Cboe Global Markets, Inc. (CBOE) Q3 2011 Earnings Report, Transcript and Summary

Edward T. Tilly - Executive Vice Chairman and Executive Vice Chairman of CBOE Debbie Koopman - Alan J. Dean - Chief Financial Officer, Executive Vice President of Finance & Administration and Treasurer Edward L. Provost - Executive Vice President William J. Brodsky - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Chicago Board Options Exchange Incorporated and Chief Executive Officer of Chicago Board Options Exchange Incorporated

Edward Ditmire - Macquarie Research Michael Carrier - Deutsche Bank AG, Research Division Gaston F. Ceron - Morningstar Inc., Research Division Christopher J. Allen - Evercore Partners Inc., Research Division Daniel F. Harris - Goldman Sachs Group Inc., Research Division Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Howard Chen - Crédit Suisse AG, Research Division Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Jillian Miller - BMO Capital Markets U.S. Surinder Thind - Jefferies & Company, Inc., Research Division Alex Kramm - UBS Investment Bank, Research Division Roger A. Freeman - Barclays Capital, Research Division

Good day everyone and welcome to today's CBOE Holdings Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, for opening introductions, I would like to turn the call over to Debbie Koopman, Director of Investor Relations.

Good afternoon and thank you for joining us on our third quarter conference call. On the call today, Bill Brotsky, our Chairman and CEO, will discuss the quarter and our continued progress in executing our strategic initiatives; then Alan Dean, our Executive Vice President and CFO will detail our third quarter 2011 financial results. Following their comments, we will open the call to Q&A. Also, joining us for Q&A today is our President and COO, Ed Tilly; and our Executive Vice President of Business Development, Ed Provost. In addition, I'd like to point out that this presentation will include the use of several slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. As a preliminary note, you should be aware, that this presentation contains forward-looking statements, which represent our current judgment on what the future may hold, and while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full disclosure of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, after this conference call. Now, I'd like to turn the call over to Bill Brotsky.

