Q3 2020 CME Group Inc Earnings Call
[music].
At this time I would like to turn the conference over to John P. sure.
Oh. Please go ahead.
Good morning, and thank you all for joining us today I want to start with the Safe Harbor language and I'll turn it over to Terry and John for brief remarks, followed by your questions. Other members of our management team will also participate in acuity.
Statements made in this call and another reference documents on our website that are not historical facts are forward looking statements. These statements are not guarantees of future performance. They involve risks uncertainties and assumptions that are difficult to predict therefore actual outcomes and results may differ materially from what is expressed or implied in any statements or.
Detailed information about factors that may affect our performance can be found in our filings with the FCC, which are on our website.
Also on the last page of the earnings release, you will find a reconciliation between GAAP and non-GAAP measures with that I would like to turn the call over to Terry.
Thank you gentlemen, thank you all for joining us today I wish you all the best.
You and your families. During this challenging situation for many around the world. My comments today will be brief as John said, so we can spend the majority of our time directly addressing your questions, where we released our executive commentary. This morning, which provided extensive details on the third quarter also as John referenced I have.
And Sean Derek Angeline Winkler, well with me this morning, and we all look forward to answering your questions.
We continue to see historically low levels of volatility and several of our asset classes, which began in the second quarter.
During the third quarter, we averaged 15.6 million contracts per day down.
Down from 17.6 million contracts per day in the second quarter.
We're fortunate to have a broad product portfolio during the third quarter, we saw strength in our equity business are higher rate per contract metals and agricultural products.
Delivered volume growth in Q3, and FX volume recovered an average of 100000 contracts per day.
Higher in Q3 than Q2.
Our market data business during the quarter had exceptional results with revenue of 139 million the highest quarter in our history.
We continue to launch innovative new products and we have prepared for the cutover a broker tech onto Globex later this quarter, we remain committed to achieving capital and operational efficiencies for our clients cleared.
Clearly the lack of volatility is impacting two of our largest asset classes rates and energy.
That is the current reality, but not a permanent one we have intensified our efforts on the expense side, which is something we can control.
As John will discuss in a moment, we are reducing our 2020 expense guidance by $70 million from the initial guidance we provided in February.
Realizing we are in a tough environment. We also plan to deliver very strong expense management going into 2021 with that short intro, let me turn the call over to John to talk a little bit about the financial results.
Thank you Terry with our strong expense discipline and the remote working environment. We finished the third quarter with adjusted operating expenses, excluding license fees of $386 million down 6% compared to the same period last year and down 5.5% year to date, we are extremely focused on actively managing our costs.
Just to re mention this expense level reflects an entire company ever to ensure that we are spending as efficiently as possible in the face of a tough operating environment.
Adjusted diluted EPS for the quarter is $1.38 and is $5 to 34 cents through three quarters, which is up slightly from last year base.
Based on our outlook for the rest of the year our guidance for adjusted operating expenses for 2020, excluding license fees is being reduced to $1.575 billion down from $1 billion $645 million, which at the midpoint of our initial guidance at the start of the year and down $20 million from our full year estimate.
We updated last quarter.
Finally, we're bringing we're beginning our budgeting process for 2021, and we expect the intense expense focus to cover to carry over into next year.
We recently, let our employees know that we are deferring promotions for now freezing wages going into next year and we are looking at other opportunities to reduce discretionary spending.
With that short summary, we'd like to open up the call for your questions based on a number of analysts covering US. Please limit yourself to one question and then feel free to jump back into the queue. Thank you.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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Again, Please press star one to ask a question will.
We'll pause for just a moment to allow everyone the opportunity to signal for questions.
Thank you our first question will come from rich Repetto with Piper Sandler.
Yes, good morning, Terry Good morning, John and I hope everybody.
Hey, good morning, hope everybody safe and well you talked about you know the environment the low interest rate environment, but you do have this this migration cutover in the fourth quarter. So I guess Terry Besides the savings that you expect from it I am just trying to get.
Better idea, what you think the behavior behavior changes like whether you sort of.
Got a better feel for the margin savings.
We see a change in behavior from it and.
And also I noticed some new regulations from the FCC out on treasury trading platforms, and whether that recognizing them as ats will that have any impact on on broker tech and and cut over.
Yeah. Thank you rich and I hope you hear from your well I'm going to ask Sean the covenant, but before I do that I'll make a few remarks as it relates to what I perceive as potential behavior changes as the platform comes onto Globex I am like everybody around this organization very excited about having a broker tech onto the globe X platform.
And to deliver the efficiencies that we've talked about when we first made the announcement of the transaction I'm I don't think you can underestimate the value of cash and futures on a single platform. So really canceled liquid platform like features that we've never seen it before so even though the rates as we have discussed or.
A very disappointing place as far as the fed policy is go it doesn't mean that people will stop managing their rates were still continuing to see a tremendous amount of issuance going especially into the long into the marketplace. We're going to see that and we are excited by the broker tech integration on that show the behavior I I've heard a lot of positive things from the client base.
As how they're looking to manage risk.
As it relates to the other questions around the FCC and others that you asked I'll ask Sean to make a comment but behaviorally I think that the participants are excited about having this single point of contact to manage that risk.
Hi, Terry this is Sean jumping in can you hear me Yeah, Yes go ahead.
Yeah, So I'll jump right in and then you know in terms of the migration to go back. So I'm very excited about the Goldex technology customers are very excited about the goldex technology and the significant increase in determining that it offers to our client base. In addition to that I'm very excited about the functionality that we're going to have available to us on globex.
For both protect cash markets that that wasn't available previously on the previous technology.
Secure very excited yeah, we do plan on launching.
Shortly after we migrate protect to buybacks where.
We will launch the gold RV or relative value trading. This for the first time allow a curved ER water pipes by eat a little lucky to trade the spread between different securities so simultaneously buying and selling securities such as to size five tens tens bonds.
By doing that actually there's a number of different values that will be added to the market first you will no longer have to like those spread trades, we believe the 10% to 15% of the treasury market is probably done in curve trades, although today broker tech they are done as a leg the individual trades so for.
