Cboe Global Markets, Inc. (CBOE) Q3 2012 Earnings Report, Transcript and Summary

Deborah Koopman - Vice President of Investor Relations 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 Alan J. Dean - Chief Financial Officer, Executive Vice President of Finance & Administration and Treasurer Edward T. Tilly - President, Chief Operating Officer, President of CBOE, President of C2 Options Exchange, Chief Operating Officer of C2 Options Exchange and Chief Operating Officer of CBOE Edward L. Provost - Chief Business Development Officer and Executive Vice President

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Roger A. Freeman - Barclays Capital, Research Division Paul Lanks - JP Morgan Chase & Co, Research Division Howard Chen - Crédit Suisse AG, Research Division Jillian Miller - BMO Capital Markets U.S. Alexander Blostein - Goldman Sachs Group Inc., Research Division Alex Kramm - UBS Investment Bank, Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Kenneth M. Leon - S&P Equity Research Surinder Thind - Jefferies & Company, Inc., Research Division Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division Gaston F. Ceron - Morningstar Inc., Research Division Faye Elliott-Gurney - BGB Securities, Inc., Research Division Edward Ditmire - Macquarie Research

Good day, ladies and gentlemen, and welcome to the CBOE Holdings Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Debbie Koopman, Vice President, Investor Relations. Please begin.

Thank you. Good morning, and thank you for joining us on our third quarter earnings conference call. On the call today, Bill Brodsky, our Chairman and CEO, will provide an overview of the quarter and an update on our strategic initiatives; then Alan Dean, our Executive Vice President and CFO, will review our third quarter 2012 financial results. Following their comments, we will open the call to Q&A. Also joining us for Q&A is our President and COO, Ed Tilly; and our Executive Vice President and Chief Business Development Officer, Ed Provost. In addition, I'd like to point out that this presentation will include the use of several slides. 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 Brodsky.