Thank you Debbie and good afternoon, everyone. I'm pleased to share the outstanding third quarter 2011 results for CBOE Holdings, which were a success by any measure. Our strongest quarter to date was highlighted by double-digit growth in operating revenues. Up 35%, adjusted net income, allocated to common stockholders up 69%, and earnings per share up 92% over the prior-year period. Our company's operating margin was a record high 52.2%. This afternoon, I will discuss some of the initiatives and factors that drove the strong performance, then Alan Dean will walk you through the numbers. First, I will note that Ed Tilly, who always joins us on these calls, does so today, as our new President and Chief Operating Officer. He succeeds Ed Joyce, who stepped down for health reasons, after a long and very distinguished career at CBOE. As Executive Vice Chairman for the last 5 years, Ed Tilly's leadership has been critical to the success of several major CBOE initiatives, and over the past several months, he has assumed a number of Ed Joyce's responsibility. We are fortunate to have a very deep and experienced bench, and I know this transition will be seamless. And another side note, I will also mention the events this week at MF Global, that did not have any material impact on CBOE Holdings. MF Global's business at CBOE was not significant, relative to other firms. Its bankruptcy did not disrupt our trading markets, nor do we expect it to have any impact on our day-to-day operations. Now, let's take a look at the third quarter of 2011. CBOE Holdings averaged 5.4 million contracts per day, an increase of 46% over the third quarter of 2010. We recorded year-over-year and quarterly increases, across all product categories in the third quarter, with particularly strong growth in our highest margin index options and futures products. Compared to the third quarter of 2010, equity options were up 5%, ETF options grew 105% and index options rose 70%. Compared to the previous quarter, equity options rose 2%, ETF options were up 38% and index options increased by 45%. Increased trading continued into the current quarter, as total options average daily volume in October, rose 16% over the same period of last year. As a result, year-to-date options volume through October at CBOE Holdings, is up 6% over the same period last year. Excluding dividend trades, CBOE Holdings' combined market share for the quarter, was 27.5% compared to 26.9% in the previous quarter and 28.6% from the third quarter in 2010. Unadjusted, CBOE Holdings accounted for 27% market share in the third quarter of 2011. And through the end of October, the company's total options year-to-date market share for the 26.7%. We've maintained an overall market share range of 26% to 28% for the past year, while increasing our revenue per contract. VIX options and futures were among the volume leaders in CBOE Holdings in the third quarter of 2011. While volume and VIX futures and options continue to grow steadily at a very healthy rate, even in periods of low or moderate market volatility, we saw sharp spikes in volume, as high volatility rocked the market to much of the third quarter. VIX options trading jumped by 127% over the third quarter of 2010, as investors sought to hedge against or take advantage of extreme market volatility. The increase in VIX futures trading, was even more dramatic, volume more than tripled that of the third quarter last year, and resulted in the product's fourth consecutive quarter of record volume. As volatility levels subside, trading of VIX futures and options tends to return to a steady rate of healthy growth, but it does so, from a new higher plateau. These growth spurts are not too surprising, given that volatility trading is still at a formative stage. This trading in our flagship SPX index options also drove strong quarterly volume at CBOE. Trading at SPX, the most actively traded cash index option in this country, averaged $1 million contracts to date for the quarter, an increase of 62% over the same period last year. Year-to-date, through October, SPX trading has averaged 794,000 contracts per day, up 10%, compared to the same period last year. In size and leveraging capability, make SPX the overwhelming index option of choice for institutional investors. And CBOE's trading floor, where trade is negotiated large and complex institutional orders, drives its ongoing success. Now let's turn to SPXpm which we successfully launched on October 4. Since that time, I'm pleased to say that the number of active market makers on C2 nearly doubled. For the month, SPXpm averaged 5,000 contracts per day, and as shown in this slide, volume began to increase during exploration week. More telling, open interest stood at a very healthy 50,000 contracts on October exploration date, and yesterday, over 2 weeks out from the November exploration, open interest stood at nearly 47,000 contracts. These are exactly the kind of numbers we look for in building traction for a major new product. We continue to fine tune C2, to better facilitate trading at SPXpm. In mid-October, we activated features to process paired and complex SPXpm orders on C2, and just this week, we increased participation guarantees for orders in SPXpm to better compete with guarantees, offered for like products and other exchanges. We will continue to monitor and modify our trading system, now that the new product is up and running. We've also begun to roll out our targeted education