would say that with regard to our business, I mean this is a major event that's occurred within our clearinghouse. We have been doing, as I said, a deep dive across the operation. I would also say that this was an event that was not, to be very honest, a 17 times increase in the average daily spread and that all happened in one day, and it was many times – multiple times larger than any event that the clearinghouse has ever experienced. So it was in fact a very onetime, very extreme event. And so what you have to look at is not only what can you do to prevent it but as you're going through the process of managing through it, how do we make sure that we just are robust across the whole thing.
I think that at this point, it really has been a very productive process. I think that Oliver Wyman's done great work and we will continue to find ways to improve. We do believe that we've been operating appropriately within the guidelines that we've set for ourselves and the regulators have set for us. But at the same time, there's always ways to improve.
Okay. Great. Thank you very much.
Thank you. And our next question comes from the line of Chris Allen with Compass Point. Your line is now open.
Good morning, everyone. Just want to touch again on market data. I think most people assume now that the hurdle for any further pricing increases has clearly gone up, not just from a data perspective but also from an access connectivity perspective. So I'm just wondering if you can maybe remind us the magnitude of revenues that fall into these buckets related to U.S. equities and what growth, if any, is kind of embedded in your organic growth potentially moving forward?
And then also related, what do you think that the SEC will focus, assuming on this issue moving forward, a more holistic review of overall equity market structure? Thank you.
So within the market data and connectivity business, both of those businesses, we've been pretty clear, are low single-digit growers. And I would say, first of all, within the market data business, it's not just U.S. equities data. We have U.S. equities data, options data, futures data, fixed income data, Canadian data, Nordic equities options and futures data. So we've got a plethora of products that fit within our market data business. But we've also been very clear that we have not been and don't expect to be dependent on fee increases to be a major driver of revenue increase there.
In fact, the significant driver of revenue increase so far has actually been new client acquisition, finding new clients in new geographies and finding new clients here in the U.S. We continue to find demand and new pockets of demand for our products here in the U.S. as well. So it is not – we're not dependent on kind of price increases.
And same with the connectivity business, again, it's a low single-digit grower. We're not anticipating that to be a big driver of growth within the business and we've been managing it very, very – I think we've done frankly a great job of managing the businesses in the interest of our clients. We're extremely disclosive when we do things in those businesses that impact customers, and we do them in connection with enhancements and changes we're making to the product. So, again, Chris, this is not – we don't anticipate this being a driver of growth and we've been pretty disclosive about that.
So our growth is going to come from our index businesses, our Investment Data and Analytics businesses, our Market Tech businesses, our other products, our Corporate Services businesses, those are kind of the areas that you're seeing consistent growth and driving the 5% that we achieved for the quarter in addition to the 7% we've achieved for the year.
With regard to a holistic regulatory review, we've been encouraging the SEC, if they're going to look at one piece of market structure, they really ought to look at every piece of market structure. Market data is a product of the market structure that's been created. The competitive dynamic that we operate in for listings and trading and market data is all the product of Reg NMS. So if they're going to tease apart one element of it, they really ought to look at the entire market structure that they've created with Reg NMS, and we've been encouraging them to do that for years. We will continue to encourage them to do that. If they want improvements, they've got to look at the interrelation across everything that we do here.
Thanks. That's it.
Thank you. Thank you. Our next question will come from the line of Dan Fannon with Jefferies. Your line is open.
Thanks. I'll follow up on the Nordic clearing issue and you talked about hiring Oliver Wyman and what you're doing. I guess can you talk about your regulators and their response and how you're working with them and what we should expect in terms of the next steps that we should hear from the regulators?
So we have been highly engaged with our regulators throughout the entire event so during the event and after and we have continued to work with them to give them as much information that they've asked for. And we continue to have a live dialogue with them. I think that at this stage, we're in the process of working with our regulators, working with our clients, and doing our own internal assessment. And all of that I think will come together to looking at some improvements and changes we'll be making to the clearinghouse going forward.
Okay. Thank you.
Thank you. And our next question comes from the line of Alex Kramm with UBS. Your line is open.
Hey. Good morning, everyone. Sorry to stay on the market data topic. But I know you gave a lot of detail already and really appreciate it. But I think there's still a lot of confusion so I just hope that you can actually dumb down the debate for a second here. Because when you look at your stock and some of your peer stock performance, I think there's this view in the marketplace that people ask about exposures and there's like hundreds of millions of dollars that the SEC on the fly will decide will just go to zero or close to zero.