<unk> eliminate that leading risk secondly by putting in a spread order type we're going to have that spread order type it in a much tighter minimum price incrementally than outright contracts third.
We're going to use implied or functionality on globex that has been extremely successful in our your dollar futures for example, where when you have an outright what are let's say to your notes and you've gotta spread order in twos versus fives that that implies an outright border in five five year now so we're very excited about.
Yeah, reducing whiskey in the trade lowering the cost of the trade and enhancing the overall liquidity. The platform. So we are very excited about that I think mentioned a couple of other things that we're investing at the same time you know another platform. We are investing in on the E. B S side, it's something we call Qt M two data or quote driven markets today.
No. This is a brand new technology state of the art technology that will allow us to have much faster round trip times and much better technology overall for the bilaterally traded party exchange market. So were equally excited about that we do expect that had to be fully rolled out sometime next year we have.
Begun rolling it out now.
Last maybe I'll mention before stopping you also very excited about new analytics.
Right that we are able to deliver to clients, having both the cash and features platforms that Terry mentioned earlier. So next week, we're going to be launching a new tool on our E. B S. Quanta analytics platform DBS Quanta analytics is a that total cost to trade or a transaction costs.
And also.
For the foreign exchange market. It currently allows you to look at the bid offer spreads and the depth of book and the bilaterally traded market. Yes that were you know using your current chosen liquidity providers. It allows you to look at all the other liquidity providers that you would not currently using it also will.
As you look at the Central limit order book. So we're in the process of adding features to the analytical tool in particular, we're going to be added seven cold market profile. So this will show the the great value, having both the futures liquidity pool, and the cash liquidity pool and it will show you the advantages of at really the.
The need for anyone who tried that globally to trade in both liquidity pools in order to minimize their overall cost. So we're very excited about all the technology investments that we're making and you know the growth that should provide platform.
Thanks, Shaun Richard So hopefully that gave some color to how we feel about the migration and a cutover and behavioral issues I think your other part of your question was around the FCC and Sean did you touch on yeah, I apologize in terms of the FCC, the new regulations, well, we'll oh.
You know in terms of reggae P.S. on Catchmarks platforms, we already out here to most of the regulations.
There are a number of platforms that do not so while there are exemptions for a U.S. treasuries certain exemptions under undress People's for U.S. Treasury platforms since historically.
Broker Tech traded Canadian government bonds, as well as mortgages Ah Ah.
Next and broker Tech did not take advantage of those exemptions. So oh, there maybe some new adherents said, it's required a broker tech generally already at here is to the rules that we expect to be required.
Thanks, John.
Thank you. Thank you very much.
Thanks Rich appreciate it thank you rich.
Okay.
Thank you. Our next question comes from Dan Fannon with Jefferies.
Hi, Thanks, good morning.
Hi, My question is on market data, obviously, a good quarter you highlighted subscriber growth then it kind of some of the demand trends can you talk about the kind of the type of customer that that's the incremental subscriber here and maybe the momentum our outlook for this business as we think about a year, we're heading into next year for queuing into next year. Please.
Sure. Thanks for the question, yes the.
We had a great quarter and in Q3 revenue up to 139 million and that with the majority of that was driven by higher subscriber counts for that real time data and so what we're seeing there is that as as many firms are continuing to be in a work from home environment.
It is necessitating additional access to our real time data. We're also seeing good demand for our data is being used in automated trading solutions as well as more usage of Fannie data into the input I'm into other financial products and services.
So I think its you know largely driven by this work from home environment that still continues to be you know strong I think as we look forward. We are definitely focused on integrating the data that came over from next as well, we're continuing to build out our cloud based distribution capabilities, we talk.
Like last quarter about see any smart stream and then yeah pleasantly surprised there I would say about the interest from customers for that it has exceeded our expectations and I think there you know, it's it's about the scalability of putting data into the cloud on it being much easier for customers to access.
And so we continue to have a good pipeline of clients coming into that.
We're also continuing to work on strengthening our market data policies and pricing and also you know the enforcement related to those activities and lastly, working on up our benchmark business and that includes our participation in the Ark. So for term rate RFP. That's due later this month.
Great. Thank you.
Thanks, Ken.
Thank you. Our next question comes from Alex Kramm with you'd be yes.
Hey, Good morning, just quick one on the expense side. One you know obviously you saw the updated guidance I think it assumes a little bit of a fourq you increase so maybe just talk about that's the seasonality then but more importantly, maybe there's a little bit early but as we think about 2021 can you just.
Remind us how much savings you had this year from from coal, but I I leave the word teeny et cetera that that you expect to come come back next year, obviously, the timing is uncertain, but any how should we think about kind of like savings that you had that that will not recur next year because of college.
Hey, Thanks, Alex This is John jump in [noise], Yeah as you.
Q4 has a historically higher level of spending on marketing spend some of which is contractual has been deferred from the start of the year and its picked up in Q3, and we anticipate an increased spend in Q4, but still at a significantly lower level than the annual spend last year. We also anticipate additional expense.
Expenses associated with system is being put into production associated with the migration on the globe bags and with the data center consolidation efforts and the build out of our New York, New Jersey data Center. So based on the current forecast you always see huh.
I would expect to see a depreciation and the other cost line as the biggest changes from Q3, Robert we will still continue to look for additional synergies and cost reductions throughout.
The Q4 in terms of next year, it's a bit early in the process and we're in the in the budget development process now, but the entire organization has done a tremendous job over the years and managing our costs and we expect to do the same next year as I mentioned in our prepared remarks, we've already taken action.
To manage our expense growth and 2021, you know our objective is to be diligent managing our costs, but to be flexible should the environment change in opportunities present themselves.
Let me just add what John said about your raised Cove, it and what do you how much do we say through 2020 through colder than what do we think 20 Twond. Gen 21 is it looked like I think that is still.
It'd be decided because we're only one side of that trade, we can't just be sending people over there is the country of the world. If other people are not receiving them. So it will all depend on jurisdictions abroad and here in the U.S. about how meetings are to be taken place.
