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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Intercontinental Exchange Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Warren Gardiner, Vice President of Investor Relations. Please go ahead.
Good morning. ICE's third quarter 2018 earnings release and presentation can be found in the Investors section of the theice.com. These items will be archived, and our call will be available for replay.
Today's call may contain forward-looking statements. These statements which we undertake no obligation to update represent our current judgment and are subject to risks, assumptions and uncertainties. For a description of the risks that could cause our results to differ materially from those described in forward-looking statements, please refer to our 2017 Form 10-K. In our earnings supplement, we refer to certain non-GAAP measures including adjusted income, EPS, operating income, operating margin, expenses, tax rate, organic revenue and EBITDA. We believe our non-GAAP measures are more effective of our cash operations and core business performance. You'll find a reconciliation to the equivalent non-GAAP term to GAAP term in the earnings materials and explanation of why we deem this information to be meaningful; as well as how management uses these measures in our Form 10-Q.
When used on this call, net revenue refers to revenue net of transaction based expenses, and adjusted earnings refers to adjusted diluted earnings per share. Please see the explanatory notes on the second page of the earnings supplement for additional details regarding the definition of certain items. Also, with us on the call today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Ben Jackson, our President.
I'll now turn the call over to Scott.
Thanks, Warren. Good morning, everyone, and thank you for joining us today. I'll start on slide 4 with some of the key highlights from our third quarter performance. ICE's consolidated third quarter net revenues increased 5% year-over-year to $1.2 billion. Trading & Clearing net revenues were $558 million, up 7% year-over-year. Data & Listings revenues totaled $642 million, an increase versus last year of 6% on an organic constant currency basis. Adjusted operating expenses totaled $521 million for the quarter and adjusted operating margins were 57%.
I'll pause here to note that in early October we exercised our option to acquire the remaining minority stake in MERS, which will be the foundation of ICE Mortgage Services. Going forward, ICE Mortgage Services will be reported in operating results and included in our Trading & Clearing segment. With the change, other income will be roughly $6 million lower in the fourth quarter versus the third quarter. However, we now expect incremental fourth quarter revenue related to ICE Mortgage Services to be in the $17 million to $19 million range with associated expenses of $9 million to $10 million on top of our prior expense guidance.
Continuing with the third quarter highlights, our adjusted tax rate was 21% in the quarter reflecting clarifications around U.S. corporate tax reform and other adjustments which drove a year-to-date true-up in our tax provision. Our adjusted year-to-date tax rate is 23% and we expect the fourth quarter adjusted tax rate to be between 23% and 24%. All of these factors helped generate adjusted earnings per share of $0.85, an increase of 16% from the third quarter of 2017.
Through the first three quarters of 2018, operating cash flows have increased 23% to a record $1.7 billion. We've returned nearly 90% of that cash to shareholders through repurchases and dividends. And we continue to expect to deliver a record $1.7 billion to shareholders during 2018. Finally, please note that this morning we announced a new $2 billion buyback authorization beginning in January of 2019. This new authorization will provide us with capacity for buybacks over the next six quarters, and flexibility to act opportunistically should the need arise. And importantly, we expect to grow the dividend once again in 2019.
Now, please turn to slide 5 where I'll provide an overview of our Trading & Clearing business. Trading & Clearing revenue increased 7% year-over-year in the third quarter. While third quarter volume trends were down versus last year, improvement in our futures and options RPC mitigated that impact. More importantly, open interest continued to trend higher through the third quarter and with one day remaining in October, open interest is tracking up 7% year-over-year and is near its highest level in over five years. This growth has been driven by strength across virtually every asset class.
In oil, open interest is up 8% including WTI OI which is up 12%. For ag, open interest is up 14%. And finally, interest rate's OI is up 15% against the backdrop of continued uncertainty associated with Brexit, EU politics and further central bank action. As we have consistently said, open interest is a helpful guide for gauging the health of our markets and is proving to be a leading indicator of volume growth during volatile periods. And with the recent increase of volatility in many of our markets, you can clearly see the impact of that in the rebound in volumes during September and our strong volume growth in October.
Overall, October futures and options ADV is tracking up 32% versus the prior year. ADV in our energy complex is up 15% year-over-year, led by strength in oil as well as natural gas, which is up 19% year-over-year. Ags and metal volumes are up 48%. And in our financials complex, interest rate volumes are up 53% year-over-year, while equity derivative volume, excluding the Russell contract is up over 75%.
Now, let's move to slide 6 where I'll discuss the Data & Listings segment. Third quarter Data Services revenue grew 6% on an organic constant currency basis to $530 million. This result was consistent with our expectations entering the quarter, despite a small currency headwind and softness related to NYSE session fees within our connectivity business. As we have begun migrating customers to our new and more efficient Pillar technology, some have taken the opportunity to rationalize the number of trading session, a dynamic we expect will continue in the fourth quarter.
Within Data Services, exchange data revenues were up 5% year-over-year on an organic constant currency basis. This was driven by Futures data growth of 6%, reflecting continued interest in our Futures market, even during periods of slower volume activity as in the third quarter.