So maybe you can just contrast for a second that this is regulated market that that's just not something that procedurally can happen here. And I know you talked a lot about like this will drag out over years. But maybe you can just – any incremental stuff that you can give us to help us just clear up the debate like this is not about a revenue reduction coming next quarter and the long term coming.
And then sorry, just related real quick, you mentioned that some of the growth in the last two years, yes, there's been pricing but there's also been price reductions. So if you can give us just a net number in terms of what pricing on those 130 products has contributed over the last two years, it would be really helpful. Thank you.
So, with regard to the market data issue, it's a great point, Alex. So I think it's really important to read the statements from the Chairman and from the Republican commissioners. I think the first thing to note is that they're not saying that necessarily that our fees are not reasonable. I mean it's kind of a double negative. But they are saying that they would like more evidence to support the fees that we have delivered.
What's frustrating to us is that every single one of those fees is approved by the SEC, and so, they've all been reviewed. At no point did they ask for further information before granting us the approval. So, now they're coming back and saying we want more information. And we have to understand that in terms of what they want.
It's also very clear that the Republican commissioners have said they're not looking to rate make, they're not looking for cost-plus (00:46:22) model. They're just looking for further justification in the context of it being a competitive market, having competition around the market data and each and every single one of those filings has its own situation, so how do we look at maybe delivering more value to our clients in connection with the fee change; or if it's a new product, what value are we delivering to our client as we're launching this new product.
I would say that, obviously, we are objecting to the fact that they're doing a retroactive review of every single thing that they've already given us approval for over the years. But at the same time, it is very clear to me that they're not looking for these fees to go to zero. The exposure is not our data revenue. The exposure is how do we justify and make sure that we're demonstrating that we're acting appropriately in the context of a competitive marketplace.
And we feel confident that we will be able to do that quite successfully. So that's not a situation where you have this immediate exposure that you're talking about. I totally agree with you. And even over the long term, we believe in the years to come as we're working through this process, we will demonstrate that we've acted very, very well on behalf of our clients to support our data business. And so that, I think, is the way to look at it, Alex, but it is important to recognize looking at the words of the release, that they're not making an arbitrary decision to change things. They're just saying let's go through kind of a deeper dive on the evidence to support what we do.
In terms of the revenue and the growth and the net, that's something actually we're still going through ourselves. But I would say it's really kind of a – it's really a mix and match. So we aren't currently providing any sort of specific disclosures because it's such a broad base of filings and each and every one of them will be reviewed individually.
Appreciate it. Thank you.
Thank you. And our next question comes from the line of Jeremy Campbell with Barclays. Your line is open.
Hey, thanks. Adena, thanks for the color on the SEC market data issue and probably getting your view out there is probably a good thing since it's been mostly a one-sided conversation to date so far. But as we look ahead to the roundtable over the next couple days, do you guys expect this to be more of like an airing of grievances or is there something that we should be looking for that you think could be kind of a realistic and definitively positive or negative kind of either outcome or progression?
I think that we have to look at this as just one event in a 20-year discussion and debate on this topic. So we can expect it to be definitively – that there's any definitive decisions or changes or anything that will come out of it other than a discussion.
The good news is two things. They are allowing us to submit a written statement, which we will do. So it allows us to put out all of our arguments in a way that's very coherent and very easy to read and hopefully provides great support because I agree with you, it has been a one-sided discussion so far and it's time for us to have an opportunity to be proud of what we've done and proud of what we've created for the industry and to remind people that our markets are the best markets in the world. They're incredibly resilient.
In fact, on October 11, we processed 28 billion messages in our systems across our equities and options market and with no real degradation of service. It was an – I mean we're great at what we do and we provide a great service to our clients and to investors. We have millions of investors who rely on us for market data. The average price that a retail broker pays for per client is like $0.17 per month. So we believe that we have a great story to tell so we are excited to do it.
I think that in terms of the outcome, I think you're going to find that it's a pretty – we are going to have an opportunity to speak on five of the seven panels and so will other exchanges. So I do actually believe it will be a balanced discussion, and we will understand even further what the debate really is and recognizing that it really is a debate amongst the exchanges and the large banks. I mean that's really what it's going to come down to.
Great. Thanks.
Thank you. And our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Your line is open.
Hey, good morning. Another question on the SEC roundtable. We would expect some market participants to suggest changes to the consolidated tape such as making providers rebate all revenues in excess of actual expenses or incorporating depth-of-book data in the SIP feed, which would presumably devalue your proprietary data feeds. Can you give us an early preview of your take on that particular debate?