So I am anticipating our travel schedule will be light again in 2021, and I'm going to encourage more people doing things from zone to make sure that we can realize those cost savings. So I can't give you an exact number and we are evaluating it now but I do think its.
Important to realize that you know, we we do need to be in front of some people and there's others. We don't so we will make sure that we achieve those savings as it relates to the travel.
Sounds good thanks, guys.
Thank you.
Thank you. Our next question comes from Jeremy Campbell with Barclays.
Hey, guys. Thanks for taking the question I'm, just wondering about that new water contract with now it's like do you guys have said to go live in December you know just wondering did this new product kind of bubble up from potential users or are these a potential future users a little different from your current user base. It's kind of wondering if this could be the start of a user base expansion and or no product develop.
One or another natural resources or renewables going forward.
Sean you want to talk a little bit about the agreement with NASDAQ and the water futures contract.
Sure we were very excited obviously to extend the license with NASDAQ last year.
And you know the growth in NASDAQ features have been a very big success. This year. In addition to that and as a part of that contract. We have access to other independents that they offer and yeah. We send it out to the the Dallas water Index. We are excited about growing the customer base.
We do believe that this will have an interest by large industrial users so manufacturers.
As far as farmers.
Hi, say farmers already customers of our products. Nonetheless, we do believe that municipalities are farmers industrial firms will be or in some cases, new customers for these what potential new customers for these products. So we are excited about it in terms of the product launch itself innovative new polished <unk>, yes.
It it could lead to an expansion and should lead to an expansion of our customers.
I don't know newly Winkler would like to comment on it at all sorry.
Yes on really well and I will as well go ahead Joel I.
I think yeah. It's it's a good point I think in addition, right to the water contract. This this fits within this broader context of E.S.T. products and the philosophy, we're working with our clients around on that is that you know there is a suite of products that are completely news that that Josh Sean just talked about.
That are new to their innovative and they will help customers and their firms need they're very aggressive you know carbon goals over the longer term. While we have another you know set of initiatives to continue to modify and make enhancements to our existing contracts, which may be things like a certificate.
Oh, sorry, yes, T. wrappers and so we've got a pretty robust you know program in place to improve product development around E. S. T. Since you know from the broader you know scope of things you see investment is is really picking up and you know that at the start of 2020. It was virtually the only class of funds that.
We've seen investment in flow and so it's a major topic of conversation with our clients, primarily driven I would say in in Europe, but increasingly in the U.S. as as well as a pack. So we've got you know existing asset managers banks hedge funds all showing a lot of strong interest, which is why you know you're starting to see.
Those products you know roll out from from Sami group. The cornerstone of that is it's certainly the S&P S. T 500 contract that is gonna be that foundation of what we build on everything around and you know again. This is client driven and certainly investment driven we do believe that will help attract new customers and just to add.
So that Germain you know I've been around a long time, and we've I've heard nothing about.
Other than why don't you have a water futures contract and I think there was really not a catalyst for water futures contract until some of the things that Julie referenced under the U.S.G. program and to manage the risk of water going forward could be something that we've never seen before so we are excited by the partnership with NASDAQ to launch this quarter.
Correct, we think like a lot of things, it's all about timing, there's a lot of great ideas out there went bad timing, we think that the timing is right on this because of some of the things that Julie referenced when you look at the makeup of the globe today, especially to the Earth is 80% water most of its undrinkable that is not a good equation for the environment that we're seeing today people are gonna.
Need to manage that risk and we feel that we're from a prominent place to do it. So we're excited to work with NASDAQ and for the companies that Julie just outlined in order to bring risk management to something that's critical to each and every one of our lives.
Perfect. Thanks, guys.
Hey, Jerry.
Thank you. Our next question comes from Brian, But Dal lists don't you think.
Great. Thanks, good morning folks.
Just wanted to go back to the the integration to do on the broker Tech to Quebec front for me [laughter] just on both from John If you can remind does of the cost saves or that that we would expect in the in the one Q 21 run rate [laughter] persons.
For Q 20, where you where are you in Threeq 20.
From from that integration.
And then and then on the revenue side between units.
A big initiative of this has been potential revenue synergies and Sean you talked about yard value curve.
Any way to kind of size you know what potential increase in interest rate volumes do you think you might be able to.
To to get you know over the next say you're from happiness relative value capability launched.
Yeah sure. Thanks, I'll take the first part and then tell us to show and on on the revenue.
A question Yeah. We're we're very pleased with the progress, we're making with the integrating of the business Oh, the glow back and our synergy capture.
As a reminder, we over achieved our run rate synergy capture last year, when we targeted $50 million and achieve 64 million were on track with the migration you know with the I'm sorry, we're on track.
With ER with the achievement of our expense synergies a we are targeting a $110 million run rate synergies by the end of 2020, So a $46 million increase in our run rate synergies and also as we mentioned previously we anticipate exceeding our two.
2020 realized synergies.
From an anticipated 15 million to 25 billion. So ended the year last year at 64 and the year. This year at 100 intends to a $46 million increase in terms of what we realized in our income statement or we targeted 15 million, we're going to achieve 25.
<unk> million Oh, so I'm real pleased with that and it's been an entire company effort and with that I'll turn it over to Sean to talk about the revenue side [noise].
Hi, Thanks, very much in terms of the revenues I'm not going to give any specific guidance in regards to revenue, but I'm very excited about several different initiatives that we have available to us with you know the migration of the catchmark over to buybacks as well as.
Combining the advantages of having both the derivatives and cash markets under one roof. You know we are making several adjustments to the offering first of all we got that new technology, greater determinism and new trade types that will be available on that new technology, which we're very excited about where we're going to be offering new analytical tools.
Which will show the benefits of trading both catchmarks and derivatives markets and we're adjusting some of the existing products in order to make them more attractive all in regards to create greater efficiencies at the same time. We're also working close to the DC DTCC in order to bring to the market further.
Down the road Inc. increased or enhanced.