and marketing program, aimed at rapidly building awareness of SPXpm among customers, likely be early adopters, including users of SPDR options and other index ETFs. We expect the trading at SPXpm will ultimately be embraced by a diverse group of customers, including liquidity providers, currently trading SPX, active retail investors, online traders who prefer a high notional value of S&P 500 contracts, and OTC users, seeking an exchange trader alternative that minimizes counter-party risk. We collaborated with our vast index trading community CBOE trades more than 95% of all U.S. index options to design a product with meaningful, customer-friendly features, not found in other electronically traded S&P 500 option products. The result is a product tailored to offer S&P 500 option customers, point and click access, with greater efficiency, greater control and lower cost. The ability to offer SPXpm on C2, as well as SPX on CBOE, enables us to broaden our customer reach, with 2 very deep pools of liquidity: one that saves us the convenience of screen trading, and one that saves us the flexibility afforded by floor trading, to negotiate large complex orders. We believe that SPXpm is best-in-class, among electronically traded S&P 500 products. We are very bullish that our SPXpm and SPX combination, will provide significant returns to the company's bottom line. Now, a brief update on C2. Our -- all electronic exchange continues to post steady gains and volume. Third quarter volume averaged 255,000 contracts per day, an increase of 34%, over the second quarter of 2011. Going forward, we expect that new users, who recently connected to C2 in order to trade SPXpm, particularly firms that are active in the leading ETF option classes, will also trade multiple listed classes on C2. We continue to closely monitor C2's progress, and to adjust our market model accordingly. This past Tuesday, we initiated 2 major changes, aimed at increasing C2's market share in ETFs and individual equity options. First, we implemented a new maker-taker fee schedule, offering the industry's highest maker-taker credit for posting liquidity. This provides maximum incentive for C2 market makers to quote at the NBBO. We also modified the matching algorithm used to execute orders among multiple market participants. The new algorithm is pro rata, with no priority or entitlements, thus, rewarding market participants' score at the NBBO, and provide the largest size at that quote. These changes are aimed at placing C2 at the top of the NBBO, for maximum market depth, and providing a deep pool of competitive liquidity, in the most active option classes. This combination offers incentives, unlike any others in the marketplace. We look forward to reporting on the results of these changes in the months ahead. Turning now to market regulations. The SEC and the CFTC remain focused on writing rules related to Dodd-Frank, which continue to be a moving target. Both agencies are currently addressing provisions related to OTC slots, including regulations regarding steps, clearing account requirements and new derivative trading rules for banks. The extent to which Dodd-Frank will give more OTC business to exchanges, depends on the final rule implementation. Given the current pace, it seems unlikely that mandatory trading requirements for cleared OTC swaps would be effective, prior to 2013. Total implementation of Dodd-Frank could be delayed until after the next election cycle, and parts could be potentially unwind depending on winding -- unless, depending on election results. The bottom line is the Dodd-Frank will result in more exchange trading, but we cannot say when or to what degree. However, it is our very strong belief, that even after the Dodd-Frank mandates, the net effect of the global crisis and the continued economic uncertainty, is that firms will continue to seek more actively, the transparency, the certainty and the guarantees of exchange trading and central clearing. This view has been regularly affirmed by our customers. We remain confident that our unique focus on options and volatility products, leaves CBOE Holdings strategically well positioned to take advantage of the considerable secular growth products of the options industry. As we look forward to the balance of this year, we are encouraged by the volume rebound that we've experienced over the past several months. We expect to continue to achieve positive financial results for the balance of 2011 and beyond, as volume remains strong, and we continue to grow our top line by continuing to prudently manage expenses. The successful launch of SPXpm is a prime example of how CBOE's commitment to product development, coupled with a disciplined financial approach, allows us to pursue major product initiatives, that leverage our strength, drive earnings growth and enhance long-term value to our stockholders. Going forward, we will build on education and marketing initiatives to drive investor awareness, of the benefits of SPXpm and build on our VIX trading business. We will continue to expand our product offerings, including our VIX product line, build on the success of our C2 platform and position CBOE to benefit from regulatory reform. Finally, our strong operating cash flow and debt-free balance sheet, provides us financial flexibility, to continue investing in innovation and growth, while continuing to reward stockholders. And with that, I will turn it over to Alan Dean to discuss our financials.