Thanks, Debbie. Good morning, and thank you for joining us today. I know many of you are calling in from the East Coast, and I want to preface my prepared remarks by acknowledging the very difficult circumstances that many of you and your families are dealing with in the aftermath of this devastating storm. We know that a long recovery is ahead. Our employees, like all Americans, are seeking ways to help in the relief effort. We are urging them to follow President Obama's request for financial support of the recovery efforts, and our company will lead by example in that donation effort. There's been speculation in the media on whether the closures, Monday and Tuesday, could have or should have been avoided. We participated in the calls with other exchanges and the SEC in the spirit of cooperation. We did not and will not second guess decisions made by those in the eye of the storm. Their first priority was to avoid any additional calamity, financial or worse, that could potentially result from keeping markets open as a life-threatening storm engulfed the entire Eastern seaboard. Every natural disaster is different. No doubt there will be lessons to be learned once the response to this has been more fully evaluated. For now, we are grateful that trading resumed yesterday without a hitch, and we're returning to business as usual, at least in the financial markets. Thank you again for joining us under what are difficult circumstances for many of you. I will now turn to my report, the CBOE's results for the third quarter of 2012. It's my pleasure to report another strong quarter for CBOE Holdings, where our ability to leverage proprietary products to compete effectively in multi-listed products and to prudently manage our resources enabled us to achieve solid financial results. There were several bright spots in trading volume at the CBOE, maybe even more notable, given the very lackluster trading in the broader market, particularly in U.S. equities, where third quarter volume has hit the lowest in 5 years. Year-to-date, the options industry is down 13% from last year's record pace. At CBOE, where increased market share and a diverse product line have helped to mitigate the effects of a broader market decline, volume for the same period is down 7%. In light of the market challenges, we took proactive measures to reduce expenses while continuing to invest in our growth initiatives. My remarks today will focus on progress made in those initiatives and on the considerable opportunities we see ahead, beginning with product development. There are several positive developments to note with regard to our high-margin proprietary product lines, CBOE's S&P 500 Index options complex and options and futures on CBOE's Volatility Index. Our S&P 500 Index product line, which includes our flagship SPX product, SPXpm and SPX Weeklys, which is also a PM-settled product, carries our highest options rate per contract. SPX Weeklys, one of these bright spots that I mentioned, represent one of CBOE's fastest-growing products. CBOE invented the weekly options concept by helping customers to target opportunities tied to specific market events, such as earnings and government reports. SPX Weeklys was CBOE's first weekly product, and it initially traded solely in open outcry. In late 2010, we transitioned SPX Weeklys to our Hybrid trading model, which incorporates electronic and open outcry trading in one exchange. Volume nearly tripled in 2011, and year-to-date through September, trading is up 39%. Moving on now to our volatility franchise. Trading in VIX options and futures continues to thrive even amidst low volatility. VIX options average daily volume is up 4% through September compared to last year's record-setting pace, and volume in VIX futures continued to ride a wave of dramatic record-setting growth. Through September, VIX futures average daily volume rose 68% over 2011's record. Trading volume in both VIX futures and VIX options set new daily highs in September, which was also the highest volume month in VIX futures history. The tremendous growth in our VIX complex is fueled in part by a growing number of exchange traded products tied to the VIX Index. At the end of September, there were more than 34 such products, with assets under management in excess of $4 billion and with total shares outstanding at an all-time high. In addition to the ongoing domestic growth, we are very excited about the potential for increasing the use of our proprietary products globally. Our index products continue to provide unique utility to overseas customers. SPX enables investors to take a position in the broader U.S. equity market with a single transaction, and VIX has emerged as a proxy for worldwide equity market volatility, which, in turn, drives tremendous interest in VIX options and futures. We expanded our international marketing efforts by leveraging our U.S. Risk Management Conference, now in its 28th year, with our first European Risk Management Conference held in Ireland this September. Risk Management Conference is strongly focused on VIX and SPX, and we were thrilled to host over 160 participants, which included some of Europe's most sophisticated options and volatility practitioners at our inaugural overseas event. We were especially pleased to announce at Risk Management Conference, our plans to establish a London hub next year using our CFE network equipment, housed in a London data center. The hub will provide European firms with a highly efficient way to send and receive data and to execute trades on the exchange. We also announced our plan to expand VIX futures trading to virtually 24 hours a day, 5 days a week in response to customer demand for greater access to VIX futures. We believe that around-the-clock trading in VIX futures and the CFE London hub will offer the ultimate trading flexibility to customers worldwide. Both initiatives are pending regulatory approval. In one other new product development, we announced plans on October 1 to launch S&P 500 Variance futures at the CFE. We expect that the advantages of trading in an exchange environment, including centralized clearing and price discovery, will make our new contract very competitive with the OTC market and the S&P 500 realized variance for the S&P 500 realized variance swaps. In addition, we expect to find interest among market participants whose access to the OTC swap market is limited. We are targeting a year-end launch. Moving on to equity options trading at CBOE. As mentioned earlier, we achieved considerable market share gains year-to-date in multiply-listed options. Though -- through September, our market share for all U.S. options trading was 29.7%, an increase of 220 basis points over the same period last year. These gains were due largely to the success of our Volume Incentive Program or VIP. We never rest on our laurels in the highly competitive and fluid equity options arena. In fact, we've seen some erosion in our year-to-date market share gains, and in response, we plan to unveil the next generation of our VIP program, VIP 2.0, in the near future. As discussed in previous calls, we closely monitor trading on CBOE and C2 to ensure that both of our options markets are optimally deployed, given the very dynamic competitive environment. We recently received SEC approval of a rule to allow for Designated Primary Market makers or DPMs on C2. So it will come as no surprise that we intend to introduce a DPM-centric model on our all-electronic exchange. CBOE pioneered the DPM concept, which we believe will bring additional liquidity to C2. The DPM model also provides us with a framework for new pricing and incentive plans, which we are very excited about. We had, in fact, planned to be announcing our plans for C2 this week, but so many C2 participants have been directly impacted by the East Coast storm and its aftermath that we elected instead to temporarily delay announcing our additional plans but look forward to doing so in the very near future. I will wrap up by saying that I'm especially proud to be part of a culture at CBOE that enables us to successfully weather short-term market challenges, while never losing focus on product innovation and investor education to grow our business for the long term. Product diversity helps us manage fluctuations in volume, but we also constantly monitor how to best allocate our resources to pursue future growth opportunities even when market conditions are challenging. We know that volume inevitably rebounds, and we are all thrilled when that happens. But we are in the business of managing, not predicting volume cycles. CBOE has been at it a long time. Whether the industry is soaring or slowing, our disciplined approach to cost management and our focus on future growth does not change. This approach has served us well and will continue to guide us going forward. Thank you for your attention. Let me now turn it over to Alan Dean, our CFO.