Portfolio Margining were cross margining between features and cash products I've already spoken about the new trade type arbitrary type that we will be launching shortly after we migrate to globex. So we are very excited about that I did mention earlier.
As well we were launching next week, a new analytical tool that will allow participants on the MBS analytics more quantitative analytics.
To have synchronized cash and futures data for the foreign exchange market.
Showing top of book depth of book.
And really guiding participants as to the best of liquidity pool to use or a you know in regards to executing or whatever they need to execute in whatever size they need to execute in whatever currency. They need to execute we're very excited about that the E V. S. Quanta analytics just.
For background has about 600 users globally I'm asking about 300 users a log on each and every day. These are regional banks across the U.S., but uptick Europe and Asia and just for the first time will allow them to see the value quantitatively of using.
Both sets of products in their risk management. So we're very excited about that in terms of our crops itself. We.
We will be you know next year launching similar analytics for the for the Treasury market. I'll also maybe you mentioned two additional things that we will be we will be doing we're going be long the minimum price increments on the three year notes.
In the first quarter as you know that had a significant positive impact on to your notes when we did it both on the cash platform as well as all the features platform.
Now almost two years ago.
Or so so again you know, we're just existing products well initiate new trade types are offering new analytics and new technology I mentioned earlier that we are in the process of rolling out something called Tdm to it out over a quote driven markets too, though for the E. B S platform you put in particular for extra.
This will make it a state of the art direct trading platform and you know we do plan next year on rolling that out as well for for U.S. treasuries. So yeah, we're very excited oh across each of the different initiatives that Weve got up a union plan I guess I'd say to the next.
Three months, but also the next 12 months.
And just to be more precise and timing to the the timing of the cut over to on the platform integration in the fourth quarter and then the timing of the RV curve launch in one Q.
Yeah, the the RV will be available as soon as it's on the global platform, but we'll probably do a significant launch in Q1.
And just the timing of the of the cut over is that November December.
We are doing a Europe in November and the U.S. in December got it that's what's currently plan yes.
Perfect. Thank you so much.
Good color.
That's right and go in kind of give you a little reference on the other part a of the.
Yeah. So in Q3, just to give you guys a little bit of an update you know it was another quarter, where we completed more than 500 cross introductions and so that has put us over that thousand cross introduction mark for the year.
You know FX is it continues to be the franchise kind of front and center on that it's been interest rates. You know is it a second there, but what I wanted to talk a little bit about how as we've been able to now convert many of those cross introductions into sales opportunities at a 150, new sales opportunities in our pipeline.
And also realizing some sales wins from that and so that's when we actually see and have Ah you know proof that our clients have started to train those new products and services systems can you give specific examples to your question is we've been able to bring a repo trading data those are legacy broker tech clients on.
Do I see any direct platform and they are they are beginning to trade our listed interest rate futures and options franchise. Another relevant example is cross selling across a number of customers that were legacy broker tech clients I in introducing them to so for futures and so these are the types of things that we can do as a combined sales organization.
In conjunction with the technology changes and migrations that are happening behind the scenes that we believe will be fruitful and continuing to bring new revenue went to the exchange <unk> that business is helpful. Thank you.
Thanks, Brad sure I prefer.
Thank you. Our next question comes from Mike Carrier with Bank of America.
Hi, good morning, they stay in the question given just the muted backdrop British Green energy complex at the fed on hold and the cobot situation. Just curious if you're starting to see more interest in certain categories. Given some hints of inflation and then based on past periods, what maybe some of the early sign to see demand picking up.
Thanks.
John are there yeah.
Yeah, I know you.
Hang on to talk about how much you're go first and then I'm going to make a comment or two of them. We'll give it to you yeah. So just to be clear like you're looking for kind of catalyst the demand side of the equation in some of these markets.
Yeah, and mostly I mean, we've seen the pressure would depend on hold but I'm, just saying you kind of see some into inflation and how that could potentially yeah, maybe spur more activity, whether it's on interest rates or energy I'm, just because you know those are typically correlated.
Yeah, So I think they're probably pick up on two pieces that I mean, maybe I start on the Ah what we've seen in the metal side I know the gold market has been you know probably one of our fastest growing markets. This year. If you actually look at the growth of that product that's been global it's actually been largely driven by the growth that we've seen out of Asia as well and that's been both a function of gold and precious metal demand I you'd be in a store of value certainly.
In times of uncertainty inflation times go directly back to the comments that we've heard from the fattest that opens the door to inflation, we've seen that pushed both up through 2000 and has many global demand story for us if you see it from the materials. We put forward on the summary sheet, you'll see a range of of records that were hit over the course of the quarter in fact in a in a very quiet Q3.
Three we set a series of all time records and precious metals led by both gold and silver. So we've seen a significant increase in demand on that side of equation as prices have gone up and that's been a strong participation across commercial buyside retail and our sell side customers as well what really excited about is the the resulting.
From that as we have seen more focus on precious metals, just about 11 months ago, we rolled out through the clearing house a system by which we allow customers to bring forward the collateral.
Warrants in post those as collateral for the clearinghouse and why that's important is because on the less than 11 months, Mike we've seen $3 billion of capital efficiencies brought forward for our card members whereby they can use a golden warrants, which typically set of data assets on balance sheets of banks to be used to actually bring forward and.
From quarter four to make credit available in all of our asset classes. So as we talk about being one of the things we're doing in light of creating a monetizable a set of assets for a customers providing $3 billion of of effective liquidity for our customers to be used across all of our asset classes. When it gets really strong story there another way in which we're focused on the client then.
If it's an uncertain market, where we're seeing growth in different parts of the franchise, so with that I'll turn it over to Sean or backup care before we go to trial, Mike. Let me just make couple of comments about the rates business because I do think they are important and I think a lot of us forget because of the policies that have gone on over the last seven eight months. During this pandemic, but if you look back just a year or so ago, we had a 10 year trading.
Over 3% on the yield the markets have moved dramatically during this pandemic and I think people lose sight of how quickly things can change I'm, not saying, they're going up but I think you have to look at a few of the catalysts that are in front of US one of the catalysts that I see in front of us and I'm not predicting markets, but I will tell you is a possibility of this when we're looking at November 30.