Thank you Bill and good afternoon, everyone. As Bill noted, the third quarter marked the best quarter in our company's history, delivering record revenues, earnings, margins and cash generation. Total operating revenues for the quarter were $143.6 million, representing year-over-year growth of 35%. This strong increase was fueled by significant growth and trading volume. Adjusted operating income was $75.0 million, representing 52.2% of revenue, our highest level ever. Adjusted net income grew even faster than revenue, increasing 69% over the same period last year, which translated to adjusted diluted earnings per share of $0.50. Our GAAP results reported for the third quarter, included certain unusual items that impact the comparison of our operating performance. These items are detailed in our non-GAAP information provided in the press release, and in the appendix of our slide deck. I will touch on those items later. Turning to the details of the quarter, let me begin with our revenue drivers. As shown on this slide, operating revenues increased by $37.6 million or 35% in the third quarter. This improvement was primarily driven by an increase of 51% or $36.9 million in transaction fees, and a $1.9 million increase in regulatory fees. Access fees declined by $1.6 million. Let's review each of these drivers in more detail, starting with Slide 23. The growth in transaction fees was driven by a 47% increase from trading volume, and a 2% increase in revenue per contract. Our revenue per contract or RPC increased to $31.03 compared with $30.06 in 2010's third quarter, reflecting a shift in product mix towards higher margins, index options and futures contracts. As this slide depicts, our index options accounted for 29.0% of total contracts traded in the third quarter of this year, in comparison with 25.1% in last year's third quarter. Futures contracts, our highest margin product, accounted for a little over 1% versus last year's third quarter, when it was not material enough to note. This mix shift more than offset the impact of volume discounts, achieved through our sliding fee scales during this high-volume trading period. As you may recall, in January of 2011, we implemented a sliding fee scale for market-maker trading permits used the multiple-listed products. Access fees in the third quarter were at approximately the same level as the second quarter of 2011, and the number of trading permits has held fairly steady this year. Market makers are continuing to take advantage of the sliding scale, which has resulted in lower access fees, compared with last year. We are holding to our full year guidance of $65 million to $68 million for access fees. We expect fourth quarter access fees to approximate third quarter, which would put us at the higher end of that range. While this guidance excludes access fees for SPXpm, these fees are not yet material. This next slide details our adjusted operating expenses, which totaled $68.6 million, up $8.5 million or 14% compared with last year's third quarter, primarily, reflecting increases in royalty fees and employee costs. Breaking this number down, we look at our expenses in 2 categories, core operating expenses and volume based expenses. Core operating expenses increased 8% to $42.3 million from $39.2 million in the third quarter of 2010. The $3.1 million increase in core expenses was primarily driven by a $2.3 million increase in employee costs, and an $800,000 increase in other expenses. The growth in employee costs resulted from higher accruals for projected cash incentive awards that are tied to our financial performance. Other expenses were up due to losses recorded and the disposal of equipment and other miscellaneous expense items. Looking out to the fourth quarter, we expect core expenses on an annualized basis to be in line with our annual expense guidance of $170 million to $173 million. In addition, our fourth quarter results will include expenses for severance to be paid out under the terms of Ed Joyce's employment agreement. Volume based expenses, which include royalty fees and trading volume incentives, increased $3.7 million in the quarter, reflecting a $4.8 million increase of royalty fees, offset somewhat by a $1.1 million decrease in trading volume incentives. The increase in royalty fees is directly related to the higher trading volume and CBOE's licensed indexed products, versus last year's third quarter. The decrease in Trading Volume Incentives, results from changes in the criteria for contracts qualifying, for quantity-based fee waivers. Adjusted operating income for the quarter was $75.0 million, resulting in an operating margin of 52.2%, up 890 basis points, compared with an adjusted margin of 43.3% in last year's third quarter. This substantial improvement in margin illustrates both our ability to control expenses, and drive operating efficiencies, as revenues grow. Our business model clearly translates into improved margin and solid cash generation. On a GAAP basis, we reported an effective tax rate of 44.6% versus 41.1% in last year's third quarter. The higher rate reflects the impact of an increase in the Illinois tax rate effective January 1 of this year, and a charge taken to reserve for potential additional tax liabilities, as a result of an advisory opinion, from New York state, regarding New York state taxing authorities, issued in the third quarter, which attempts to extend the state's taxing power over certain electronic transactions, and other fees of out-of-state exchanges, going back as far as 2007. This charge of $4.2 million decreased GAAP earnings per share by $0.05 for the 3 and 9 months ended September 30, 2011. Don't have to tell you that states across the United States are struggling financially and continue to look at all avenues, to boost their revenue. While we do not agree with this interpretation and are vigorously challenging it, for accounting purposes, we are required to reserve from potential liabilities and we have done that. To minimize our future tax exposure in New York, we plan to close our New York office at the end of this year, and relocate that staff to New Jersey, where we already have a presence with C2. At the same time we have been working with state officials in Illinois, to affect changes in the Illinois tax code. We will continue to work with legislative leaders in Illinois, and are hopeful, that a bill will be passed soon. Our adjusted effective tax rate for the quarter, which excludes the charge for the potential New York tax liability, was 38.9%, compared to a 41.0% in last year's third quarter, and 40.7% in the second quarter. The adjusted -- the fact that tax rate for the quarter was possibly impacted by the release of certain tax reserves, following the completion of prior-year audits. Excluding this $1.6 million reserve adjustment, the third quarter adjusted effective tax rate would have approximated the second quarter's tax rate. Based on what we know at this time, we expect our GAAP effective tax rate for the full year, to be in the range of 42.2% to 42.8%. We are reaffirming our full year 2011 guidance, last provided in our August 4 earnings press release, with the exception of the revision to our tax rate outlook, which I noted earlier. Also, keep in mind, that fourth quarter results will include a severance charge, which we expect to report as non-GAAP. Reviewing our balance sheet briefly, as shown on this slide, we ended the quarter with cash and cash equivalents of $147.2 million, compared to $106.5 million at the end of June. We remain debt-free and our cash generation remains strong. Our cash flow from operations so far this year was $164.3 million, already exceeding the full-year 2010 cash flow of $134.9 million. For the third quarter, cash flow from operations was $71.7 million compared with $13.5 million in last year's third quarter, a fivefold increase. Consistent with our capital allocation strategy, we continue to return excess cash to stockholders. Given our strong liquidity and confidence in our long-term strategy, we were active buyers of CBOE shares during the third quarter, purchasing 599,900 shares, at an average price of $24.82, totaling $15 million. The repurchases were made under our $100 million share repurchase plan, authorized by our board on August 2. We plan to continue to be an opportunistic buyer in the future, and we'll provide updates on share purchases at the end of each quarter. Since our IPO in June 2010, we have spent $481 million on share buybacks, tender offers and dividend payments. Our strong cash flow and balance sheet give us the flexibility to both invest in our business and drive growth and return value to shareholders through dividends and share repurchases. In closing, we are very pleased with the results and accomplishments of this record-setting quarter. We remain confident in our growth strategies and look forward to building on our strengths and driving increased stockholder value. With that, I will hand the call back to Debbie so we can get started taking your questions. Thank you very much.