Moving to Desktops and Connectivity, revenue was up 3% on an organic constant currency basis. Desktop revenues declined versus the prior year, but stabilized sequentially. This was offset by Connectivity and Feeds revenues, which grew 4%, as the impact from the continued consolidation of our legacy network onto the ICE Global Network was mitigated by improved execution and new customer implementation and double-digit growth in our Feeds business.
Finally, Pricing and Analytics revenues, which represent half of our data revenue and nearly a quarter of our total revenue, were up 7.5% on an organic constant currency basis. As you can see on the slide, this is an acceleration from 4% in 2016, 5% in 2017 and 6% in the first half of this year.
Product innovation to meet customers' needs in an evolving market and regulatory environment continues to generate strength in our core pricing and reference data business. And importantly, ASV for pricing and analytics is tracking up nearly 8% year-over-year to start the fourth quarter, giving us confidence and a strong finish to 2018 and continued momentum entering 2019.
Next on slide 7, you'll see the solid contribution from our NYSE business thus far in 2018. Total revenues associated with the NYSE are up 6% on an organic constant currency basis this year. Improved industry volumes and market share gains have yielded trading revenue growth of 8% through the third quarter. We believe that recent technology investments such as Pillar as well as additional trading solutions such as NYSE National and NYSE American, which provide unique liquidity and listing services to small cap growth companies, enhance our position in this very competitive market.
Listings revenues on an organic constant currency basis have grown 6% in 2018. The NYSE remains the premier listing venue for global corporations raising over $25 billion in IPO proceeds year-to-date and has been the venue of choice for 23 of the last 25 IPOs over $1 billion.
And finally, continued investment in both our data and connectivity solutions has helped drive 3% growth in NYSE Data Services revenue this year. Importantly, I'll note that total NYSE revenues, coupled with the business efficiencies we've delivered since our acquisition in 2013, helped generate strong cash flows that are enabling the record shareholder returns in 2018.
In summary, October futures and options volumes in our trading business, which contribute around 30% of our total revenue, are up over 30% versus the prior year, and open interest continues to build and is up 7%. Our Pricing and Analytics revenue, which delivers nearly a quarter of our total revenue, will grow 7% this year. And ASV entering the fourth quarter is up nearly 8%. And the NYSE has grown 6% and is generating strong cash flows.
All of this has combined to allow us to return a record amount of cash to our shareholders, even as we have spent over $1 billion in additional strategic initiatives to enhance our future growth. We're on track to finish 2018 on a strong note and positioned for continued success in 2019.
I'll be happy to take your questions during Q&A, but we'll now hand the call over to Ben to provide an update on our bond strategy.
Thanks, Scott, and good morning to everyone on the call. I'll begin on slide 8.
As technology advances and the regulatory landscape evolves, fixed income market structure is transforming. Participants are increasingly looking for more efficiency and are challenging the traditional model.
With our comprehensive suite of products and services, our growing portfolio of ETF and index solutions and connectivity to over 5,000 customers through our fixed income service offerings, we are uniquely positioned to address these needs and reduce the frictions that exist across the trade lifecycle today.
The first example of this coming to life was the August announcement of our ETF primary trading initiative with BlackRock. The ETF create-redeem process is currently a disconnected workflow, sometimes taking hours, if not a full day, to complete.
Leveraging our industry-leading pricing and reference data, portfolio analytics and our execution technology, we expect to bring to market the ICE ETF Hub, a tool that will improve participant productivity and lay down a foundation for this trillion-dollar industry to continue its robust growth.
A second example has arisen this past quarter. In response to feedback from a number of large ETF sponsors and index fund managers, we launched a portfolio rebalancing service. The service is leveraging our customer network, pricing data, reference data and auction capabilities from ICE Credit Trade.
Some of the world's largest asset managers have already utilized the product, which enables them to efficiently reposition a portfolio against a changing benchmark or to quickly absorb capital flows, while limiting trade friction and tracking error, particularly when those funds are benchmarked to indices underpinned by our leading pricing and reference data.
The third and fourth examples are in response to customer demand in the growing area of electronic execution of micro and OddBot trading. These initiatives will include partnering and connecting to third party order management systems in order to streamline client workflows. Efforts are already underway with a number of providers, including Charles River and Aladdin.
Finally, as the industry gains additional comfort with electronic trading, they are looking to combine the speed, liquidity and execution quality found in our well-established streaming price or click-to-trade protocols with RFQ functionality. While the underlying technology needs are relatively simple compared to our streaming price liquidity tools, RFQ is helpful for larger trade sizes and highly illiquid instruments. So we are working to enhance our existing RFQ capabilities which already represent close to 20% of our volume, and handle over 10,000 requests per day. And we will integrate this enhanced RFQ functionality into our robust all-to-all execution platform, which logged over 800,000 trades in the third quarter of 2018. And so as we look to 2019 and beyond, we see tremendous opportunity to partner with our customers to solve real challenges across this asset class, and I look forward to updating you on our progress in the future.
Thank you, Ben. Good morning to everybody. Before I begin on slide 9, I'd like to address certain issues surrounding the U.S. equity markets. Today, the U.S. equity markets offer the most advanced trading and most transparent data services in the world, services that are critical to market efficiency, resiliency and security and why the costs to trade U.S.-listed equities is the lowest in the world. Today, price information is available equally to retail investors for little to no cost, a direct result of competitive forces across the brokerage and exchange marketplace. And in fact, we believe that the NYSE data costs to the top five Wall Street banks is less than one half of 1% of the nearly $26 billion that they've generated in their equity-related businesses just so far this year.
