Cboe Global Markets, Inc. (CBOE) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the CBOE Holdings Q3 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for this conference call, Ms. Debbie Koopman.

Thank you. Good morning, and thank you for joining us for our third quarter 2013 earnings conference call. On the call today, Ed Tilly, our CEO, will provide an update on strategic initiatives for 2013; then Alan Dean, our Executive Vice President and Chief Financial Officer, will review our third quarter 2013 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 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 discussion 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 Ed Tilly.

Thank you, Debbie. Good morning. I'm happy to report another strong quarter at CBOE Holdings, driven by increased trading volume overall and in our higher-margin proprietary products, in particular. Our team continued to execute on CBOE's company-wide goal: to maximize market share in multiply listed options, while developing and promoting the higher-margin proprietary products that distinguish CBOE in the global marketplace. Our business continued to grow as a result posting a 7% increase in operating revenue and a 9% increase in adjusted diluted earnings per share for the quarter. Alan will take you through the financial results in more detail after I run through the highlights for the quarter. First, I'll look at options volume and market share. Total options average daily volume at CBOE Holdings grew 5% from the third quarter last year and declined 7% from the second quarter 2013. Year-over-year volume increased 20% in index options and 18% in ETNs and ETFs, offset by a 10% decline in equity options. CBOE continued to increase its industry-leading market share. Excluding dividend trades, CBOE accounted for 28% of all options trading in September, up from 26.9% in June. We garnered 20.9% of multiply listed options, up from 19.7% in June. Throughout 2013, we've noted the ongoing growth of VIX futures and options trading, despite prolonged periods of low market volatility. More recently, as VIX reacted to October's government shutdown and the threat of default, we saw the effects of spikes in volatility in VIX trading. Investors increasingly turned to VIX futures and options to buffer the changing political and economic winds. And on October 8, VIX volumes reached a new single day high of 1.78 million contracts, surpassing the previous record of 1.4 million contracts set on April 15 this year. While volume spikes like those seen in October provide a glimpse into the great beyond for ongoing growth in VIX futures and options trading, it's important to note that October's gains followed yet another quarter of remarkable growth in VIX trading, absent significant marketplace volatility. Third quarter ADV and VIX options and futures grew 21% and 48%, respectively, over the third quarter of 2012. Record volume days may grab the headlines, but the continued growth of these products, amidst historically low volatility, is to us, an even more compelling story that validates the tremendous utility of these products and the headway we have made in promoting them. Turning now to some update on those efforts. This past Monday, we successfully implemented the first phase of our extended trading hours initiative in VIX futures, which provides for an additional 45 minutes trading session, following the regular close of VIX futures trading at 3:15 Central Time. We look forward to implementing Phase 2, which adds another 5 hours to the trading day this Monday, November 4. This phase will allow European-based customers to access VIX futures during their local trading hours. Trading will begin at 2:00 a.m. Central Time, which aligns with the 8:00 a.m. open of the London markets. We're pleased to provide extended trading hours, not only to our European customers, but to what has become a truly global base of current and potential VIX users. In October, we hosted our second annual CBOE Risk Management Conference in Europe, where I was once again reminded that VIX is truly the world's gauge for market volatility. RMC Europe drew 150 sophisticated market