No we do not have a president elect come November 3rd for a projected period of time the government still needs to go through his processes of auctions and things of that of treasuries. The question will be what multiple people be willing to pay for those auctions not knowing what the makeup of our government could potentially look like so you could see some a lot of uncertainty.
Well in the marketplace I'm, not just reflecting on the price of a equities I'm looking at how people perceive the price of debt coming out around from around the world out of the United States. If we go into those contested election process.
You know the tenures trading roughly another yield on the 10 years roughly three quarters were presented today and it's always down you know dramatically just over 14 16 months ago. So I do think on IRET story. There is something here that people need to be cautious about and I'm not predicting that it's going to change dramatically, but I do think the risk factors.
In a market that could make it swings. So those are the things that I'm looking at and we are managing from a business perspective.
All right great. Thanks, a lot Terry maybe I'll.
Terry do you want me to jump and maybe some green shoots I'm, saying.
Hi, good real quick.
Yes. So you know I think we already know a massive increase in treasury issuance. This year by the U.S. treasury relative to the increased funding needs in the three trillion.
Absent this year record all time record deficit all time records debt.
And we're in approaching all time record debt to GDP. So so massive increases in terms of the federal reserve and its longer term intent to increase inflation.
We are starting to see green shoots further out the curve. So specifically to your question. If you look at the month of October because at the year over year growth month to date on the Ultra tenure is actually up 3% in terms of its average daily volume. The bond futures are up 10% in terms of their average daily volume and the ultra bond is up 20.
The percent in terms of its average daily volume. So we are starting to see as we would expect further out the curve increases in activity relative to this environment that should overtime be down the curve. Thanks.
Thanks, John.
Thanks, Mike hopefully that was helpful.
Thank you. Our next question comes from Chris Allen with Compass point.
Good morning, guys I wanted to revisit a expenses specifically the guidance for fourth quarter.
Well, it's been a 40 million Williams.
Well, you Im sorry, plus about 40 minutes sequential increase in the fourth quarter.
Normally you see a bump in marketing and other below that's driven by your conference, which is not occurring Sims any granularity around the an increase and then on the build out of data center and trading platforms, just kind of wondering what's onetime in nature or what's going to be in into the run rate for next year and how much of that is gonna be offset by some of the savings.
As you shut down some of the broker brokerage I believe yes overtime.
Sure. Chris This is John I'll jump in on that yeah. So as I mentioned previously you know what we what we've seen is a you know a push out of our marketing spend up from the first two quarters and in part of the third quarter into the back half of the third call.
Order in into the fourth quarter and some of that marketing spend is contractual in nature.
So you are correct that there are our customer facing events that we normally have in the fourth quarter have you know have been postponed some of Oh, but some of that are you know spend a that we have in marketing is contractual and and as you know got pushed into the later half.
The year I'm also you know as we migrate onto glow backs and as we build out our data center.
We are expecting you know that goes into work in process and then when it gets turned on it goes into depreciation. So you know where you're going to see the increase in spend relative to those those items are in depreciation in our technology expense as we have to pay maintenance.
On on on some of the third party software and on the equipment, So that's where you're going to see the costs go.
Go up into next year now what comes out is going to be the synergies that we have targeted offer 2021, and we've got the majority of the synergies in terms of run rate synergies.
Impacting or next year or so are we expect to end the year at with run rate synergies of 110 million a and we expect to end next year with $200 million in run rate synergies. So our cost base would go down by that an additional 90 million.
Now the amount that we would realize in 2021, we're still in the process of determining through our budgeting process, but you know we have a very as Terry indicated a very strong focus on our expenses going into next year and we'll be looking to accelerate synergy capture you know where we can.
And in 2021, so that that's what you should expect Chris.
Just a quick follow up I mean, how much do you usually see from promotions and raises in terms of impacting the top line.
In terms of if you take a look at our.
If you take a look at our employees that we have now and the amount of employees that have been notified that they will not be a they'll be leaving by the end of the year I would expect that to be in the range of $20 million to $25 million of increased cost that we are avoiding.
Next year.
Thanks, Chris.
Okay.
Thank you. Our next question comes from Alan <unk> with Oppenheimer.
Thank you good morning, and thank you for taking my question.
Could you please comment a bit on your conversation with your clients about the ball Q futures.
He sandy demand for Audra derivatives products, a long walk you in the future and then quickly on the sales force. The client engagement has increased quite dramatically what does it take to monetize that engagement and dry hot or it can be interested in trading volume. Thank you.
So and started up and let me just comment real quickly on the valve futures that contract was just listed in partnership with NASDAQ. We are excited by that or potential that contract, but I think it's very early in a launch to try to predict how the success of that contract is gonna be we've all been around a long time and we've seen.
How long certain contracts take to nurture and again timing is a big component of anything that you're doing this business.
So it's really hard for us to draw any conclusions around the ball futures, Sean can give you a little bit more color. If you want but I know, there's quite a bit of interest from clients on both sides buy and sell side around that product and how they can use it to offset or mitigate some of the efficiencies as it relates to some of our other products in the equity space.
So that is one of the benefits that we have here with our suite of equity products today to potentially get more savings of the open interest starts to build but until then it's really hard to draw a conclusion on on that product. Just you had in the second part of your question was what.
Well it wasn't about the sales force I think your client engagement has increased by over 100% or what does it take to monetize that engagement and drive higher open interest and trading.
Yeah, and we won't we'll we'll we've answered the ball question George Let's just talk about the sales force.
Yes, we thank you for the question on we've we've had a busy Q3 as you mentioned a client engagement was up about 145% versus the same period last year and so you know what were seen previous to other quarters and we've still been in this work from home environment is that that activity is being driven by increased claim.
Calls emails these virtual meetings, the cross selling reduction that I talked about earlier, what we've been quite busy on in Q3 is actually supporting all Q and a number of other new products and so we've executed a number of high profile sales campaigns or the micro in many options launched a three year term.