At this point we'd be happy to take your questions as Alan said. [Operator Instructions]

[Operator Instructions] Our first question comes from Roger Freeman of Barclays Capital.

I guess on the pricing on C2, you mentioned changing the rebate.

[Technical Difficulty]

Our next question comes from Richard Repetto of Sandler O'Neill.

Why don't we just make note of the fact that we've lost Roger, and we'll pick him up as soon as he gets back in the queue.

I would take Richard's question, and then if we could get Roger back on. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Anyway, my question Bill and I guess, for Ed too. The strategy on C2, the pro rata, it seems like in the option industry, it seems like we're getting 2 models on the exchange, as far as electronic exchange models. Some that try to cater more to directed order flow, others that are moving just more wide open. And I guess, do I have this right, this picture right? And then why you chose, and if I do, then why you chose the strategy that you're taking with C2?

I'll try to answer the question. We have chosen pro rata. We do see in the make-take environment, really 3 algorithms. The pure price time, modified pro rata, which is included some preferencing that you pointed out, and we're going to a non-entitle or non-preference pure pro rata. What we think, and what we actually expect to see with the combination of raising as a make fee, that we will -- beyond the NBBO, and offering the pro rata incentive for more size that, while we expect to hold the NBBO for the longest period of time with the highest make. And now attracting what we think in the model as the largest size because of the pro rata portion, that on orders where the markets are being swapped, and those markets that we saw really in August and September, we and C2 expect to be on top of the market for the longest period of time, with the greatest amount of size and benefiting from those order types, right out of the gate. So we'll keep you up-to-date on that progress, but that's the reasoning behind the change.

You want to try to get back to Roger?

Yes.

Our next question comes from Roger Freeman of Barclays Capital.

So I might have -- Rich may have asked around this, but what I wanted to just get at is, in terms of the -- with the rate, whether that's going to compress at all your net take. And also, just on C2, are you seeing any -- actually, with SPXpm, are you seeing any -- obviously, it's only a few weeks now, but any shift in that customer base? Are you able to tell if there's retail order flow coming in?

So Alan, why don't you answer the first part on the fee issue, and then Ed, you can go back on the...

Well, first of all, the volume on C2 is relatively small compared to C1. So it really won't have any impact on our overall RPC. I really don't expect it to compress our net take. I think that what we're focused on is increasing market share, driving business to C2, and we think this new fee structure is the chance of doing that. So that's our focus.

So the second part of the question, it's Ed Tilly, Roger, we -- early few days, and the early week of SPXpm, we did see a lot of professional trading. Really market maker to market maker, not surprising. They're really the first movers in any new product. And then as we came closer to expiration, we did see some retail participation. Retail obviously, as you know because of the size of the contract, very large retail players. And then, we expect to see a lot of different shifts as we have introduced new functionality. You may or may not be aware, that we started offering the SPXpm contract, primarily, with straight orders. That is, single-line strategies. We went to and increased the functionality to include complex orders, and then, we added functionality to include pairing orders. And just Tuesday, as Bill pointed out in his prepared comments, we increased the guaranteed participation rate on paired orders to the maximum allowed by rule to 40%. So we think we'll go from that very professional base that we began with, now attract a more diverse user base, as the product becomes more and more mainstream.

Our next question comes from Michael Carrier of Deutsche Bank.

Maybe just 2 questions on the numbers, first just on the tax rate, I think most of us are looking at the adjustment. So I just want to make sure, when we're thinking about the fourth quarter, should we still be in this -- in this 41% range? And then, just on the royalty fees, it seems like when we look at it, just as a percentage of the related volume, that takedown. So in terms of what you guys have to pay, when volumes get to certain levels, is the rate that you're paying out less?

This is Alan Dean. We've never been public on the exact structure of what we pay and to whom. What I can say is that, it isn't the same across all products, and that you could have royalty fees changed at a slightly different rate, compared to index volume, altogether, just because each of the contracts is structured slightly differently. But overall, the correlation is there. Royalty fees should go up and down with index volume. On the tax rate, we were changing our tax rate for the year, only to reflect the $4 million hit from -- that we're providing for, for New York State. And I gave that guidance in the call. So you can extrapolate back what the fourth quarter will be, based on the guidance we're giving you for the year. We're not actually giving you guidance for the fourth quarter but you could figure it out.

Our next question comes from Ken Worthington of JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: In terms of volatility, obviously very high. You're trading volumes, kind of crushed at this quarter. Particularly, what we hear on the VIX. Any idea how many new traders began trading the VIX this quarter? Or any anecdotal information you can share with regard to customer penetration in the VIX. And is there a way to compare VIX penetration to -- like a more mature product-like penetration in the SPX product for example, just to get a sense of how much runway we have to go on the VIX product.