practitioners, keenly interested in SPX and VIX trading. We were delighted to make true volatility-related product announcements at the conference, beginning with our plans to launch VIX futures and options on the Russell 2000 Volatility Index, RVX. The Russell, 2000 is the premier measure of the performance of small-cap U.S. stocks. Russell 2000 options, RUT, is our third most actively traded index option. RVX is calculated by applying our VIX methodology to RUT options. We are thrilled to provide customers with the ability to trade the volatility of the Russell 2,000 Index. We were working closely with our equally enthusiastic partners at Russell Investments to bring these products to market. Our plans call for RVX futures to launch on November 18, and RVX options to launch on December 2. Our second major product announcement at RMC was the creation of those CBOE Short-Term Volatility Index, VXST. The new short-term VIX is calculated using our proprietary VIX methodology and was designed to complement VIX. Whereas VIX is a 30-day horizon, the short-term VIX looks out just 9 days, making it particularly responsive to changes in short-term volatility. Together, these 2 indexes provide an unrivaled picture of expected market volatility. We spent -- expect to launch VXST weekly options and futures in the first quarter of 2014, pending regulatory approval. Customer response to short-term VIX weekly has been positive and enthusiastic. We anticipate investors will embrace the new product as a means to pinpoint and hedge the volatility associated with market events, such as earnings and Fed announcements and to generally fine-tune the timing of their volatility trades. We are thrilled to introduce a product that combines the most compelling aspects of VIX futures and options and SPX Weekly. To a great extent, the dramatic growth story of VIX futures and options has overshadowed the tremendous increase in SPX Weekly's trading. CBOE created the Weeklys concept in 2005 with the launch of SPX Weeklys, now one of our fastest growing products. A recent study by the Tabb Group, U.S. options trading 2013 notes that firms are leveraging Weeklys as liquidity builds and product availability expands. Tabb predicts Weekly's volume will reach 25% of total industry volume by year's end. At CBOE, SPX Weekly's year-to-date volume through September is up 127% over last year's record pace. Moreover, SPX Weekly's trading has created a new SPX customer base, which includes individual retail investors and what we referred to as active semiprofessionals. Both groups favor the trading precision afforded by the products' shorter-term horizons and lower premiums. Semi-pros, in particular, appreciate the SPX Weeklys, like SPY options, have point-and-click access, but represent 10x the notional value of SPY Weeklys. Global interest in SPX and the opportunity to grow SPX options trading among overseas investors mirrors that of VIX futures and options. Overseas investors gravitate to SPX products much as they do, VIX products, for their efficiency and hedging global economic risk. Simply put, VIX has become a proxy for global market volatility, while SPX enables investors to access the broad U.S. market with a single transaction. Given the numerous synergies of our 2 marquee products, our overseas VIX marketing and educational efforts enable us to cost effectively extend our SPX marketing reach as well. Frankly, we couldn't be more enthusiastic about the opportunity to increase trading in both product lines. I'll now wrap up by saying that our entire team is excited by the opportunities to continue to build volume and liquidity in our VIX and SPX products and to create new streams of liquidity through new products, such as a futures and options on our new Short-term Volatility Index. As we close in on the end of 2014, we remain focused on the strategic initiatives we laid out at the beginning of the year. New product development, maximizing our revenues and multi-listed products, extending our customer reach and providing the highest standards in market regulation and compliance. With that, I thank you for your attention. And now, I'll turn it over to Alan Dean.