This is in stark contrast to the state of the equity markets only a few years ago, a state in which the exchanges were owned by many of those same banks and brokers and when access to data and information was discriminatory against those who were not the exchange owners. It was an era that many falsely romanticize. Today, the major U.S. equity exchanges are owned by the public and our for-profit status is a profits interest for the benefit of the public.
Exchange managers, like my colleagues and me, are guided by discipline imposed by free competitive transparent markets. I've really been saddened at recent industry statements suggesting a disbelief in the power of public markets to guide balanced decision-making, suggesting that notwithstanding the rapid investor response of evolution of the U.S. exchanges over the last decade as public companies such free market capitalism is somehow thought not to be in the best interest of investors and our nation.
The current rhetoric fails to acknowledge that it is competition that has caused the estimated total costs to trade for many of the New York Stock Exchange to be [over] 20% lower than a similar trade at the IEX exchange or 30% lower than some dark pools operated by Wall Street banks and brokers. It also fails to acknowledge the impact of our technology investments, which have improved cyber-security, reduced latency, and increased network capacity.
In fact, the price per unit of bandwidth on our network is estimated to be 18% lower than it was just three years ago. At the same time, the consolidated tape known as the SIP now processes an estimated 20 times the number of messages as it did just 10 years ago, and peak messages on the public options tape known as OPRA are estimated to be up five times what they were only five years ago. And market participants have been the beneficiaries of the improved technology and economies of scale that come from operating multiple exchanges.
These accomplishments were all the result of critical technology investments aimed at improving and advancing our public markets, which resulted from competitive public ownership of exchanges, not from regulatory fiat. And they're why we and the SEC are able to sit here today and unequivocally state that all Americans benefit from the most transparent and liquid capital markets in the world, a statement that I hope our regulators consider very thoughtfully before listening to those recommending that we regress to the policies and procedures from the flawed equity markets of a past era.
Let me now shift to the other entrepreneurial growth initiatives that ICE prides itself on, a strategy that has driven value creation for our investors for over a decade. Applying technology information and expertise to a mission of bringing transparency and efficiency to markets is a playbook that we have run since our inception. And we see opportunity to apply that blueprint, not only to the fixed income markets that Ben just discussed, but also in areas such as mortgages and digital assets. This summer, we completed the technology build for MERS, and in early October, we exercised our option to purchase the remaining minority stake. If you're not familiar with MERs or as it will soon be called ICE Mortgage Services, it is an electronic data repository which tracks the changes in residential mortgage servicing rights and the beneficial ownership interests in the United States. Essentially, it is the DTCC for the U.S. mortgage market. Membership spans 5,000 banks, credit unions, servicers, investors and government agencies.
And over the past 17 years, the number of loans registered has grown from 1 million to over 100 million, with over 75% of the newly originated U.S. residential loans being registered on the system. The mortgage market is now looking for efficiencies, and our goal is to help bring some of those efficiencies by electronifying parts of the mortgage workflow. Solutions such as our newly launched eNote and eVault offerings will help reduce paper costs and allow for greater oversight and control of what is a $10 trillion market.
Another opportunity for growth is to help frame out the market for digital assets. We've long studied developments in both blockchain and cryptocurrencies, and in talking with our customers we saw a need for more institutional solutions. In August, we announced the formation of Bakkt which is a new company, designed to enable institutions and consumers to buy, sell, store and spend digital assets on a seamless platform. Bakkt is led by CEO, Kelly Loeffler, who many of you know from her past leadership roles at ICE, and includes a group of premiere partners including BCG, Starbucks, Microsoft and others.
In its first phase, Bakkt will work with ICE's markets and clearing to deliver institutional-grade risk management, physical delivery and warehouse solutions that do not exist today. We're approaching this with a great deal of transparency and we've already gained approval from our Clearing House Risk Committee at ICE clear US. The digital asset risks will be in a segregated waterfall where the separate guaranteed fund is provided by Bakkt instead of the clearing members and we've set up the workflow in a manner in which bank and brokerage members do not have to take possession of crypto assets but are still able to serve their customers in this space. This type of infrastructure is critical to the growth and development of the nascent $200 billion asset class and for it to responsibly continue to innovate over time.
This month, we announced that Adam White will be joining back as its Chief Operating Officer. Adam was one of the first employees at Coinbase and most recently served as their head of institutional markets. And in December, pending CFTC approvals, Bakkt plans to launch its first product, a daily physically-delivered Bitcoin future and a warehouse for storage that leverages the ICE technology and security infrastructure.
Now, if you turn to slide 10, you'll see that uncovering these opportunities and executing on our strategy is why we've grown revenue and earnings for 12 consecutive years. And we lay the foundation for continued growth in the near term as evidenced by our year-to-date results. In the medium term with opportunities such as our new fixed income and ICE Mortgage Services products, and over the longer term with initiatives such as the FinTech innovation at Bakkt.
I'd like to conclude my remarks by thanking our customers for their business and for their trust in the third quarter, and I want to thank my colleagues for their efforts that contributed to another very strong quarter for ICE.