Sure Ken, this is Bill Brodsky. I'll do my best. It's not a science on this. First of all the way I gauge it, is I look at the investment banks and the ETNs that they initiate, and when we see that happening, we know that they are trying to offer their customers a whole host of products. So for example, I saw during the quarter, I believe was UBS came out with a whole range of ETN benchmark to the VIX. So to me, those are new users, or at least, new products where firms obviously, would rather use their own proprietary products, than to recommend some other firm's proprietary products. And so my view is that, that is continuing. And I think a lot of our business now is coming indirectly by the ETN sponsors, who then come into VIX every day, to readjust their positions. Second thing is on penetration. I can only say anecdotally, I think we have a very long runway on VIX. SPX and index option trading is not new. It is an area where I think that we have growth getting people from the over-the-counter market, the institutions to come into the exchange market for all the obvious and compelling reasons, but there's little doubt in my mind, that the VIX area, which we call the volatility asset class, is still very embryonic.

Our next question comes from Jillian Miller of BMO Capital Markets.

I just want to get an update on the bill on the Illinois Senate, that they introduce to your state tax. Can you guys walk us through, I guess, the process from here? Whether you think there's enough support in the Senate has to pass the bill in its current form? And then, what your expectation would be for timing of the bill becoming a law?

Yes, I can give you little bit of color on that. There has been much more activity in the Senate than in the general assembly. The Illinois has a unique cycle, they call it a veto session. And they had 3 days last week. And although, it's called a veto session, it's actually -- the legislature is in full activity. They can do anything they want, not just veto. It's really -- was originally designed to give the legislation opportunity to reenact or do something on bills that the government may have vetoed prior to the fall, and then, they come back in the fall for a very abbreviated session. So this year, they were in last week for 3 days, and they will be in next week for 3 days. I do not expect them to stay in more than their 3 days, and that may be the end of the session for this year. So there is a possibility that you'll see some movement in legislation next week, we are very active in engaging on this matter, as does the CME. And so next week, will be a kind of a pivotal time, to see if anything is going to happen this year. If things couldn't get extended, but if you follow the history, normally, it will be 3 days next week and that will be it.

Our next question comes from Alex Kramm of UBS.

Just wanted to follow up on Ken's question, I guess, on the VIX. I guess he asked about participants and so forth. Given that the futures market is still pretty small portion of your overall business, do you think there are some fleets that you have to do to the markets to make it more approachable I guess? The reason why I'm asking, I saw this whole little filing on the -- I guess traded settlement, and talking to some folks. It sounds like, it makes it easier for some ETN players to get closer to the index. So just -- is there more that you have to do to actually tweak that market? Or do you think, that markets aren't just in place, are just tackling new participants to start using the product? Thank you.

This is Bill Brodsky. And you may have noticed that we've extended the trading hours on VIX futures. That's one of the tweaks that we've done, because we think that there's more opportunity outside the billable hours. But this is something that we're constantly watching for, Ed Tilly has some other things he'll add to give you a little more color.

Alex, you're dead on. The TAS or Trade at Settlement order type is going to be a new function for us. It is targeting the ETN users, who need the actual closing trend. We think that's going to accommodate most of them, of course, we would consider a very, very short time period, VWAP, if the TAS doesn't serve their purpose. So we're prepared for more enhancements, if that's what the users need. But for right now, we do think that TAS will satisfy the majority of them. We are always looking for solutions in technology, that would attract more users to the marketplace, and we think we're on to something here by offering a Trade at Settlement order type.

Our next question comes from Daniel Harris of Goldman Sachs.

Just wanted to touch base you mentioned, obviously, in the early days of the SPXpm contract here. And you've got new market makers coming on all the time. What is the backlog that you're seeing there in terms of professionals that want to be trading SPXpm that waited to see how it launched? And how do you think that runway goes over the next few months? Maybe putting some measures around what you have today versus what you expect to come on over the next quarter or 2?

Dan, it's Ed Tilly. Let me take a shot at that. So if you look at the process for us, we basically follow our roadmap to how we think we launch successful products, right? We develop the compelling story on the product. We bring that to the marketplace. We attract this deep pool of liquidity. We think we've done that, we've got a great diverse group of users. We roll out the order types and functionalities that we think are best-in-class, and now, we begin the big promotion, the big get-in-front-of-the-customer story, and that's what we're going to tell. We think we've got a great starting point, and we have Ed Provost here, who I'd love to ask, if he could give us a little color on how his team is going to go out, with the educational process, and the marketing schemes surrounding the SPXpm product, Ed?

Yes. So Dan, we have a multi-prong, promotion to increase the awareness of the product. We had just last week, the heads of education from the top 10 retail options brokerage firms in the building going through this product, soup to nuts. If you'd walk through our Grand Central Station, and some of the stations in Chicago you will see a significant spread in advertising, both focusing on our VIX and our SPXpm, we have our options institute instructors, traveling across the country, doing in-person educational seminars, with respect to the products. So we're at the very beginning of this process. We're very, very optimistic, the interest has been strong, and we have every reason to believe the volume will continue to grow.