Thanks, Ed, and good morning, everyone. This morning, I will review the key drivers of our third quarter financial results and comment on our outlook for the remainder of 2013. Let me start with a quick overview of the key stats for the quarter. We delivered another strong quarter with operating revenue of $136.7 million, up 7% compared with last year's third quarter. Operating income was $68.4 million, representing an operating margin of 50%, a 260 basis point improvement over the same quarter last year. Adjusted net income allocated common stockholders was $41 million, up 9% compared with the third quarter of 2012, resulting in diluted earnings per share of $0.47, a solid improvement versus adjusted diluted earnings per share of $0.43 for the same period last year. Before I continue, let me point out that our GAAP results reported for the third quarter of 2012 includes 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. There were no adjustments to our operating results in this year's third quarter, but in last year's third quarter, we did have some non-GAAP adjustments relating to the tax provision, which I will discuss later. Turning to the details of the quarter. As shown on this chart, the growth in operating revenue was driven by increases in transaction fees, regulatory fees and exchange services and other fees, offset somewhat by a decrease in other revenue. Transaction fees increased $6.4 million or 7% from the third quarter of last year due to an 8% increase in trading volume, offset slightly by a 1% decrease in the average revenue per contract to RPC versus last year's third quarter. The growth in trading volume was primarily driven by the continuing growth trajectory of our proprietary products. With total trading volume and index options up 22%, and futures contracts up 52%, exchange rate of products also contributed to the volume gain, increasing 19% while equities declined 9%. Our blended RPC, including options and futures, was $0.315, down slightly from $0.317 in last year's third quarter. The decline was primarily due to an increase in volume-based incentives for certain multiply listed options traded at CBOE under our Volume Incentive Program, or VIP as a result, the RPC in our options business declined to $0.273 compared with $0.287 in last year's third quarter. The revenue per contract on equity options and exchange traded products declined by 35% and 31%, respectively. On the plus side, lower RPC in these products was significantly offset by the ongoing shift in product mix towards our highest margin index options and futures contracts. In the third quarter, CFE's revenue per contract was $1.56, a slight decrease compared with last year's third quarter, reflecting discounts provided on certain trades. Multiply listed options continue to represent a declining percentage of our trading volume and transaction fee revenue, primarily due to the tremendous growth we are witnessing in our proprietary products. As depicted on this slide, in the third quarter of this year, index and options accounted for 29.9% of total contracts traded, up from 26.5% in last year's third quarter. Futures contracts accounted for 3.2% of total volume compared with 2.3% in last year's third quarter. The shift in the mix of trading volume towards our highest margin products fueled much of the growth in transaction fees for the third quarter of 2013. Index options and futures contracts accounted for 79% of our transaction fees for the quarter, up from 69% in the third quarter of 2012. We continue to see the strongest growth potential coming from our proprietary products and look forward to the introduction of our new volatility products Ed discussed, as well as continued growth from our flagship products. The $3.2 million increase in regulatory fees was primarily due to increases in our options regulatory fees. As we pointed out in our last earnings call, since the revenue drive from these fees is only available to cover expenses, we incur to carry out our obligations as a regulator. We make adjustments as needed to keep that revenue in related expenses and balance. To that end, effective September 1, we reduced the options regulatory fee for CBOE and suspended the options regulatory fee for C2. This change in addition to lower industry-wide customer volume resulted in a $1.5 million decline in regulatory revenue for third quarter compared with the second quarter. This range was split about 50-50 between the options regulatory fee changes and lower industry-wide customer volume traded by our permit holders, which was down about 13% versus the second quarter. Assuming similar trading volume in the fourth quarter as the third quarter, we would expect regulatory fees to decline by about $1.6 million on the fourth quarter compared against the third quarter. The decrease in other revenue was primarily due to lower fines assessed to trading permit holders resulting from disciplinary actions. Last year's third quarter, there was one particularly large fine, which accounts for this variance. Moving down the income statement to expenses. This next slide details total operating expense of $68.3 million for the quarter, up only $800,000 or 1% versus last year's third quarter. This increase primarily reflects higher royalty fees, offset somewhat by lower expenses for outside services and travel and promotional cost. Core operating expense of $44.8 million decreased $1.3 million or 3% compared with the third quarter of 2012. The key variance accounting for this decline was lower cost for outside services, resulting from a decline in legal expenses. Overall, year-to-date through September, core operating expense annualized is tracking in line with our guidance range and where we expect to be for the full year. Looking at volume-based expenses, royalty fees increased by $2.5 million or 22%. This increase is directly related to the growth in trading volume in licensed products, as well as certain royalty fee adjustments. Our GAAP effective tax rate for the quarter was 39.1% versus 24.4% in last year's third quarter. This variance was due to the recognition of significant discrete items in 2012 with no comparable benefits recognized in 2013. 2012's effective tax rate included the benefit of discrete items relating to prior years totaling $7.7 million or $0.09 per share, as well as the impact of the recognition of other discrete items that related directly to 2012 activity. As you can see from this slide and the press release exhibits, we have broken out the adjustments to GAAP results. Based on our year-to-date results, we now expect our effective tax rate for the full year 2013 to be in the range of 39% to 39.5%. Taking a look at the balance sheet. We finished the quarter with cash and cash equivalents of $226.4 million, compared to $207.8 million at the end of June. Our business continues to generate strong cash flows from operations. Year-to-date, we have generated approximately $172 million in cash from operations, paid nearly $43 million in dividends, used about $20 million for capital expenditures and another $20 million to purchase stock. After investing in the growth in our business, we have continued to return to cash to our shareholders through dividend payments and share repurchases. We repurchased over 306,000 shares in the third quarter at a total cost of $14 million at an average price of $45.63. At quarter end, $89.3 million remained available on our current share repurchase authorizations. We will continue to be disciplined in our repurchase activity, which will vary based upon stock price and other factors. Lastly, I would like to provide an update on our guidance for the remainder of the year. Incorporating our results through September, we now expect capital spending to be in the range of $33 million to $36 million, primarily reflecting lower spending than anticipated in that certain projects. Due to the change in outlook for capital spending, we are lowering depreciation and amortization to a range of $34 million to $36 million. And as I said earlier, we expect our tax rate for 2013 to be in the range of 39% to 39.5%. In summary, we had another solid quarter, and we are off to a very strong start in the fourth quarter with record trading volumes in our proprietary products in October. We are well positioned for continued growth and increased operating leverage going forward with positive business momentum, operating and expense discipline and a healthy balance sheet. With that, I will turn the call back over to Debbie.