I'll now turn the call back to Carrie, our moderator, to conduct the question-and-answer session which will last until 9:30 AM Eastern Time.
Thank you. We will now begin the question-and-answer session. The first question will come from Rich Repetto of Sandler O'Neill. Please go ahead.
Yeah, good morning, Jeff, and good morning, Scott. And first, thanks for the comments on the U.S. equity markets. It seems like there's a lot of distortion and thanks for the information on slide 7 because I think there's been a lot of extremely uninformed information out there on the exchange licenses.
But anyway, let me just change the subject and go do something that's a little bit more optimistic on the fixed income side. I guess, Ben, you are looking at now – you've added the RFQ sort of model. And I was just trying to see what was the driver. Is this a recognition that RFQ is in place to stay? Or was it just – or that it will hold a certain portion of the electronic fixed income market? Or was it just because it's so easy to add to your capabilities right now?
Great question, and thanks, Rich. If you take just a quick step back, I think, at present, the market doesn't fully appreciate the comprehensive suite of services that we're providing to our customers across fixed income. But I'm pleased to say that our customers are starting to realize it. And that's why they're coming to us for solutions like the ETF hub that we've announced with BlackRock and that we've reached out to the industry, and we're getting fantastic response on that. We have the portfolio rebalancing service that we just launched this past quarter and have a large asset manager already utilizing it right out of the gate.
But when you look at it, our strategy of connecting, integrating, and investing in market-leading assets across the fixed income landscape really helps our customers solve comprehensive problems that they're dealing with and inefficiencies that they're dealing with in fixed income, and it starts with pre and post-trade analytics. You have our golden record of reference data for bond terms and conditions. We are the trusted source for pricing, both end-of-day on millions of instruments as well as intraday. Our index and ETF expertise that started with NYSE and was bolstered significantly in fixed income through the Bank of America Merrill Lynch Index acquisition.
And now with our execution venues, the ability for us to provide the choice of executing, whether it's via the efficiency of streaming protocols in highly liquid instruments or for relatively illiquid instruments, where RFQ may be the best option to get that price, or robust auction capabilities. What we're looking to do is to provide as much choice as possible for our customers to execute.
And the reality is – and you hit it – is that RFQ is pretty easy to build. When you're building a streaming service, which is where these platforms such as BondPoint and TMC came from, you have to have the ability to handle – BondPoint, for example, handles 100 million price updates a day. That's substantial. You're dealing with streaming prices, where on BondPoint, 10,000 securities. If you go onto their screen, you can execute a single trade of 250 bonds on both sides.
So you have this robust streaming protocol that's out there that people are choosing and is growing for us. But we felt that. And these platforms have already had an established RFQ mechanism. And we wanted to continue to provide that choice where the market so chooses.
The next question will come from Ken Worthington with JPMorgan. Please go ahead.
Hi. Good morning. In terms of connectivity, it seems like the SEC focus on data could easily evolve to a more meaningful conversation about connectivity. Could you help us frame the part of your Desktop and Connectivity segment that could or does fall under the Exchange Act of 1934 or Reg NMS? And particularly the portion of your connectivity business, where your critics could suggest you're discriminating against access for trading?
Yeah, Ken. It's Scott. So our connectivity business, as we've said, is a single business that runs across the ICE Global Network. And so we report it as a single thing because it is a single thing.
And we have customers who connect to us to trade at the NYSE. We have customers who connect to us to consume our data. We have customers who connect to us to trade in our futures markets.
And so we look at it as a single business, if you will, and report it accordingly. And don't really see a need to break it down any further, particularly in a world where it was fairly clear in the remit from the SEC that they didn't challenge whether or not the prices were fair. They simply said, bring us more detail.
And so we don't look at it as a business under threat or under pressure. We look at it simply as a business that may require us to provide a bit more information in the future. And one, I'll point out, that continues to see capacity growth. Our capacity growth on a year-to-date basis is up 12%. Jeff mentioned the cost per unit of capacity is coming down significantly, but the business overall continues to grow. So we run it as a single thing. We report it as a single thing. And that's what we'll continue to do.
Thank you.
The next question will come from Michael Carrier of Bank of America. Please go ahead.
Thanks, guys. Hey, Scott, maybe first one. Just on the volume backdrop. Obviously, October's been strong. You didn't give any update on the expense side. But just wanted to get your sense if we're in this environment and this – maybe not the October levels, but we're in a better volume backdrop over the next few quarters and into 2019.
Like how should we be thinking about the incremental margin from the transaction part of the business? Just because it hasn't been the big driver of the growth. So I just wanted to get maybe an update on what it could mean for the margin.
It's a great question. For a part of our business that even though it's half our revenue, people seem to forget about.
We've noted that over the last year, open interest has built and built and built and pointed people to – when volatility hits, volumes will be there. And directly to your question, why that's so powerful is because there is very little to no incremental expense that comes with that volume growth. And so the incremental margins are high.
And so our expectation, as you've seen historically, is that as we deliver volume growth over 30% in October and as that runs through the rest of the fourth quarter – noting that it's the typical holiday quarter, and so you'll see some seasonal slowdown – that tremendous volume growth, that's based on really continued open interest growth, delivers with it high incremental margins.