Thanks, Bill, and good morning, everyone. I am pleased to report solid third quarter results. During last year's third quarter, we achieved the highest operating revenue and earnings for any quarter in the company's history, driven by a surge in trading volume. As we faced lower overall trading volume in the third quarter this year, we took steps to reduce expenses to enhance operating margins going forward. This slide summarizes our third quarter results compared with last year's third quarter. Operating revenues for the quarter were $128.3 million, a decline of 11% compared with the prior year period. Operating income was $60.8 million, representing 47.4% of operating revenues. Adjusted net income allocated to common stockholders was $37.7 million, decreasing 16% compared with the third quarter of 2011 and translating to adjusted diluted earnings per share of $0.43. Before I continue, let me point out that our GAAP results reported for the third quarter of 2012 and 2011 include 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. Turning to the details of the quarter, starting with total operating revenues. The key metric impacting revenue for the quarter was lower trading volume, which resulted in lower transaction fees. This decrease was offset somewhat by increases in exchange services and other fees, as well as other operating revenue. Transaction fees declined $23.2 million or 21% from last year's third quarter, driven by a 22% decrease in trading volume, offset somewhat by a 1% increase in average revenue per contract or RPC compared with last year's third quarter. Trading volume for the quarter was down across each product category, with the exception of the futures contracts, where VIX futures continue to establish new records for contracts traded. RPC for the third quarter increased to $0.317 compared with $0.313 in last year's third quarter. This increase resulted from higher transaction fees per contract derived from index options and futures contracts as a result of fee changes implemented earlier this year. The RPC for index options and futures contracts increased by 13% and 17%, respectively, compared with last year's third quarter. These increases more than offset declines in multiply-listed options, equities and exchange-traded funds, resulting from our new Volume Incentive Program. RPC also increased sequentially, up 1% in the third quarter compared to the second quarter, mostly due to a shift in the mix of trading volume. Exchange services and other fees increased by $3.3 million versus last year's third quarter as a result of fee changes we implemented at the beginning of the year. Given the year-to-date revenue derived from these fees, we are increasing our guidance to a range of $28.5 million to $30.5 million for the year from a range of $27 million to $29 million. The $3.9 million increase in other revenue was primarily due to fines assessed to trading permit holders as a result of disciplinary actions. Continuing down the income statement. This next slide details total operating expenses of $67.5 million for the quarter, which was down $1.1 million or 2% compared with last year's third quarter, primarily due to lower volume-based expenses. Core operating expenses were $46.1 million, an increase of $3.8 million or 9% compared with the third quarter of 2011, primarily due to increases in employee costs and outside services. The increase in employee cost was primarily due to severance charges of $2 million taken during the quarter. Outside services were up primarily due to higher legal expenses. Legal expenses can fluctuate quarter-to-quarter based on activity pertaining to legal proceedings. As we announced in September, we had a decisive victory in the ISE index litigation -- ISE option litigation, whereby the Illinois Supreme Court unanimously rejected ISE's request to appeal the Illinois appellate court's previous decision. In addition, we settled another outstanding litigation. While we were very pleased with these developments, we did incur higher legal expenses as a result. We continue to closely scrutinize all expenses and in light of the uncertain market conditions, have pulled back on discretionary spending in areas such as travel, advertising and noncritical systems projects. We are maintaining our full year 2012 guidance for core expenses to be in the range of $173 million to $178 million. Previously, we had stated that we expected core expenses to be closer to the low end of our guidance range if volume had been flat to up 4%. We now expect core expenses to be closer to the midpoint of our guidance range due to the $2 million severance charge and higher-than-anticipated legal expenses. Volume-based expenses, which include royalty fees and trading volume incentives, were $12.7 million for the quarter, which was $4.8 million or 27% lower than last year's third quarter, representing decreases of $2.7 million in royalty fees and $2.1 million in trading volume incentives. The decline in royalty fees is directly related to lower trading volume in licensed products compared with last year's record volume quarter. Trading volume incentives were down due to lower trading volume in multiply-listed options contracts and changes in the criteria for contracts that qualify for the quantity-based fee waivers. Operating income for the third quarter was $60.8 million or 47.4% of operating revenue, down 480 basis points compared with last year's third quarter margin of 52.2%. We have taken proactive measures to reduce expenses and position the company to gain additional leverage as trading volume improves. Our GAAP effective tax rate for the quarter was 24.4%, down significantly from last year's effective tax rate of 44.6% as a result of tax benefits recognized during the quarter. The effective rate for the current quarter includes the benefit of significant discrete items related to prior years, totaling $7.7 million or $0.09 per share. The lower effective tax rate also reflects the impact of the recognition of other discrete items and the benefit of a new tax apportionment method enacted by Illinois. In contrast, last year's third quarter included the impact of an increase in the Illinois tax rate, effective January 1, 2011, and a charge of $4.2 million or $0.05 per share, taken to reserve for potential additional tax liabilities as a result of an advisory opinion from New York state taxing authorities. The adjusted effective tax rate for the third quarter of 2012 and 2011, which excludes the $7.7 million and the $4.2 million, was 37.1% and 38.9%, respectively. As you can see from this slide and the press release exhibits, we have broken out the adjustments to GAAP results. We now expect our adjusted effective tax rate for the full year 2012 to be in a range of 39.6% to 40.1% versus the previous guidance range of 41.2% to 41.7%. The most significant differences in the adjusted effective tax rate and the statutory rate are state income taxes and discrete items relating to the current period. Turning to the balance sheet. As shown on this slide, we ended the quarter with cash and cash equivalents of $160.3 million compared to $134.9 million at the end of December 2011 and $147.2 million at the end of September 2011. Moving to cash flow. For the first 9 months of this year, cash flow provided by operating activities was $140.9 million compared to $164.3 million last year. This decrease was driven primarily by an increase in working capital usage, resulting from higher receivables, offset somewhat by higher net income. Year-to-date capital expenditures were about $27 million, up about $3 million from last year. Through September, we spent nearly $53 million to purchase shares and return nearly $35 million to stockholders through dividends. During the third quarter, we did not repurchase any shares of common stock. As of October 31, we had $103.3 million remaining on our existing share repurchase authorization. A few days ago, we announced our fourth quarter dividend of $0.15 per share, reflecting an annual dividend payout of $0.54 per share for 2012, which represents a 23% increase to our 2011 dividend payments of $0.44 per share. Capital deployment is of particular interest to investors, particularly in light of the uncertainties surrounding tax law changes. We continue to manage excess cash in line with our capital allocation strategy and look to deploy capital opportunistically through dividends and share repurchases, while also considering other investment opportunities to maximize stockholder value. We plan to continue to take a balanced and opportunistic approach to deploying capital. That means, first and foremost, we will fund the growth of our business we will look to repurchase shares to enhance our EPS growth and shareholder returns while also looking to show steady, consistent growth in our annual dividend payout. As noted in our press release, we are reaffirming our 2012 guidance as updated on August 2, with the exception of the guidance revisions I covered already, which are also outlined on this slide for your reference. In closing, we remain confident on our long term growth prospects as we continue to focus on operating efficiently and delivering innovative products and services to our customers with the goal of creating value, both for market participants and our stockholders. With that, I will hand the call over to Debbie so we can take your questions. Thank you very much.