I agree its Brazilian soybean as well as we've had you know hundreds of client calls to prepare for the successful you know silver basis swap option auction that we had earlier this month.
Well you know I think in terms of monetizing that you know clients continue to point out to US just the attentiveness responsiveness that the team has shown throughout this environment and a lot of these ongoing initiatives are there to deliver you know not just innovative new products, but also efficiencies and you know the other now.
But I'd just point to is is you know this is an environment where people are on you know capital constrained and so when you look at what we've been able to deliver for our clients in terms of portfolio a portfolio margining of swaps and futures.
Today already in 2020, we've saved our clients $5.4 billion on average and that's up from 4.5 last year and so as we continue to deliver those efficiencies and help them manage their risk and we believe that's going to be quite helpful in helping them and us navigate this uncertainty.
That's helpful. Thank you very much.
Thank you. Our next question comes from Alex Blostein with Goldman Sachs.
Hey, everybody. Good morning. Thanks for the question I was hoping we could talk a little bit about dynamics in the W. CCI markets and recently softer oil trends and wouldn't really I'm trying to get to I guess, how much of that is related you think to sort of lower volatility, which is obviously outside of your control versus maybe some of the lower production, we're seeing in the U.S.
Any way to kind of help us frame volumes kind of directly related to U.S. producers and bigger picture.
If we if we get a blue sweep election and that results in any sort of incremental curbs on U.S.O. production, how does that index gimi franchise I understand the difficulties that are putting numbers around that but just a framework of kind of how oil production translates to oil volumes to see me would be helpful. Thanks.
Hey, Alex if they're a great question you know when you look at what's going on in all market effectively for the last four and half months, what we've been looking at is the market finding a short term equilibrium between supply and demand in August we saw prices drift higher kind of a 41 40 to 43 level. There you know the agreed OPEC cuts you saw a decline in oil stocks in Cushing and coal.
We actually had a weakening dollar now counteracting that is the fact that we still have not come out of the demand destruction mode. We've been in with kind of it whether you look at the metric of miles driven if you look at jet fuel demand I mean, it's still down 75%, you're just not seeing a return to normal economic activity you've seen her own activity. We're not globally traveling I think we're probably representative.
Lot of firms out there so that the smaller fixed you've been saying that that would put pressure upwards are being offset by the demand side of the equation. So you're effectively looking at a market there's trading in the $4 band I'm talking about global crude. This is George W.T.I., it's true of brands disrupt lower than in the Middle East we're talking about roughly a four dollar trading range, we gotta flat forward curve and I get it.
$2 spread in a stable spread between W. Ti and Brent right. Now. So these are impacts I think it was the point of your question is if you look at the impact of the global demand side of the equation is equally impacting global oil. This is not a U.S. phenomenon. We are certainly down or the U.S. production I think we were down from the peak of 13 million barrels a day down to about 10 and a half 11.
We haven't necessarily seen exports trail off that much we were trailing net around threed between two and a half and 3 million barrels a day of global exports that has continued to be a demand source and a growth driver, where we're seeing domestic production on the W.T.I. side global demand for Brent has slowed across the board. So when you see that we see there.
The global impact across all markets. If you look at the market share from a volumes perspective, you know if you year to date or even this quarter.
We're seeing see I mean, if you look at the world of market share of C.N.E.W.T.I. plus ice Brent you know, we continue to maintain roughly 55% of that trade volume. We continue to maintain 45, 46% to open interest that's weighted average for about the last two and a half three years. So there's an equal impact across each of these businesses. So I think these are the core of the question.
It is where do we see demand to return and how would that be reflected in our volumes well one of the issues. We've seen is when markets go slowly start to trade sideways you know that the reality is we've got a superior distribution out into the financial players of the energy market, whether it's the specifics of hedge funds classified asset managers retail clients. So typically the only.
Even pull back we see a little bit of underperformance on the W.P.I. side now that we see as a temporary situation. So as we resolve them demand returning we likely see it it will be a participant in an upswing in volumes globally, but I think one of the issues that we see in the energy market is natural gas.
It's been negative for the crude oil market natural gas is a market where that that's really the strength of our portfolio. If you look at this business not only is it up this is a high for our PC business that we have that's $1.15 RPC and future. It's $1.50 seat 52, RPC on the options side and actually look at the Henry hub market share of this business our volume years.
Today or Henry hub futures are this business is up 26% our options business is a 56% and why this is important it continues to highlight the global nature of Henry hub as a global benchmark and that's shown by the fact that our over the course of this year, our non U.S. volume participation. The Henry hub was up 82%.
116% growth in Asian hours over Henry hub, <unk> futures market and our European business is up 69%. So within the energy complex as a whole we're trading sideways in crude we're seeing significant growth in the higher RPC Nat gas business and so we're likely to see that continue and finishing and I'll turn it over to Terry from a Reg side.
So you might see some unknown pressure relative to the fossil fuels business. If you look at the role that natural gas has to play as a clean energy and alternative we see that continuing to grow. So we think we're a good position there given the fact that we own 82% of that market with that I'll turn it over to Terry So let me kind of what a couple of things, especially when it comes to a potential blue sweep because I find this.
Quite interesting.
On the production side.
Let's do a little quick history, remember, who lifted the ban on the oil export business. It was President Barack Obama administration that was just a one off administration ago that did that a Democratic administration, who was very supportive of making sure that you wouldn't I'd States of America being oil exports.
So the rhetoric around politics today, which is always associated around green. This is a great topic and as you can see the democratic nominees, having a little bit of trouble with some of his past comments versus his current comments as it relates to fracking on some of the eastern Seaboard state so that.
That that doesn't surprise me a bit I think what you'll see is I'm looking for more low hanging fruit when I say that taxes are low hanging fruit now I'm, not saying, it's going to be corporate or personal or both but that won't be low hanging fruit that I think that a prior I blew sleep administration, we will try to address trying to address production.
On the energy at the Obama administration, just supported the first time in the history of this country to lift a ban on exporting of oil seems to be a bit of a stretch and I'm assuming some of the Republican colleagues will remind or Democratic friends about who did this and why it's important to the sanctity in safety in the United States of America, now that could change as Washington.