Thanks. At this point, we would be happy to take questions. [Operator Instructions]

[Operator Instructions] Our first question comes from Rick Repetto with Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: But -- so with that, my one question is going to be around expenses, Alan. I'm a reasonable guy and I'm looking at -- if you look at the low end of your expenses, you -- the 1 89, that would imply $47 million for the last quarter, up from $44.8 million on the core expenses this quarter. So could you give us some color why it would increase and -- we know you've taken this under-promise and over-perform thing to a new height here. So...

Wow, Rich, okay. Rich, if you look at where we were through 2 quarters, we're actually at the high end of our guidance if you annualized the 2 quarter results. We had a good third quarter, primarily driven to reduction in legal fees and outside services. And although I wish I could predict with high degree of certainty what legal fees would be month-to-month or quarter-to-quarter, that's impossible. It depends on a lot of things and including litigation activity and other things. So I think the range that we've given the expense range is a good range, and that's where I expect to end up for the year. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Inside the 1 89 to 1 94.

Yes, yes.

Our next question comes from Alex Kramm with UBS.

Real quick on, I guess, on pricing, the -- obviously, the multiply listed business becoming smaller and smaller at the percentage of overall [indiscernible] pie. Obviously, the pricing has come down substantially, and people continue to point that out. It doesn't matter as much anymore, I guess. But given that market share stabilized and your competitors seems to be not as aggressive anymore, I mean, Alan, I think you said in the past there might be areas to get a little bit more constructive again. You still believe that, or do you think that's a good range from here?

Well, first of all, revenue per contract declined a little bit in this quarter compared to prior quarters, and that's primarily driven by a slight increase in market share. So that meant more of our customers were able to take advantage of our VIP program. So that's a good thing. I still do believe that revenue per contract in the multi-list category will continue its decline, although no one in the industry has made any significant fee changes since we responded to a competitor back in February. And I think we made another change in March. So everybody is still kind of holding firm. Now the last part of your question, are there opportunities to increase revenue per contract? There may be. Our fee schedule, unfortunately, is very complex, very long. We'll look for opportunities, but we won't be doing anything that we think will alienate our customers or endanger our business. So we constantly look for opportunities. I'm hopeful we'll find some. I wish I could be more specific with you, but that's all I can say right now.

Our next question comes from Alex Blostein with Goldman Sachs.

A question on capital management. So clearly still, ton of cash on the balance sheet. You guys are approaching year end. You bought $14 million of stock. You're kind of kicking down the CapEx spend. I know, historically, you kind of said buy back dividends first and then maybe special in some specific situations. Could this be one of those years where, again, you guys would consider special, or if not, what's the plan, I guess, for the excess cash? Because I think, historically, you talked about kind of like a $50 million working capital number.

Yes, I have $50 million, $40 million to $60 million as a kind of a range. I said it would be a minimum cash level for CBOE, and I still feel that way. And that low level is because we do generate so much cash on a consistent basis. And we do focus on returning capital to stockholders. And our first objective is to make sure we invest -- reinvest in our business as necessary. And then after that, regular dividends. We'd like to see that regular dividend grow along with our business. And we've been able to do that since our IPO 3 years ago. And most recently, 20% increase in our dividend from $0.15 to $0.18 per share back in August. And -- nothing is off the table in terms of what we might do to return cash to stockholders. Special dividend, we did a special dividend that was tax related about 1 year ago, but I know our board would look at that as a possibility going forward, as an alternative. Also, I -- what's not off the table is a variable dividend, like the other companies have done. I think we've looked at that all. Thirdly, we could look at some sort of acceleration of our stock repurchase program. And so the theme here is that we remain committed to returning cash to our stockholders. And we'll -- we aren't ruling out any of the different ways we could do that.