At this point, we would be happy to take questions. [Operator Instructions] Operator, please take our first question.

[Operator Instructions] The first question is from Rich Repetto of Sandler O'Neill Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Bill and Alan and Debbie, I guess my question is on the VIX product growth. Bill, you went through it in the presentation, just it's a franchise in itself. And I guess the 2 points I want to ask were, where do you see growth going forward? And then, it does give you more leverage, we believe, with the S&P license. Can you give -- the exclusive trading license. Can you give us any updates you might have with any discussions with S&P given your growth of the VIX?

So wait a second. Rich, I got to get this straight. You're supposed to ask one question. Do you want go back to VIX or do you want to go back to the S&P thing? Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Okay, I'll just take the second one.

I think, you're better off with the first one. Look, as we've explained in many, many other meetings, we've had this 30-year relationship with S&P. It's an excellent relationship. The contract has many years to go. When we are ready to have those conversations, there'll be time to discuss it. But the point is that we are not discussing the ongoing relationship with S&P other than to tell you that it's excellent. And you're right, the VIX situation makes our relationship with S&P even better and our negotiating situation even stronger than it ever was.

The next question is from Roger Freeman of Barclays.

Just I guess coming back to the capital management. I heard your comments and saw comments within the press release sort of acknowledging potential tax changes. You didn't buy stock in the quarter. Just can you kind of clarify or -- thinking maybe a little bit more, I mean, are you considering other options like a special or something?

So, Roger, this is Bill. So let me start off, and if I need help, Alan will join in. But our Board has been very clear that we want to return excess cash to our stockholders. And the 2 ways that we have preferred to do it is a dividend policy that is consistent and that is well within our capability to maintain and the second is to do stock buybacks. Obviously, we are cognizant of what's going on or isn't going on in Washington, and therefore, we want to remain flexible in the next quarter. But I can tell you that our strong preference is the first 2 points.

Roger, I'll add there's still time for all decisions before year-end, and we aren't ruling anything out.

The next question is from Ken Worthington of JP Morgan. Paul Lanks - JP Morgan Chase & Co, Research Division: This is actually Paul Lanks, dialing in for Ken. I wanted to follow up on the first question about VIX. Curious what volumes look like in the non-core products and how you view the growth opportunity there versus the more core products like SPX.

I don't know how we -- what do you mean by non-core products? If you wanted to focus on VIX, we'll do that. Is that what you're talking about? Paul Lanks - JP Morgan Chase & Co, Research Division: Like the non-core volatility-oriented products. Like SPX will be more core product and maybe something like emerging markets indices...

Okay. The bulk of the volume is in VIX, VIX options and VIX futures. Other things are, to a greater or lesser degree, proceeding. And what we believe is that if we continue education of customers, both domestically and globally, the concept of VIX, which is really a whole new asset class, will lead to further growth. But the bulk of our business is clearly in the S&P 500 VIX options and VIX futures. Emerging markets is one of the promising areas. What we're doing is engaging on a very long-term educational process that will teach people how VIX works and then it can be applied to other asset classes, particularly non-equity classes. So it's going to be a long slog, but as far as we're concerned, well worth the effort. Alan?

Yes. I think it might be important to add that something that we, I think, at least, suspected and knew before but was confirmed in our Risk Management Conference in Ireland, is that interest from overseas and markets that aren't -- you wouldn't think are tied to the S&P 500. They look at our VIX product as a surrogate for volatility in their markets. So I think there's a lot of growth opportunities outside of the U.S. in this S&P 500-based VIX product outside of our borders.

The next question is from Howard Chen of Credit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Just a quick one on guidance. First, you've all done a great job of controlling expenses in both better and worse volume backdrops. Alan, can you give a sense of the savings related to the recent announcement? And then if I can jam in a second, the exchange fee guidance assumes a fairly meaningful step-down in 4Q. Is that a function of you trying to say something on stress from the dealer community or is this timing-related? Or is this just kind of good old CBOE conservatism on your part?