I would just let you know that that debate again has been going on for 20 years. The first time that those two suggestions were brought up was in 1999 and in 2003. And the SEC in both cases rejected the notion that there should be a cost-plus-type-based model supporting this type of business. And they looked at it in the context of the overall regulations they had established through Reg NMS. The fact that these are – the SIP in particular, the highly regulated utility, it has participation across the exchanges.
I would point out that the revenue generated by the SIP does support the new entrance of new exchanges, and that's one of the things the SEC specifically wants is to have more exchange competition and the revenue that comes out of the SIP does allow for new entrants to come in and become sustainable pretty quickly. So I would have to say I think that that runs counter – those arguments run counter to everything that the SEC has tried to create over the last 15 years, and they have been debated and rejected multiple times through the process of discussion and debate. So I don't think those are arguments that you will find have a lot of support across the broad spectrum of clients.
Obviously, we know that those are going to be brought up because they always are and they're discussed, but if you want innovation, you want competition, you want us to make sure that we can, in fact, be resilient and have the opportunity to offer our clients choice across the spectrum of market data and trading platforms, then at the end of the day, you have to allow for there to be a value-based review of these types of products.
That's helpful. Thank you.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks. Just I guess one more on that topic. Appreciate your comments, Adena, on reviewing the whole market structure and, obviously, the SEC has been doing this a long time, putting out a concept release in 2010 on market structure, which really never ended up getting addressed. But, I guess, within the market data between the SIP and proprietary, do you envision an avenue for restructuring the SIP somehow in the Consolidated Tape Association and how that revenue model could actually change and then to leave obviously the proprietary data intact? Or do you think it really can't be addressed unless you address everything else within the market structure and this debate gets basically kicked down the road for a long time?
Well, I do think you have to – I mean, your question is a good one because it recognizes the fact that everything's in an interrelated ecosystem, right? So, if you think about it, the rules that established kind of order protection and all of these things that go along with how orders get routed from one exchange to another, the interconnectedness of all of the exchanges, the resiliency that that's created across the ecosystem within the U.S. exchanges, the competition that exists amongst the exchanges and other broker-dealers, all of that is a creation that allows us then to look at, okay, what are the data products that are absolutely required for making a trading decision.
And the SEC has been entirely clear on that that they expect that, at the point of trade, that they would expect that you would have access to consolidated best bid and offer and last sale information at the point of trade. But, in every other part of the market, you should have the freedom to take the data that you think best meets your trading strategies and best meets your needs for information. And they've given a wide range of optionality to the exchanges and to the broker-dealers to be able to provide that. And that is a fundamental tenet of Reg NMS. So, you can't look at that issue separately from looking at the overall landscape that they've created, the Order Protection Rule and other things related to the market structure.
So, one of the things you can look at though is, is the SIP – is the governance of these utilities, is it really proper? So, does it have enough of an opinion being brought into the room? Do you have proper participation across the industry in looking at and examining how this SIP works? And I think that's where we've actually made some proposed changes already ahead of the roundtables to the SIP in terms of governance, in terms of including more industry participants, potentially having some voting participants coming from the industry as well as really clarifying the Vendor Display Rule, so that it's very clear at what point is a consolidated tape necessary versus when it's not.
Right now, there's some ambiguity and it's actually creating confusion. So, clarifying that it's necessary at the point of trade and allowing choice that has saved the industry $200 million so far is probably the right way for the SEC to look at how they can create more choice and save the industry a lot of money. So, I think those are the types of things that we want to see change. So there's always improvements you can make. But I don't think that you're going to see a fundamental kind of – I would say that, right now, I think that everything works together very, very well to create a very resilient and functioning market. And we should remember that before we try to make changes.
So you think there wouldn't be a major change in the revenue component on the SIP and how that's divided up between the exchanges or the participants in the industry even if you can change that without changing props?
Well, I would like to point out that we already share a lot of the tape revenue with the industry when they have internalized, so they don't trade on exchange and they internalize those prints and they report those prints to the Nasdaq Trade Reporting Facility, we share the vast majority of that data revenue with them. So they already receive a lot of revenue coming off the SIP, the market participants do, through a sharing plan that we have.
So I would say that we do not anticipate that – I mean we certainly don't support any sort of fundamental changes in the revenue construct. We do though support changes in governance and changes in clarifying the Vendor Display Rule to give clients more choice, which would then save them a lot of money.
Great. That's great color. Thank you.
Yeah.
Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Your line is open.