Our next question comes from Dan Fannon with Jefferies.

I guess just given all the technological issues that have kind of occurred across the various exchanges. I guess could you talk about the potential discussions and/or regulatory changes, or I guess, more scrutiny that you guys might see for the industry as a whole or what you guys might be doing, kind of going forward to prevent as a group potential future issues?

Dan, Ed Provost. Thanks for the question. Sure, we have, this year, following our issues back in April, been very, very focused on reviewing our procedures for software development testing, hardware configurations and the procedures we employed for rolling over to our DR, if that would be necessary. We were active participants in Chair White's conference in Washington on September 12, out of which came 5 different working groups. We are active participants in all of those, looking at national market systems to ensure that there's no single point of failure in the national market system. So we're actively participating both in the broader national effort and also looking internally at everything we do to ensure that we can minimize, if not eliminate, any kinds of technology issues in the future. I'm sure Alan would agree. We will make the necessary investments to ensure that we have the most stable systems in the business. We're committed to do doing that and feel like we have made great progress this year in that regard.

Ed, if I can jump in and expand on what you said. Although we're still in the planning stages for 2014, preliminary indications are that we will increase our capital expenditures next year as compared to this year. As we look for ways to further harden our systems, we are committed to doing everything we can to improve our performance and liability. And although I can't be specific right now on what that may mean in terms of dollars, I felt that given the question, I should tell you how it's looking right now for 2014.

And Dan, I would just wrap that up by saying there is an SEC rulemaking document out there, called Reg SCI. Ultimately, that will dictate what exchanges need to do in these areas, and we'll look forward to seeing how that gets resolved in the long run. We have commented on it as have others in the industry. So it will be a great focus by the whole securities industry on technology and stability and eliminating some of the issues we had as an industry in 2013.

Our next question comes from Niamh Alexander with KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: The Russell, the rollout of the Russell volatility futures and the index, can you expand a little bit on that? It sounds really interesting, and there's kind of -- is there a particular community of investors that kind of sought it out from you [ph]? Was it a reverse inquiry from the Russell? What would be the target group for this, and how do you plan to roll that out?

Niamh, yes, so Russell, I think is exciting, as I pointed out in the prepared remarks. Really a different investor base. So Russell, as it concentrates the small cap of slightly higher volatility, as you would imagine, a much broader base and representative group of small cap stocks. So the investor base is different by definition. With that, we think there's always an opportunity in launching a new contract with the same methodology, the same tradable contract and methodology as S&P 500 mix. We'll get traders who not only want to isolate the volatility risk in Russell, but also allow for the trading between Russell volatility and S&P 500 volatility, much the same way you may trade S&P 500 versus Russell. So there's a natural user base just looking to hedge, take positions in Russell vol which will be different than the S&P 500, and then the pairs trade, the ability to trade Russell vol against S&P 500 vol. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Definitely helpful. And I'll get back in line with -- are you just trying to market it differently. Have you kind of a sales force targeting it to a different group of traders or whatnot? Or is it kind of going to roll to your group of market makers?

So it'll roll out much the same way as we've done with other new contracts. So we'll launch, as we said, the futures in November 18. Jane Street will be our DPM in the futures. And then the options launch on December 2, Group One, same DPM, same specialists as our S&P 500. So we'll have a natural center of liquidity providers here at CBOE. The same physical trading pit for options and, of course, the futures will be all electronic. So we're able to go out as institutional marketing guys able to go out and tell an additional story, another chapter in the volatility evolution in trading and being able to introduce small cap vol.

Our next question comes from Howard Chen with Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Ed, you give a really helpful update on all the new growth initiatives that you've recently released and what's upcoming. I was just hoping you could just frame for us kind of goalpost and what you would call success on some of these upcoming initiatives, extended trading hours, Russell 2000 futures, the PM-settled Mini-SPX, as you evaluate over the coming months, because I know a lot of these new initiatives have a longer glide about them. So it would be just helpful if you frame that all for us.