Thank you, Howard. Well, there are a lot of factors that you brought up. The guidance that we changed on core expenses, what we did is we said we didn't think it would be at the lower end of the range, given weak volume because of increased expenses that we experienced in severance cost and legal cost. And that's really just how I see it going forward. And reducing expenses, controlling expenses going forward is a battle that never ends, and we look at employee costs on a continuous basis, contract programming, promotional expenses. There's a fairly routine and rigorous process that we go through when we're experiencing stress in volumes. So we've done that certainly this summer, and we will continue to do that as long as we think that volume is weak. Does that get it Howard? I'm not sure if that gets to the heart of your question. Howard Chen - Crédit Suisse AG, Research Division: Yes, I think that gets it. I was just curious if there was a way to quantify the savings in the workforce reduction and the second on the exchange fees, if there's any other -- if you were trying to say anything in addition to what you put in the release on it.

I think it's important to note that we weren't public at all on the savings that we thought we would realize through the reduction of force that we experienced in early September. What we -- you can look at it is our headcount, and it puts our headcount reduction -- after the reduction of force, we're back pretty much where we started a year ago or at the beginning of the year. And so we're experiencing some pressures, some upward pressures in headcount and other areas of the exchange. And so our reduction of force was -- holds us flat more than anything.

The next question is from Jillian Miller of BMO Capital Markets.

So just to touch on some of the global VIX opportunities you highlighted. You're extending trading hours for VIX futures and opening up a hub in London, and I just wanted to get your thoughts on where global volume is now as a percentage of the total VIX futures volume and where can it go over the next few years. And also, it might be helpful to size the opportunity. If you could tell us like what percent of assets under management tagged to VIX are coming from funds outside the U.S.

Yes. So on the first issue, we see tremendous potential growth outside the U.S. going forward. Obviously that's the reason we're investing in the London hub, and we met with people from Europe at our Risk Management Conference, where, on one hand, the level of sophistication of some of them is outstanding, as good as any place in the U.S. and in others there's an increasing appetite to learn more about it, both hedge funds and more, what I'll call, traditional institutional money. The growth -- what was the second part of the question?

How much is outside the U.S.

Well, I don't know if I can tell you that because many of the funds that exist are from international banks, and they have clients all over the world. So we just see the assets under management per fund, but I don't think we have access to that -- the derivation of the -- where the money comes from.

This is Ed Tilly. That's right, Bill. Similar to the options volume, we know there's volume coming from outside of the United States. We're not sure because most of the access is by members. And we're not sure where that -- the origination point is. But I think what I'd point you to is we have been extending the hours of VIX well over the last year, and we see 5% to 7% of the VIX volume coming in before the U.S. market opens. So while we can't point directly to where the volume is coming from, it's certainly -- the trend that has led us to expand and then go to 24/5 and then actually reach as far as putting in a pop in London as you point out. So the trend is right for us in free market open VIX trading, and that's really what we're going after.

The next question is from Alex Blostein of Goldman Sachs.

I wanted to spend a minute on the VIP 2.0 program. Maybe you can kind of talk a little bit about the timing. But more importantly, it feels like you guys have done this in the beginning of the year, your market share picked up a little bit and now it's back down to around 20%. I guess, what gives you confidence that this would work better? And as a follow-up to that, I guess, in the beginning of the year, you were able to raise prices on some of your proprietary products. So would you be able to do the same again this time around? And is there some sort of re-ceiling of how high these prices could go for you?

Our goal in VIP 2.0 is to optimize revenue. It could mean, although not necessarily, that RPC would drop in our multi-listed products. But the goal would be that our overall revenue would increase. So I wouldn't expect that we would do anything that wouldn't increase our overall revenue. Why do we think that a revised VIP program will be effective? Well, we don't do things in a vacuum, and we are careful about what we do. And so I think when we roll something out, we've got a pretty good idea, at least directionally, and I would say even more confident on how effective something would be. So while we haven't announced the specifics on VIP 2.0 that we'll roll out at the end of this year or at the beginning of next year, we think we're confident it would be effective, that it would optimize our revenue and be good for CBOE overall. I think I forgot one part of your question. You talked about loss of market share in October. Yes, we did experience that in October, and we had a competitor who had a -- their response to VIP 2.0 was to establish a program that was similar to ours, but then, through the ownership structure of the exchange, allowed them to provide benefits to their owner, order flow provider in a way that was best for them. So I think we can establish a program, modify our current program in a competitive way going forward.

The next question is from Alex Kramm of UBS.

Real quick, just wanted to come back on, I guess, Roger's question on the capital side. I don't think you mentioned that. But if you look at your balance sheet right now, you have $160 million in cash, I think, at the end of the quarter. I think you're throwing off another $20 million or so before the end of the year, so that puts you at about $180 million or so at the end of the year. So just curious if you could remind us what you think -- if there was the potential of a special dividend, what you think you need to run the business, how low you could go. I mean you have very visible cash flow. And then maybe just related to that, are there any other items in the fourth quarter we should be thinking about that could reduce that potential?

Alex, the policy, the way the board looks at our capital allocation hasn't changed. We first look to fund our business, after that, return capital to shareholders. They prefer regular sustainable dividends. And then after that, stock repurchases. There's tax situation going on now that could throw different variables onto the mix, and there's timing before any decisions have to be made. And we do have $160 million on the balance sheet. I only need, say, $40 million to $60 million, is what I've said in the past and I'm holding to that. That kind of a minimum level suits us just fine. So nothing has changed other than exogenous factors. And we'll -- with time, I think we'll make things clearer for you.