And so the expense growth that you'll see moving forward, as you said, we didn't update guidance because nothing really changed, other than we'll add $9 million to $10 million related to MERS, more than offset by $18 million to $20 million of revenue. But with regards to that Trading & Clearing business, as the volumes grow, the incremental margins are high, the overall margins will expand, and it really doesn't drive expense growth.
The next question will come from Chris Allen of Compass Point. Please go ahead.
Morning, guys. I just wanted to follow up on the fixed income side. Obviously, developing RFQ. You're looking to get bigger in the institutional side. Last quarter you gave us some color just in terms of the size of the executions done on BondPoint. Wondering if you can give us a follow-up on that? And then maybe speak to the impact on TMC as some of the largest wealth managers are now to trade the platform and any incremental impact they've had there?
Yeah, so similar to – thanks for the question, Chris. Similar to the response I gave to Rich, I think the thing everyone needs to think about is the combination of our analytics assets, our reference data, our pricing assets, our index and ETF expertise as well as these execution protocols that we have through these trading platforms.
And it's really the combination of these assets is where over time, as I'm updating you and I've been updating you on initiatives like the ETF hub and portfolio rebalancing, what's really bringing these institutional initiatives to life is the combination of all these assets that's enabling us to get there.
To your direct question around performance of the businesses, so I mentioned in my prepared remarks that we had high volume of 800,000 trades in Q3 alone. That's across TMC and BondPoint. If you can think about that as being up double digits. So we're pleased with the growth that we see in these platforms and also the expansion into the institutional space through some of these strategic initiatives.
The next question will come from Dan Fannon of Jefferies. Please go ahead.
Thanks. Good morning. Scott, just wanted to clarify on the capital return. You guys have done a lot here in the first nine months. And I think your goal is $1.7 billion, I think you said for the year and you're already at $1.5 billion. So want to just – if that's an at least number and we can think about the opportunistic side of buyback and how we should think about capital return even into 2019 in terms of the priorities?
Yeah, it's a good question. We've consistently been at the $1.7 billion for the year and that's where I think we'll land. As you'll recall in the second quarter, coming off of our earnings call, the stock was under a bit of pressure that we felt was completely unfounded and we did move opportunistically and accelerated some of the share repurchase. Our authorization for this year is $1.2 billion. We'll spend that. We'll likely exhaust it, middle of this quarter give or take. Share – our dividend will grow to above $500 million this year. So that's where you get to the $1.7 billion.
The nice thing about the new authorization of $2 billion is it shows – ours and, importantly, our board's continued view that our share price still seems to be disconnected a bit from true value. And so not only do we have the capability now over the next six quarters to grow our share repurchases, we have more flexibility if there are disconnects in the prices to move opportunistically. And so as we come into the February call, we'll give you an update specifically on the dividend which, as I said, we expect to grow again share repurchases, and exactly how much we would expect to spend during 2019. But I think the signal to you on the 2019 repurchase is we want to be positioned to continue to grow our cash returns, but also to be in a position to move in when the stock comes under unwarranted pressure.
The next question comes from Alex Kramm of UBS. Please go ahead.
Hey. Good morning, everyone. Wanted to go back to MERS for a second. Thanks for the specifics there, Scott. But can you actually flush the revenue model out a little bit more for us going forward? I mean, I think if I'm correct, I think it's like $11, $12 per transaction kind of model today. So – but you're already capturing 75% of new originations. So is this basically the originations will go up? Or is there a different revenue model for backloading? And how could data fit in down the line? So basically, what should we be watching for as we try to model this business?
Alex, this is Jeff. It's a good question. So MERS right now, the way we think of it is a backbone that has unbelievable connectivity across the entire industry, and it's because of the legacy business that you mentioned, the legacy registration business that so many people have connected to MERS and use MERS, and if you buy a home or refinance now that you know the name MERS you'll look at your closing statement, you'll probably see that $10, $11, $12 charge on your closing statement for the basic registration.
What we're working with the industry is to now take that backbone and add to it other services that can really digitize the mortgage market. The mortgage market in the United States is still very paper-oriented. Even though you may, with certain providers, do an online mortgage application, what you don't realize is behind the scenes, ultimately those things get printed out on the paper and are dealt with in paper form. So we launched two new services; an eNote services so that the note part of the mortgage can be digitized and the note itself can be kept in digital form. And then in eVault where that note could be actually held by MERS.
Many of the large banks and mortgage providers have their own vaults and MERS would essentially have a pointer that would tell the market where the golden record is, even if it's not at MERS. But we've now launched an eVault service. What we've seen on eVault is an uptake by the small and mid-tier banks that are interested in a one-stop solution by MERS as they go digital. And increasingly, we're talking to them about how we could put these vaults inside our cyber layer, and inside our data centers and what have you, which have tremendous capabilities beyond the capacity of many, many small users.
So those new initiatives are the things when we talk about digitizing the mortgage space that we'll be talking to you about. Not necessarily the legacy business. The legacy business is a fantastic business that allowed us to buy a company that is already generating profits now that we have the new platform in place. But it's really the future growth of the electronification that we'll be talking to you about.