Our next question comes from Howard Chen of Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Alan I just want to clarify the access fee guidance. So the guidance excludes SPXpm, and I'm just curious, why you aren't anticipating any step-up in the fourth quarter? Is it conservatism, are you waiving fees or is there something I'm missing? And can you just give us more detail on that sliding scale, and then how that works.

Yes, we did waive the add-on the premium for SPXpm through the end of November, to trade SPXpm. So what's left is immaterial. And the New Year, we'll look at that, and if it makes sense, we'll give more clarity on that in the New Year. Now what was the second part of your question? Oh, the sliding scale. Here's how it works. It's only for multiply listed products, only for market makers, and the deal is, if a big liquidity provider firm will commit to a minimum level of permits for the year, then we give them a discount, and the rack rate, if you will, for permits. And so they're committing to us for the year. And what the firm gets is a lower per permit rate. And what we get is certainty on permits for the entire year's predictability. And I think it's worked. So the firms did get -- did pay us lower fees. On the other hand, I, pretty much, illuminated the volatility in permit fees throughout the year, which makes my job a little easier. So that's how it works and I hope I answered your question.

Our next question comes from Niamh Alexander of KBW.

[Technical Difficulty] It sounds like we lost Niamh. Well, I’ll try to get her back.

Our next question comes from Chris Harris of Wells Fargo Securities.

Where are you right now with new product introductions based off of VIX? I know we've talked in the past about gold and oil. I'm just wondering if there's anything you can share with us, that's currently in the pipeline or under development?

This is Ed Tilly, Chris. What we've been public on is our goal to expand the complex. We -- our last attempt with gold, we found ourselves really offering to the marketplace, a volatility product that doesn't have the negative correlation that VIX does to the S&P 500. So we'll be looking into the actively-traded, some of the holders and the ETFs. There's been some interest expressed to us from the street. And so the next products that will come to the market will be really driven from the end-user. Which is really more in line with CBOE's model, and rolling out new products. So I would have you look to expect those very active ETFs and holders. And more, as soon as we can share it with you.

Our question comes from Chris Allen of Evercore.

Most of my questions have been answered. I just want to ask you, I guess a quick one. Just on the share count, I saw it go up a little bit this quarter, even with the buyback. So if you can just provide some color in terms of what's going on there, that would be helpful.

I don't have a ready answer for you. The only -- I'm trying to figure, what had happened to cause share count to go up, it must have been by a very small amount in the third quarter. We're going to have to get back to you on that one. I don't have a firm response.

[Operator Instructions] Our next question comes from Ed Ditmire of Macquarie.

Just a quick question, can you update me on what the run rate is, for the amortization of the IPO equity award this quarter?

Yes. I can in just a second. That amount for the third quarter was $2,976,470 for the quarter.

Our next question comes from of Gaston Ceron of Morningstar Research.

Just another quick question on the tax situation. I don't know if you've covered this earlier, Alan, because I had to tune it out at one point. But I heard you discussing the sole issue of New York and kind of, addressing it partly by moving to New Jersey. I know this might sound like a little self-evident, but given that the states, as you said, are pretty desperate for revenue coming in, what's the saying, this is not going to happen in New Jersey or any other state? I mean, sort of what -- did you get assurances from there? Or -- so what are your options going forward, if this thing really spreads?

There's no assurances. It could spread. We already have a presence in New Jersey. So by increasing our presence there, it doesn't increase our current tax liability. Just to add a little transparency, we have 3 people in our New York office, 3 employees. And so that's the office we're closing down. 2,800 square feet, moving it to New Jersey and because of those 3 people, the state of New York is proposing that we look at the billing addresses of the people that we bill in our transactions fees, and then assessing the tax. I know the electronic transaction fees, based on billing address. So you can imagine that we have a lot more billing addresses in New York City than we do in New Jersey. And that's the case. So -- but I can't predict tomorrow, you never know. I feel pretty good about next year. No question about it.

Thank you our next question comes from Roger Freeman of Barclays Capital.

I just have a couple of quick follow-ups. Just one on the VIX product. Is there, with the ETNs that have come out, are there any that are hedged longer-term volatility? As I think that's been one of the issues that our product has a shorter term. So I'm just wondering if that's -- if there's any other addressing that?

Roger, this is Bill. As I said I noticed during the quarter that UBS had a whole new family, but I'll have to say, I'm not expert on what the different variations are. But as you know, there are over 2 dozen ETNs now, that somehow, a benchmark for the VIX. But the bulk of it, obviously, is much more short-term. But I can't tell you, I don't have a list of each one in front of me.