So just to clarify, there's nothing else in the fourth quarter in terms of cash outflows? So in essence, you want to have something like $120 million, $140 million excess, right?

Using your math? I can see how you got to it.

The next question is from name Niamh Alexander of KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: I have -- kind of sights on the special dividend. I assume you're not interested at all to borrow for a special dividend. So I'll move on to the volatility end product, which is trading really well. Could you help me get a sense of the stabilization or so in the VIX futures complex because the rate card has been whipping all over and the volumes kind of gotten to enough of a level where it's making a nice difference to the earnings. What's a good run rate to think about for the fee there in that futures complex?

So I'm not quite sure I followed the question exactly. But let me... Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: If I back into the RPC in the futures complex, it was like $1.35, $1.37, $1.32 towards the end of last year. This year, it was $1.70. The last couple of quarters we're kind of averaging out at $1.60, $1.61 for just the VIX futures. So I'm just trying to think has the fee changed or has it kind of stabilized? Is it more just volume mix shift now that's driving it?

No, no. We did change fees right at the beginning of 2012. And in a way that it -- we knew it would increase our revenue per contract. And I think we even talked about that in our first quarter earnings call. So that's what's driving the increase in the revenue per contract from last year to this year. So with that, this is the spot that we find ourselves today. We expect to go forward. It was a change in the day-trader program, and the extent at which our customers use that can vary slightly. But with the change that went into the beginning in the year, this is really the trend.

The next question is from Akhil Botia [ph] of Rosenblatt Securities.

I just wanted to get some more color on the DPM program for C2, which participants you're targeting and where you think you might go to gain market share from.

I'm going to ask Ed Provost, who's with us, to respond to that, please.

Thanks for the question, Akhil, Yes, so in C2, we've evaluated the market model that we've had in place since inception, and consistent with some remarks we have made in the past, we have seen a shift away from some of the traditional maker-taker market models, which have been introduced in the business, including the maker-taker model at C2. So we are looking at and we've obviously filed and announced our shifting market model in our C2 exchange to a DPM-centric model. That aspect of the market model is similar to what we employ here at CBOE, where individual firms are appointed as DPM, which is a specialist-like function in each of the option classes. And we think that's consistent with the direction that the industry is going, more toward what we call the classic market model. Accompanying that will be some changes in our pricing model, but we're not public on that yet. So we feel very comfortable that these changes, when fully implemented, will make C2 much more successful going forward.

And do you have any DPMs signed up yet for C2?

So it'd be premature for me to comment on that yet. As Bill mentioned in his remarks, some of our slowdown in our introduction is tied to some of the events on the East Coast and some of the dialogue we've been having with our member firms will be involved in this program. So I'd just say stay tuned.

And the next question is from Ken Leon of S&P Capital. Kenneth M. Leon - S&P Equity Research: [indiscernible] asked about the special dividend either. But I want to hone in on average trading volume is down sequentially year-over-year, no surprise. But we haven't really focused on whether there's a burning regulatory issue, either from members or the CFTC, that's already having an immediate impact on trading and not just a global macro risk.

So are you asking if there's a CFTC-based regulatory issue that... Kenneth M. Leon - S&P Equity Research: Whether there's members and their customers adjusting already from the Volcker Rule or whether there's pronouncements underway or still in discussion with the CFTC that is having a direct bearing on trading volumes.

I think -- this is Bill Brodsky. My sense is that, there's clearly some impact of the Volcker Rule. We saw Goldman Sachs get rid of their proprietary trading operation, but then what happens is the people leave the firm, they set up their own shops. I think it is having less of an impact on our VIX product line than anything else because the VIX product line is so unique that we see new participants, I can tell you we've seen this even as recently as this week, firms that are very established in the business for years, are showing interest in VIX that they didn't show a year ago. So even if there may be some slippage because of the overhang of Dodd-Frank and the specter of Volcker coming in, the business constantly reinvents itself, and I believe that the VIX product line is something that has an enduring effect regardless of what I'll call the changes going on in the broader industry.

And I think, Bill, that's perhaps the dampening effect that we might see today. I think the opportunity, is what we keep pointing at and aligning ourselves and being ready for is the rule-making around may and must move OTC trading to a [indiscernible] or exchange market. While there's still uncertainty there, all we have done and we'll continue to do is prepare ourselves for any outcome that pushes OTC volume to our markets. And we're seeing some of that early traction, but look forward to more clarity as rules are made and finalized.

The next question is from Daniel Fannon of Jefferies & Company. Surinder Thind - Jefferies & Company, Inc., Research Division: This is Surinder Thind calling in for Dan Fannon. I just wanted to touch base on the tax rate. I mean there was a number factors that affected it this quarter, and we're basically back to the lows we kind of saw in 2009 and 2010. So I was hoping you can help me understand perhaps the sustainability of the tax rate going into next year.