And Alex, just to help a little bit with the model question. I think probably the best thing to do is to take the fourth quarter guidance and multiply by four to kind of think about that as the 2019 base. And then I think similar to Ben's comments on fixed income and Jeff's comments on ICE Mortgage Services, you look at that as the starting point with us building the strategy out through 2019 and then really generating growth into 2020, 2021, et cetera, which I think builds on our track record of investing today in new growth initiatives that will generate growth two, three, four years out.
The next question comes from Alex Blostein of Goldman Sachs. Please go ahead.
Hey. Good morning, guys. Thanks for, I guess, all incremental data again on the NYSE data side of things. Scott, I think I heard you mention some choppiness in the NYSE session fees. Is it helpful to quantify, I guess, how much those are and whether or not that should impact in any sort of way your prior guide on market data? I think you guys had $538 million, $542 million for Q4?
Yeah. As I mentioned, that's largely actually a dynamic around the rollout of our Pillar technology. And that Pillar technology will make us – it has made us far more efficient from an expense base. It makes our security and uptime far better, our trading capabilities far better. But as we've rolled old technology to new technologies, some customers have taken the opportunity to rationalize the number of sessions that they have. And so that hit the third quarter a little bit. As I mentioned, I think it will continue into the fourth quarter just a couple million bucks in the quarter. And so it puts a little bit of pressure on the numbers.
But overall, it's small in the scheme of things. It doesn't detract from the trends we've talked about, particularly the trends in pricing analytics which are very strong and accelerating and our futures exchange data, which was solid in the quarter. And our feeds business which I noted grew double digits. So the reality is our data business has a number of moving pieces. That's one of them that was a bit soft in the quarter and will be again in the fourth quarter. But I think the overall engine in the data services business is clicking pretty well.
And maybe just another backdrop that I think all of you on the call that follow this financial services space are aware of, but just to state the obvious, there's been a consolidation in the exchange business by the large public company exchange operators. There's also been a consolidation in the market-making business. There's been a consolidation going on in the brokerage business where the large brokers have increased market share. There's been a consolidation going on in the ETF management business.
Our financial services space in a digital world is consolidating and lowering overall transaction cost by putting scale against these digital systems. And you see it all across our industry. And ultimately, it's really massively lowered the cost of transacting business which is why we can say that the United States is the cheapest place to manage capital raising and equities in the world.
The next question will come from Brian Bedell of Deutsche Bank. Please go ahead.
Great. Thanks very much. Maybe just to finish up the look at market data into the fourth quarter. The $538 million to $542 million. Thanks for the comments on the connectivity desktop side. Maybe if you can also talk about the contribution of the stronger futures data to the exchange data line within data as we move into 4Q. Clearly, the pricing analytics is also growing or accelerating, as you said, Scott. So as we look into 4Q, I guess should we expect a potential acceleration into that $538 million and $542 million with some potential upside given those trends or is the Pillar headwinds enough of a sort of a headwind to keep you in the bottom of that range? And then also, just any audits of collection data feeds in the exchange data bucket this quarter?
Yeah, look, audits are part of every quarter, frankly. And we've pointed it out when it's caused a particularly outsized impact on any given quarter. The fact that we didn't point to anything in the quarter doesn't suggest that there weren't any. It simply suggests that there weren't any that were unusually large as a kind of, if you will, a part of the run rate business. Look, I think overall – and I'm not going to focus just on the fourth quarter because we run the business over the longer term. I think what you should expect is to continue to see the data services business continue to accelerate quarter to quarter to quarter.
And you see it in the absolute terms. You see it in growth terms. I mean you see it in the Pricing and Analytics business that has consistently grown. And as I noted, ASV for Pricing and Analytics is up 8% overall. Overall ASV is up between 6% and 7% ending the third quarter, entering the fourth quarter as well. So I think we've got strength across all of the businesses. You asked specifically about exchange data, good third quarter. The reality is that the futures exchange data we tend to get a little bit more out of the exchange data when the volume size is a bit little softer on some of our minimum commission fees. I don't expect that will continue into the fourth quarter because our volumes are great.
And so it's interesting because it's a revenue dollar that doesn't go away. It's a revenue dollar that maybe doesn't show up in data, and does show up in trading. And from where I sit, it's the total revenue dollar that drops down to the total earnings which matters. And that's where we consistently deliver. So I wouldn't get too hung up on any single number in a given quarter. I'd look at the track record of growth every quarter in terms of revenue and earnings, consistent acceleration in the data business, great volume growth in the trading business. And I think an underappreciated contribution from the NYSE that we showed on slide 7 across the board.
The next question will come from Jeremy Campbell of Barclays. Please go ahead.
Hey. Thank you. Ben, I know you guys said that the response has been positive so far, but with the ETF hub, is this more of a, if you build it, they will come type platform. Or is there any sort of heavy-lifting on your end with some hurdles to clear to kind of ramp adoption there? And then in growing the institutional bond trading activity, do we see most of that early upside stemming from this ETF hub or is there some extra white space out there that some of our larger competitors maybe falling short on?
Great question. Thank you, Jeremy. So, remember, when we announced this initiative on the ETF hub, we didn't do it in isolation. We were actually brought into it from one of the leading issuers in BlackRock. And really got the product off the ground and thinking about the requirements of what's going to need to be built. A lot of it's leveraging expertise that they have to – that they want to see us be successful in this market.