Okay. And then just the other question was on SPXpm. Have you said how many or can you give how many additional members have signed up since you launched that? How many licenses?

Roger, Ed Tilly. We did say that we have doubled the amount of liquidity providers, but we did not give specific numbers at this point. And Alan has pointed out, when that becomes as significant and driving number into our bottom line, on access, we'll make that more public. But right now, we can't share the exact number.

Our next question comes from Dan Fannon of Jefferies. Surinder Thind - Jefferies & Company, Inc., Research Division: This is Surinder Thind, calling in for Dan Fannon. I just wanted to follow up on the challenge of optimizing the tax rate. Do you guys have any metrics around, kind of the origin of your volumes in terms of how much is in state, how much is out-of-state, or maybe how much is coming from outside of the country? And then as a related question to that, everybody seems to make it sound that it's really easy to pick up and move from one location to another, but could you walk me through the logistics of actually doing that as well?

Okay. Alan Dean here. First of all, we don't know where our end users at, definitively. I don't know if it's the dentist in Iowa or the high-powered hedge fund in New York City, or in London or anywhere else. But we've done some analysis, and what we would think is that a significant portion of our volume comes from overseas, double-digit percentages beyond that, I really can't be more confident than that. And so, how many end-users are in New York? We just don't know because of the way our industry is structured, just can't tell you.

And then, this is Bill Brodsky. On the other part of your question about what are the dynamics of moving or staying, I would tell you, as a fundamental premise, we don't want to leave Illinois. There is a very vibrant options and futures community that is here. Our goal is to try to negotiate a structure on Illinois taxes, that is fair and is reflective of reality. And if we can make that happen and we can get some relief, then that hopefully, will resolve the matter. So it's a little premature and I'm certainly not going to get into what we were doing, how we were doing, other than to say that unrelated in the tax issue, we're running 2 of our major operations out of New Jersey right now. And that was more based on latency and not state taxes. So the dynamic is different now than it used to be, when everything was anchored to an open outside trading floor. So I would say at this point, we're working with the state officials. They understand that they don't want to put us in some disadvantage. Remember, we're the only the major options exchange in Illinois, the rest are basically East Coast with the one exception of that.

Our next question comes from Chris Harris of Wells Fargo Securities.

Two quick follow-ups here guys. One, is there any RPC difference between SPX and SPXpm? Then the second question I have, really just relate to the guidance, firming the annual expense guidance here of 170, 173, it looks like to me, that you're tracking kind of below that heading in the Q4. Is there something I'm missing there? Any reason why you're affirming and not maybe lowering? You're expecting maybe to have some incremental higher expenses in Q4? Maybe if you can just elaborate a little bit on that? Thanks.

The RPC, we designed the fees in SPXpm to yield the same RPC as we're experiencing in C1. With that said, there's major differences. For instance in C1, there's the sliding scale discounts that you can achieve as a high-volume user. Those aren't there in C2 but overall, we expect them to be the same. And regarding our expense guidance. When I said in my prepared remarks, is that I expect our core operating expenses in the fourth quarter, if you annualize them to be within our guidance range. And so I think if you look at third quarter, we'll -- if you annualize those, we're pretty close to our guidance range. And so, we felt it was prudent to stick with that number for the fourth quarter, based on what I know today.

Our next question comes from Richard Repetto of Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: One last wave of questions. Alan, you opened up the purse strings a little bit on the CapEx in the quarter. So CapEx in 3Q was pretty -- almost close to the first half. So I guess, what was that attributable to like imagine C2? And what will CapEx go to, if it goes back anywhere, the average of the first half, you get a little extra cash again. Is it fair that you might -- would you commit that to a buyback, if stock prices stayed at similar levels?

Well I'm sticking with our guidance on CapEx of $30 million to $35 million for the year. The expenditures in the second quarter, although they might have been a little bit higher than in the third quarter, a little bit higher than what you saw earlier in the year, it's the same type of expenditures. Mostly IT-related, nothing really extraordinary. That's just happened to be when they fell during the year. I hope that I'm in a position where I have so much cash that the board has forgotten what to do with it. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: And just one quick one, on the CapEx, is that cumulative on Page 32, or does not? I had sent to prepare it for the full year, I guess, maybe I was reading it wrong, as well.

Yes, we're checking that slide right now.

It's cumulative.

It's cumulative, Rich.

I'm showing no further questions at this time. I'd like to turn the call back to the speakers for closing remarks.

Okay. Well, I just want to thank everybody for joining us this afternoon and just one note, that we do hope next quarter, that we would return back to our normal scheduling of doing these calls before the open of the market. So thanks for sticking around late for us. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.