Well, I haven't really commented about the tax rate for next year, although from what we're looking at right now, I don't know of any changes that would impact the range, the guidance that we're giving you for 2012. But as we roll into the next year, we'll revisit that issue again and give you more specific guidance when we talk about fourth quarter earnings in early February. Surinder Thind - Jefferies & Company, Inc., Research Division: Okay. And just very quickly. I may have missed this, but is there kind of a minimum level of cash that you guys are comfortable holding?

Yes, $40 million to $60 million. I've been consistent in saying that. That minimum level of cash is fine by us. We have a system where that minimum level is more than adequate.

The next question is from Patrick O'Shaughnessy of Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: A question on dividend trades. I believe you guys came out and said that you're going to discontinue accepting dividend trades, and I want to say that another firm did. And Philly has basically come out and said they still think that their acceptable trade types and they want to keep offering them. Do you think there's going to be some sort of industry-wide movement to ban those? Or it is just going to be a function of as long as one competitor is willing to offer them, they'll still be out there?

Patrick, Ed Provost. I think your last statement is probably the case, if you've got one exchange that seems to be the destination for those dividend trades continues to offer that fee cap, they'll probably continue. We, CBOE, have never been a destination for those trades. Our marketplace is much too liquid, and it's just impossible to get those kinds of trades up. As to an industry-wide initiative, that would have to be driven by the SEC. The exchanges all compete with each other. We can't talk to each other about our intentions with respect to fees, but we've never been proponents of dividend trades. And while never having had them done at our exchange to any great extent, it was in our fee schedule, and we chose to follow the lead, if you will, and eliminate that from our fee schedule. But the impact on us will not be significant because we never got them. If they were to be eliminated industry-wide as a result of someone else's action, our market share would actually go up because it actually reflects negatively on our market share.

The next question is from Gaston Ceron of Morningstar Equity research.

Just had a very quick question on CFE, which we've just seen some nice growth here recently. Just wondering, Bill, I think you talked in your presentation a little bit about how you're going to rollout this S&P Variance Futures product there at some point. Can you talk a little bit further beyond that kind of a little more medium to long term? I mean what kind of other products might we see on CFE kind of going forward and what's kind of the longer-term plan for continuing to drive growth on that market?

Well, the longer-term plan is to do 2 things: one is to keep growing the core product, which is the VIX futures, which as we said earlier, has really become the proxy for global equity market volatility; and the other is to keep innovating and working with the community. The variance strips interestingly are really part of the Dodd-Frank issue, and that is there are -- there is a market out there that's OTC now that some people can participate and others don't really have access to it. And these are sophisticated products for very unique niche of the marketplace. We're working with the user community. We're working with DRW, which is a great firm here in Chicago. So these things are really part of the long-term strategy. These are sophisticated products. They take a lot of preparation to get them up and going, and then you need a lot of continuing education. So we have a whole variety of things. We have volatility on individual stocks, we have emerging market index, we have volatility on different commodity-related products. It's a whole host of things, and we have a new -- recently new head of our futures exchange that came out of the futures community, and he's literally got a global mandate to just promote that exchange.

The next question is from Faye Elliott of GBG (sic) [BGB] Securities.

Could you go over just a little bit more on the London hub and what the benefit would be? It seems that a lot of your users can use your services through the current setup. And I'm curious what the benefit to the top line will be from opening a hub in London and also, if that could affect the tax rate.

I'll respond to the first part, I'll ask Alan to respond to the taxes. We did a lot of discussions with customers in terms of how they want to use VIX. There's little doubt that if you're going to go out of this time zone that the logical place is London. The idea is to be closer to the electronic hub, which London provides. So our feeling was that if we're going to trade after hours, certainly from what we're seeing today and what we know of the marketplace, you want to be in London and that will facilitate better business than if we just try to do it through Chicago during the middle of our night. So I think it all fits together. And Alan can discuss the tax rate.

Faye, on the tax rate, right now, the way we're seeing it is no material change to our tax rate because of this London pop, this London hub. But it's still under evaluation. This hub won't become operative until next year, and so there's a few more things we need to investigate. But my look right now is no material change.

The next question is from Ed Ditmire of Macquarie.

I have a question. As you contemplate the next step in the SPXpm or C2 in terms of building liquidity there, I have a question. If the -- beyond the current plans for new kind of incentives and market structure, would there ever be a time when you contemplated that electronification of the SPX could go beyond the pm contract and the attention turned back to the main SPX contracts, i.e. would it ever be possible that you would contemplate introducing side by side electronic and open outcry trading in a fungible contract? Or will all attempts be limited to getting the SPXpm contract running?

Yes, it's a great question. The way we look at SPX and SPXpm is it there's -- this is a complex of products, and we are agnostic in terms of where the growth comes from. And quite frankly, the growth in the last 12 months has come from the Weeklys, which we started off, as I said in my comments, as a pit-traded product and then we migrated that to the Hybrid. And then we brought out SPXpm on C2. We're constantly evaluating the whole situation. But I want to stress something that we've talked about in the past, and that is our SPX product, the core product, is a unique product in our industry because it's so institutional, it trades differently than a lot of other products. So anything we do in that area, number one, we keep our eye on the ball as we want to grow the whole pie. But second, we're not going to just do things just in a kind of reactive way because it sounds good. We have to be very careful that the SPX product is the preferred and the most liquid option contract in the world and used by institutions. And we just don't want to mess with it just because it sounds good to say, "Well, let's just make it electronic."