The other thing that well positioned us to do this and made it unique for us to be their partner, and why I believe they came to us to do this, is the combination of the analytical assets, the data assets that we've mentioned several times, our instant messaging platform that we have to handle the unique negotiations that happen in that create-redeem process, our ETF and index expertise and our execution capabilities, and willingness as a newcomer to the space to really help build an open architecture industry utility that would be embraced by the industry.
And as we have gone out this past quarter with BlackRock to meet with all of the other main issuers, the other authorized participants that are in this marketplace, the banks and market-makers, the response has been overwhelmingly positive.
We formed the advisory committee that's going to be guiding the requirements, and we're finalizing that as we speak. And as we finalize that, we're going to be finalizing our launch plan in 2019.
So in sum, we're filling a void where nobody is really acting in a market that's growing at a 30% compounded annual growth rate. But underpinning it, it has no standards, no consistency of process, disconnected systems, prone to error. And really needs someone to step in and fill that void.
The next question will come from Ben Herbert of Citi. Please go ahead.
Hi. Good morning. Thanks for taking the question. Maybe just a follow-up, Scott, to Mike's question on just a more constructive volume backdrop if that persists kind of into 2019. Just are there any perhaps areas you might be looking to ramp up investment against that? Thanks.
Yeah, look, I think as you're starting to think about 2019 expense, yeah, I'd point you back to the last couple years and I don't think the framework looks a lot different.
We've got $30 million of synergies that we've committed to go, we'll deliver that. Our employees have delivered another good year. We've historically had 3% to 4% merit and bonus increases. We'll do that. D&A has tended to tick up $20 million a year or so as we roll through our CapEx spend and build out our IDC – or our ICE Data Services, data center plan and roll out Pillar.
And then we've identified certain specific investments we've made in support of current revenue and future revenue. And I think that framework holds as we move into 2019. We'll obviously give you more specifics as we move into the February call.
But I wouldn't go into 2019 looking for expense to really look that different than it did coming into 2017 and then moving into 2018. We did note coming into 2018 that we were going to reinvest some of the tax savings, which we're doing. And so I wouldn't expect the investment level necessarily to be at a similar level. But the other dynamic I think are pretty consistent and will remain.
Directly to your question, none of that is driven by trading volumes. And so to the extent that that continues to trend as it has and certainly open interest is an indicator that it will, but volatility is a key metric that will determine the extent, that that requires no additional expense and will expand margins and does drop to the bottom line and will inform our decisions with regards to our capital return plans with shareholders.
So overall expense for 2019, the model's going to look very similar directly to Trading & Clearing revenue. That growth is built on open interest and requires very little incremental spend.
The next question will come from Kyle Voigt of KBW. Please go ahead.
Hi. Good morning. Just wanted to ask a question on the regulatory environment and really relate it to the third-country CCP amendments by the European Commission that were proposed last year.
I think, Chairman [Christopher] Giancarlo has been a lot more vocal about the potential impacts of those on U.S. clearing houses and has kind of threatened to respond to that EU proposal. Just wondering how you're thinking about potential risk to your business from all this jockeying between the EU, UK and U.S., given that you're kind of uniquely positioned in all the jurisdictions involved. And what you think the likely resolution will be moving forward. Thanks.
Thank you. That's a good question, one that spends a pretty significant amount of time and has for the last couple years with the management team here.
Really the way we're thinking about it is, is a bit like the way you framed your question, which is, we don't exactly know how it's going to end up. So we feel like, and have for years felt like, we need to have assets in various jurisdictions. And we need to hone our technology and our skills and our capabilities so that we could theoretically move and follow markets if they move between those jurisdictions.
And we have a large presence in the UK, as you may know. And the UK may become a third country to the EU, in which case there'll be some kind of third country CCP regime. It may have some kind of interim fix for how that's going to work. It may not, in which case the U.S. may have a third-country CCP regime into Europe. Obviously, businesses in Europe will be able to access Europe. But then the question is, can outsiders that are not in Europe access European CCP. So all of that is in the mix right now.
I think recent conversation coming out of Europe and the UK is that there's a recognition that a hard Brexit that failed to deal with an interim solution would be bad for all the people involved. And so we've seen a lot of constructive conversation in the background about how to overcome these things, working within current law and the negotiations that are going on between the various parties.
Long story short, I think Europe has basically said, we want to oversee our financial services infrastructure. And the U.S. has said, we want to oversee our financial services infrastructure. Those are rational positions that each government has taken.
And so they're going to have to find the gray area in the middle on how they work together for the international players that are in both places. But honestly, I do see that happening notwithstanding the rhetoric. There's an appreciation that many markets are global and that everybody's going to need access in order to hedge risks. And that's in the best interest of local economies. So I'm sitting here being honestly more optimistic than I have been for the last few years.
The next question will come from Vincent Hung of Autonomous. Please go ahead.
Hi. So it seemed like at the roundtable, there's a lot of maybe some consensus around making enhancements to the SIP through the additions of flood data, (53:54) speed improvements and also perhaps opening up the SIP to competitors. So let's say, this happened. How much of a negative could that be for your SIP revenues? Or could there be offsets from charging for the prop data driving those feeds?