Always does so I wouldn't put too much stock into that either but I really believe a lot of this is political rhetoric right now it's kind of things are difficult to get done we've only seen three major pieces of legislation in the last 19 years and these days. So we had sarbanes Oxley, we had Dodd Frank and we had then president <unk>.
Yeah, Yeah, that's it everything else as you know continuing resolution. So I think this will be difficult at best and even the oil lifting of the ban was done through a continuing resolution build to keep the government open. So you can see how there will be plenty of animal for people, who want to support energy production in the United States.
To have arguments against or Democratic colleagues that doesn't mean that some of the U.S.G. use and other things that Julie referenced are still going to be front and center and people are going to be doing things, but in the short term I think it'd be very difficult on.
Destroying the production of oil here in the United States until we have a viable alternative that the rest of US can you you can have 2% of the automobiles be electric and the rest of us don't have the ability to get them. So I think it's quite fascinating with the conversation on politics, but I wouldn't bank on that for the next 12 to 24 months.
Great. Thank you very much.
Thank you thanks.
Thank you. Our next question comes from Ken Worthington with JP Morgan.
Hi, Good morning. Thank you for taking my questions on the Democrats are proposing changes to the tax code, including the doubling of the dividend tax rate for the wealthy which according to the federal reserve on about 50% of stocks and mutual funds in the U.S., where the dividend tax to be doubled as proposed how would that impact.
Your thinking on the payout of nearly all your excess cash to shareholders in the form of a dividend and does your capital management strategy make as much sense in a much higher dividend tax environment, and then I guess related in 2012, you brought the payment of your annual recurring dividend to the fourth quarter when they.
There were concerns over changes to the tax king if the tax outlook changes. After elections next week would you again consider pulling forward that payment into the fourth quarter.
So kind of started out very you know obviously out of your question very speculative in nature, because no one knows but on the potential of people trying to tax dividends I really believe as I said in my prior comments I think they will look for other ways to get tax incentives. When you look at dividend paying companies use their stocks that are traditionally held by the base of people who voted.
These people into office. These are not the high flying stocks or the five or six frame stocks or others that they might be potentially thinking they're going to get a massive revenue off of I think it would be very difficult to to take a proposal on doubling a tax dividend going forward I just I, just don't see that I could again it wouldn't.
Be very surprising to do so that being said.
Our return capital return policy will be flexible enough to make certain that we can return capital to shareholders in the most tax efficient way that benefits the bottom line of that of the older. So you know we've talked about share repurchase programs over the years I'm not suggesting that we're going down that path right now we don't even have one in place.
It doesn't mean, we can't it doesn't mean, we can't do a lot of other things and how we return capital, but we will not look at returning capital at the most highest tax profile.
Dividend on dividends, possibly going out there so but again I think that is a very.
[noise] difficult proposal for the Democrats in order to raise those kind of taxes on dividends I, just don't see it happen because it won't affect the companies that are trying to effect.
Okay, great. Thank you.
Thank you.
Your next question comes from Simon clinch with Atlantic Equities.
Hi, guys. Thanks for taking my question.
I was wondering if you could just flesh out with the collateral savings that's Oh, Fuck <unk> really and I think it is that you saved your clients. This year could you give us a sense of how your clients redeploy that capital how that might have happened historically and how you expect that going forwards in terms of spreading that across yeah.
Into other areas of your business.
Okay. Thank.
Thank you for that Simon I'll ask maybe Sean and then Julie to comment a little bit and John also things like John will talk about that.
Sure he is difficult to quantify exactly how much gets redeployed into our marketplace, but.
But we certainly do see it as me against a much more attractive platform relative to alternatives and one of the things actually we're very excited about it. We're starting this week is we're starting to test portfolio margining, all eurodollar options against interest rate swaps is going to be a new portfolio margining opportunity new facility.
That we're very excited about in addition to the current portfolio margining between interest rate.
Oh, Yeah, sorry, yeah interest rate futures and and in straight swaps. So we have seen a huge growth they take enormous growth in both the amount saved as well as or the number of participants taking advantage of it and we do see when we offer a new portfolio marketing opportunities.
We're a relative growth to other platforms tends to increase this is not the only area, where we are looking at efficiencies. So we've also for example, a little over a year ago, we introduced.
Question.
Yeah I would.
Listed equity options business, we're very excited to say that Weve run 27 compression runs.
Since we started it I was a little over a year ago, and you know weve reduced the number of contracts outstanding which increases efficiencies for our customers by 8.3 million. So we're constantly looking at creating new efficiencies core customers, whether its the equity business the rates business well actually.
Maybe you mentioned on the foreign exchange business one of things we've done over the last year is massively reduce the cost aboard minimum pricing comments you know.
Foreign exchange futures, we've also lowered them in the goals for foreign exchange features this saves participants cost in terms of when they execute the roles and when they trade or futures. We're very excited to say that recently, we saw all time open interest record Euro U.S.
Futures, we saw an old time, no record of loans held like asset managers. According to the CDC in our FX futures.
And we're excited to see the growth in the products and the good news there products from the greater efficiency. So those are some examples.
We're [noise], where when we provide these efficiencies we do see growth.
It's been hard to exactly quantify the portfolio marching and its impacts on revenue I don't know Julie do you want to jump in.
So on that point I think what it's really hard to do it's hard for us to quantify for sure, but what we have seen historically on the multiple billions that Julie referenced earlier actually it's a little bit north of the 5.4 billion because there's other part into swaps market that is achieved benefits as well.
We have traditionally seen them deploy a lot of that capital and managing risk into a whole breadth of asset classes that we have heard see I mean I'm not again, that's a historical perspective, but it's really hard for us to quantify on a day to day basis, how they're deploying that capital, but that's what it historically we've seen.
Great. Thanks, and I was wondering if I could follow up with one question just more housekeeping one but in terms of I'm looking at the revenue per contract flow across your different segments, I think pretty much would've been picked up on a sequential basis and I know that ultimately can partner I was wondering if you could help me think about.