Thanks. Good morning, everybody. So, maybe just shifting gears a little bit to the core business, just wanted to hit on Market Tech. So, I guess if we look at the new order intake, it's been trending down here for the last several quarters. I understand it could be pretty lumpy, but anything in particular that's kind of driven the slowdown this quarter? And I know revenues are not obviously perfectly correlated here, but how do you guys expect sort of revenue growth to progress here over the next few quarters given sort of the dynamic you're seeing in the order intake?
Sure. No. Thank you. And thank you for going back to our core business, I appreciate it. Okay. So, with Market Tech, I would say that, as you said, order intake is quite lumpy. And so we had – as I mentioned before, so far this year, we're matching our record from last year. So we're pretty pleased with that. The fourth quarter tends to be a high quarter in general. I mean, it's a seasonal thing. So you would anticipate that there would be some ramp there.
I think that also recognizing that revenue growth, as you said, is not a direct correlation to order intake. These order intakes can be over – the amount of money that we're talking about into order intake could cover three years, five years, seven years, so it doesn't necessarily directly correlate to revenue growth. And when we see revenue growth, I would say that we have signed on some very significant clients with very significant new contracts related to clearing that we announced earlier this year in terms of the National Stock Exchange of India as well as the Swiss Exchange and other implementations that we're working on.
During the implementation period, we do recognize revenue now, which we didn't before, but we also recognize a lot of the cost of implementation. So the margin on that is going to be much lower. Once they deploy and they're in the market, then the revenue and the margin will continue. The revenue will continue and could grow as well as the margin becoming much more attractive. So, that's actually frankly a big part of the story is looking at the time that we will have to implement and then have these go live and these are large implementations, so there will be some delay on that.
So, I think, Alex, another thing to point out is SMARTS. We did have 20% increase in the SMARTS revenue. That's just – we are just seeing that be a very, very great growth engine for us and continued demand across the entire ecosystem for our services, and we're also seeing some real pickup on the asset management side as well. So we are very, very confident in the long-term outlook we have for the Technology business of 8% to 11% growth. We definitely see continued demand and certainly the drivers are underpinning that 8% to 11% number.
Great. Thanks very much.
Sure.
Thank you. Our next question comes from the line of Ben Herbert with Citi. Your line is open.
Hey, good morning. Thanks for taking the question.
Sure.
Maybe just on how you're thinking about M&A going forward specifically in Market Technology either strategically or just seeing a lot of ability to consolidate and drive synergies throughout the space. Thank you.
Sure. Yeah. I would say that we always look at opportunities for us to catalyze growth in our businesses and we are, as we mentioned before, particularly focused in those areas that are growth drivers, growth businesses for us and how we may be able to either expand these businesses or accelerate the growth in these businesses.
So whether it's Market Tech or the Information Services business, I think those are two areas where we definitely are evaluating a lot of, I would call them bolt-on type of opportunities and that tends to be where we're focused right now. But we would say that we have a great organic growth strategy across everything that we do. We're very pleased with how we can grow organically. But if we do see an acquisition that could catalyze growth or expand our presence with our clients that is also accretive and provides a return to the shareholders, we will continue to consider those, just as we have with Cinnober. I think that's a good example of a good bolt-on acquisition that will really help our business.
Thank you.
Thank you. And our next question comes from the line of Chris Harris with Wells Fargo. Your line is open.
Yeah. Thank you. In cases that have been appealed to federal court in the past, how long is that process typically? And I just want to verify, are any at-risk revenues intact until that appeal process is over?
Yeah. So, basically, there's – our understanding of the process is there's no change in the way our revenues at all (01:01:57), while this entire process is under way, right? Every process that we just talked about, everything stays intact other than the $1 million.
Now, we will be appealing that or we've already appealed it. So that $1 million, we'll have to make sure that we go through an appeal process around. But I would say that everything stays intact until the process is complete, including the appeals. Appeals and I'm looking at John generally take?
A year to 18 months.
Yeah. A year to 18 months.
Great. Thank you.
Thank you. And, ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the call back to Adena Friedman for closing remarks.
Well, thank you, all, very much for your time today. And we are very pleased to see that the businesses continue to deliver strong organic growth. Guided by our strategic direction, we do have a clear road map to our future to reimagine markets and to realize the potential of tomorrow. And we are committed to executing our plans to realize this vision with the combination of our unique positioning, our ability to adapt to the evolving landscape we see before us, and our strong and successful culture of execution and delivery for our clients and our shareholders. So with that, thank you very much for the time.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.