Well, it's hard to know how to answer that. But you may recall that when we bought the NYSE, we tried to put out a straw-man proposal that we hope the industry would adopt that maybe everybody uses the SIP and there is no prop feed. Or maybe we get rid of the SIP and everybody uses prop feeds or so on and so forth. So we have long had the mindset that change in that area will not hurt us. It may benefit us and certainly get rid of some of the rhetoric. I've been amazed to see in the press there's still a perception that there's somehow a two-tier market of speed and access that I don't believe even exists any longer. We go to extraordinary lengths to look at delivering messages equally to all participants including SIP and as do most of our peers so that there is no distinction.
And of course, the markets should continue to invest in the SIP, the volumes, transaction volumes and changes going into the market would suggest that we need constant upgrade. And the total spend to operate the SIP is in the scheme of things, quite tiny. So it's – I don't think there's going to be a large debate over whether there should be continued investment. But the debate seems to be about who should sit in the room and who should get a vote and who should be the vendor and it's all small ball issues that in the scheme of things probably don't impact anybody in the market as long as we can all agree to continue to make it better.
The next question will come from Chris Harris of Wells Fargo. Please go ahead.
Thanks, guys. Jeff, appreciate all your comments on equity market structure this morning. I know in the past you've tried reaching a grand bargain with the banks on an unrelated matter. Unfortunately, that was unsuccessful. But with respect to these market data challenges, is there an opportunity, do you think, for the industry to come together and perhaps make a compromise on the fees? Or do you think at this point the two sides are just too far apart?
It's a great question. We proffered as part of the access fee pilot that why don't we freeze data revenues and why don't we come up with a better pilot that doesn't negatively impact listed companies but gets to the heart of where the argument by the large players which are the large banks by the large data providers and by the exchanges? Really this is a Range Rover versus BMW versus Mercedes argument. And we propose that the fee freeze on the industry for data. The interesting thing is that a lot of people now as a result of the SEC's actions think, oh, that's not a good deal. Maybe fees should go down. And even though it looked to us like the SEC went to great pains to suggest that they're not saying that fees should go higher or fees should go lower as part of their action, they didn't make any qualitative statement like that.
What I think the market has missed and what I think may be realized over time in this debate is that these hundreds of filings that were made were not hundreds of fee increases. These are filings made over a decade. When we went from largely analog to digital and when we went from a market where there was no such thing as an ETF to a robust market of ETFs. When there was no such thing as a smart order router to everyone using smart order routers, when there was no such thing as a Robo-advisor to a massive uses of Robo-advisors. All of those things are different products and services and changes and bundles. And in many cases, they're fee decreases or getting rid of products and so on and so forth. So it's a big mixed bag of filings that are in there.
The way those filings work, the way we've seen them work since ICE has owned the New York Stock Exchange is that there's not a big rubberstamp inside the SEC. We put filings in, in draft form and have a lot of conversation with staff around many of these filings. And staff often says we think the price is too high, or we don't like the bundle, or we don't like the way it's worded, or we don't like the access provisions and so on and so forth. And there's a large negotiation that goes on, on many of these with staff, and in many cases these filings are withdrawn, and they go away, or in many cases they're modified and they go forward. And what has happened I believe as a result of this order, the SEC has now said when you do a filing, if you're an exchange, show up with an army. Show up with an army of consultants, of economists and lawyers. And of course, from now on we're going to show up with an army of litigators. And I don't know if you guys have ever – that have been listening to me have ever been in a situation where you have a bunch of litigators that are advising you and so the quiet conversation of drafting and going back and forth with staff is going to be a very different dynamic from here forward because everything's going to be documented and footnoted and written down. And I'm not sure that prices go down in that situation.
It may well be that exchanges that wanted to raise prices in the past, and had staff interfaced that said that that wasn't a good idea. That may be gone in this new environment at least for the next few years. And so I'm not convinced that this is some massive downward pressure on fees. It may actually have taken the downward pressure on fees away. And when the industry – if I'm right in that and the industry realizes that, I think there is a good environment for a negotiation. But right now, it feels like a lot of the big players think, oh, I'm going to use my lobbying effort at the SEC to reduce my prices, and I'm not convinced that that's what's going to happen as part of this policy.
Yeah. I think an important point not to lose sight of too is, Jeff keeps talking about the overall quality of the markets, the participation in the markets, the cost to trade in the market. And that's more than just data. It's data, it's trading, it's all of the pieces. And so, again it's why I go back, if you look at half our data business is pricing and analytics and the revenue model we delivered, new products, new customers, existing customers. It all drives pricing and analytic 100%. For exchange data connectivity, the other half of that data revenue, it works intricately with the trading side of it. And really whether it's fewer session fees, but higher trading share or a little less on the data side, and a little more on the trading side, every one of those is a revenue dollar we'll take. And that's why I wouldn't get too hung up on which bucket it falls into. It's our revenues growing overall, it's earnings growing overall and are we providing better markets to our customers?
And this concludes today's question-and-answer session. I would now like to turn the conference back over to Jeff Sprecher for any closing remarks.
Thank you, Carrie, and thank you all for joining us today. We'll be speaking with you again in February when we'll report our results for the fourth quarter. And I hope you all have a great day, a happy and safe Halloween, and we look forward to talking to you soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.