Got you. So it sound like even if there was no further progress with the SPXpm taking -- growing its share that it will be incredibly unlikely that you would introduce electronic trading of the main SPX contract.

I don't want to go that far. I just want to say that we're going to be very thoughtful about it because we -- the most important thing here is talking to your users. There are a lot of S&P 500 products out there. We have something that has the largest dollar value and open interest. And this is a jewel that we just don't want to just -- so it's not that it might never ever happen, it's more that we're just not going to do something because it has some intellectual appeal.

The next question is from Akhil Botia [ph] of Rosenblatt Securities.

It's Akhil Botia [ph] again. Just a follow-up, what's the sustainability of these other fees? You said there will be sort of fines and what-not. And then just on professional fees, with the lawsuits resolved, will expenses step down in the future?

The sustainability of the other -- I think you were referring to the exchange services and other fees line item that's up this year, is that what you're referring to?

No, the other piece that was $6.2 million in the quarter that were due to the the [indiscernible]

So other revenue, the other revenue line item.

Yes.

Okay. Well, that was -- the increase in that line item is due to a disciplinary fine, so it's regulatory in nature. Those fines are inherently lumpy. So no, I would not take that $6.2 million number and annualize that. I would take a longer-term view of that revenue line item and look at it in that way.

Okay. And then on the legal expenses?

Well, legal expenses, as I said in my prepared remarks, are unpredictable many times and very dependent upon the litigation that we're going through at the time. So we're able to successfully and conclude 1 litigation in the quarter, and so that should help. But I want to drive down legal cost as much as I can, but we're not going to shortchange ourselves and do something that endangers the company. So I can't be specific on legal fees. But our goal is to hold overall core expenses at the rate of inflation, and we'll be more specific on that in conjunction with our fourth quarter earnings call early next year.

The next question is from Rich Repetto of Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Just a quick follow-up. On the investment or the London hub, is the expenses already in the run rate? And if it's not, is that -- I can't see how it'd be that much, but could it impact the cash, this $40 million to $50 million of what you need cash on hand?

No, Rich. The costs really aren't reflected in our results either for the quarter or year-to-date. And looking at the expenses going forward, they're not material. You won't even notice it.

The next question is from Niamh Alexander of KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: High frequency trading, getting a lot of price again. But there's no specific proposal out there from the regulators, but my understanding is that it's a very small part of your business. Can you just refresh me if maybe is it mostly kind of more focused on C2? Or how should we think about your business there, just in case we do see some new rules come down the pipe or something like that?

Sure, let me start. This is Ed Tilly. You're right. This is not a big part of our business. The high frequency trading, there's many different forms. We think our -- we benefit from those that are resting orders in our marketplace that will be considered high frequency. We don't think that the -- anything that's contemplated or the traffic, if you will, that we're reading is really directed at those high frequency traders that are adding liquidity in a meaningful way. Rather, the high frequency trading that has picked up some negative price, you're right, we don't find CBOE's matching algorithms. The traditional model here at CBOE very friendly to those type traders in that we continue to reward those that are dedicating liquidity from the open to the close. So really, not in -- going to be negatively impacted if there's a ban or registration requirement. We think we'll continue to get those that are adding liquidity in a meaningful way and those that are on the -- receiving more negative comments as HFT really not going to affect CBOE in the future. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: And if I could, you have an ongoing dialogue with the regulators on a lot of different issues, and this is getting a lot of attention in the press. Some of the exchanges have other kind of equity securities exchanges have expanded on, maybe how much of their revenue it is. And sort of defining as it were, are you kind of in -- is the exchange community in an active discussion with the SEC right now about kind of imposing rules at the exchange level or the regulators kind of crafting new legislation or curbs for that group right now that you're aware of?

Well, as you know the SEC had a public hearing in the last 10 days or so on the issue. I think that this is just an early fact-finding situation. They didn't even have a big option component. It's really focused on the equity markets in the U.S. But on any market structure issue that we believe will have an effect on the option business, we will be active participants, whether it's the SEC, whether it's Congress or even internationally.

And the next question is from Faye Elliott of GBG (sic) [BGB] Securities.

Just back to the the VIP version 2. The first VIP structuring was obviously largely unsuccessful and an additive to you. Do you think that the, I guess, competitor response that resulted in October's lower share that you can come up with yet another pricing structure that fits the additive and really protective of your fees? Or do you think that it will be -- might actually have to dig into the top line a little bit more?

Faye, that question, I think, was asked before, so I may be redundant. I think we can come up with a change or modification to VIP that will be effective, that will increase our market share, respond -- be competitive and successfully respond to our competitor who did something during the quarter that caused us to lose market share. And I think what we will do will be to optimize our revenue, increase our overall revenue. And that's our goal, our primary goal, and that's what we intend to do, and so what I think we will do.

There are no further question in the queue at this time.

That completes our call this morning. Thank you, all, for joining in, and look forward to speaking to you.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.