How to think about the revenue per contract.
Going forward, particularly for things like the interest rates.
As they shift towards that as longer term contracts and and and in those areas, where you've got the unity. Mike are you. Many features which are sort of skewing excuse me well.
Yeah. Thanks, John before John does it you want to censor kind of good okay, John but yes. Thank you Simon great. Great question. So you know.
I mean, what you see in our rate per contract really is a mix issues are the face rates. You don't know generally go down. So it's really you know a mix of products a mix of customers you know a mix of bad news as Theres more.
A couple of different mixes that happened and you know what's great about our business is that we've got an enormous number of products. Many different customer types and you know as as market shift and change different products are used and different customers utilize those products that that's what you see today.
Really in our rate per contract they tend to all be mix related so.
In terms of your two specific questions when you look at.
He on long into the curve versus the short end of the curve you know generally speaking the short end of the curve or the euro dollars tend to be about 14% lower than the average for the interest rates and treasuries tend to be you know about the same higher than average a in the.
The interest rate quadrant, so or asset class. So so that's the so that's kind of the mix. There. So you know a heavier higher RPC on the longer and.
Last on on the on the shorter end up in terms of the Micros you know the micros had been you know tremendously successful across you know primarily across our equity.
Our equity asset class in our metals asset class in terms of our equities you know sequentially. They grew to almost 2 million contracts a day for the quarter and represented about 36% of the total equity volume in Q3 compared to about 34% in Q2.
And also the RPC from Micros increased from 12, and a half cents in Q2 to 13.2 cents in Q3.
So in terms of act in terms equities in particular in addition to the performance of the Micros. We also saw higher proportion of member trading activity as well as a lower proportion of X couldn't be ticked trading activity, which has a higher RPC I do want to hit on something that Sean touched on a you know a before and that's the impact.
Acts that we're seeing on the NASDAQ.
You know trading and really that's really helped our RPC and and equities as the NASDAQ trading was up about 24% sequentially, which and they have a the NASA contract has a higher a blended RPC is an average so a couple of other points on RBC is released.
The equities.
As I mentioned, the Micros RPC increased 13.2 cents in Q3, and that's up from 7.8 setting up from Q3 last year and if you take a look at the equities, excluding the micros debt increased to 74.9 cents in Q3 versus 71.2 cents.
Same quarter last year, so both the micros and the mini Rpcs increase.
Compared to last year. So you know again, it's it's a it's a it's a mixed story.
In metals, you're also seeing something similar in terms of the RPC the metals as well you know it was our best performing asset class sequentially for CMV group, It's up 59% sequentially. You know a key factor you know when you take a look at the <unk> RPC, a you know get which made modeling.
Difficult you know for you know for that for you analyst and that was the increase in the micro activity. The micros you know again been very successful in a in metals and are approaching a 160000 contracts a day and it was up over 110% sequentially. So micros accounted for about nine.
18% of the total volume this quarter versus 14% in Q2, and the micro gold RPC for the quarter is approximately 32 cents and that's up from 27 cents in Q3 last year. So you know that's a you know a.
Big impact relative to you know a mix shifts and in battles, but im very very pleased with our micros been very successful and you know again to your point on the on the Rpcs. It's really it's really a mix makes stories.
Thanks, Don Thank you [laughter].
Thank you our final question comes from Kyle Voigt with KBW.
Hey, Thanks for squeezing me in at the end here just a just a question on pricing really quick I know you've made a number of pricing adjustments over the past several years and the teachers business.
But I also think in the past you've stated that typically these pricing adjustments come during periods of volume girls.
Just given the volume headwinds you're facing this year I'm, just wondering how you're thinking about pricing for futures more broadly and whether you still see the potential for pricing increases or adjustments in certain products as we head into next year.
You know it it kind of hysteria knowledge on comment as well, obviously, you're correct. We try to make sure that we have a value added proposition anytime we use any type of tier changes our pricing changes associated with our business that does not prohibit us from other parts of our business that are going to take.
Take advantage of a price increase.
Increases that being said, we will be very mindful of the the overall situation and we will you know we always.
Take pricing into effect.
With many factors whether its fundamentals in the marketplace not only here in United States, but globally, but we will be a very steadfast as it relates to our pricing and how we feel it was appropriate going forward. It's challenging as it always is I'm not going to lie to you, saying that pricing is easy to take advantage of but at the same time I.
Then always with the mindset and I've said this historically that we need to bring a value I'd say just to my clients, we need to bring a value added proposal when we bring in pricing changes and I think when you look at what's going on with the broker tech integration into P.B.S. to follow. These are these are all.
Pricing. These are all things that are enhancing the experience for the client. So we will cross that bridge when we get to it and but we we won four gold them, but at the same time I'm. There are many factors are going to have John one comment yes, just a couple of quick points territories theories right. I mean, we we we take a lot of time and put a lot of.
Thought into our pricing plans you know first you know we're going through the budgeting process now and that's a you know a time when we really take a you know again another hard look at our pricing, but you know really was absolutely critical is we want to have as much velocity going across the platform 24 hours a day that increased liquidity.
He is beneficial for us obviously, because you know we are money for it but also that liquidity is very valuable to our customers to Terry's point. So you know it tightens that bid ask spread it makes our offering that much more attractive. So you know we're very care.
So when we pull the pricing lover, we take a look at things on multiple dimensions to make sure that you know we create a really good and robust marketplace offer our clients and really with the I have on you know not impacting and enhancing our liquidity.
Thank you very much.
Just to add on to that and I don't want to belabor. It but you know were in Oh to seven or eight months of the strangest <unk> time in the history of our country of our world. So to try to put up a pricing strategy that makes sense during normal times are a little bit difficult. So as we continue to get on the back side of this will continue to evolve and hopefully our well what's going to change.
Change and the way our business goes.
[laughter].
Thanks Kyle.
Thank you that's all the time, we have for today I'll now turn the call back over for closing remarks.
We thank you all very much for taking time out today to go to your questions. We appreciate it please stay safe and healthy and we look forward to talking to them.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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