Sure. I'll start with the extended trading hours. It's most recent. And then since Russell is coming up end of month and then this phase 2 of extended trading hours, Monday, let's start with extended trading hours that we launched this week. We watched eagerly to see not only the volume, which is very transparent to all of you. But from our perspective, what kind of customer base, liquidity providers have we attracted in the very earliest stages of our two-phase extended trading hours, and we're pleased to see about 1/3, a little more than 1/3 of our current Futures users engaging with us in that first extended trading hours. And the contract the volume you're all able to see, and we couldn't be more pleased with starting at around 500 contracts on our first day and darn near 1,700 contracts yesterday afternoon so [Audio Gap] optimistic looking to next week beginning with our 2 a.m. launch. So we will be keeping tabs on the users, and you'll be able to see the volume as it trades because, of course, all that's real time on our website. So that's the first and second phase of the rollout of extended trading hours. I think with SPXpm, I'll turn over to Ed, as we really have historically looked at the entire complex of the SPX and couldn't be more pleased where we are. But I'll turn it over to Ed for SPX.

So Howard, thank you for the question. So SPXpm, you will recall, is a product we introduced as a monthly exploration sometime back. And with the great success we have in the SPX Weeklys, which themselves are p.m. settled, we kind of looked that this is an overall SPXpm complex with great success or attributable to the weekly contract than the XSPpm monthly contracts. But ironically, this month of October, we had record levels of open interest in trading volume in the SPX monthly. So we continue to be very pleased with the PM-settled SPX contracts, both the monthly expirations and the Weekly. So we're very, very happy with our progress and to continue to promote those products.

And then back, as we look a little bit further down the path, of course, we couldn't be more excited to have been able to share at our Europe RMC, the launch -- pending launch, assuming we have regulatory approval of our short-term volatility contracts. So that's pretty exciting when you look at, from a trader's perspective, being able to really isolate short-term moves and vol and assumptions, and being able to trade just a different part of the volatility curve some time we are hopeful of first quarter. So excited of what we see in new products, but I can't pass the opportunity to remind you that we still think the growth in VIX and the expansion adoption of trading VIX and volatility as a tradable class. I'm just so excited about what we see in the pipeline, be able to touch new users, both domestically and internationally.

Our next question comes from Ken Worthington with JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: To expand on global reach, maybe can you tell us where you stand today in terms of touching the non-U.S. customers, I don't know if you can do it, but maybe as a percentage of volume? And as you think about a further penetration, you extended the hours, you highlighted kind of global interest in VIX and SPX, but what is the opportunity in a suite of products that's maybe more geared towards local tastes? Like you've got some today, do you need more? Like you've got SPX in oil, you've got SPX in gold, as you meant physical products. Does the suite need to be expanded to really capture the potential of the global opportunity?

Thanks, Ken. Ed Provost. So we've often referred to VIX in more in line of what our analysts and the community who are focused on VIX have referred to, to say global proxy for market volatility, and we had a very, very active quarter visiting with our current and potential customers globally. In fact, we were at 50 office visits with pension funds, hedge funds, private and public endowments and the like in areas ranging from São Paulo, Brazil; to Toronto; Atlanta; Chicago; New York; San Francisco; Lisbon, of course, with our RMC; Geneva; London; Monte Carlo, where there's a big hedge fund conference. The global demand for volatility products and the understanding of how those products can be used is really unrelenting. We note that in Australia, the -- one of our 9 exchanges that have licensed the VIX methodology began trading futures on VIX. So we're very excited about the global interest in trading volatility and the demand to understand how they can improve returns and manage risk using VIX products. Your earlier question as to what percentage of our business comes from outside the United States is an educated guess in our part. We estimate in the area of 20% to 25%, really don't know that with great certainty because we don't know the access of the clearing records at that level of detail. But certainly, among all of our products, the VIX product has the greatest interest from overseas. We're pleased with some progress we've made with our London Hub. We have 4 extranet providers who have already connected to that. And as Ed pointed out earlier, although the after-hours -- extended trading hours, we believe, will be more domestic users, we very much look forward to the interest in our 2 a.m. session, which starts next week.

Yes. I think I'd want to follow up. Ed mentioned the Australia market and trading the ASX 200 VIX contract. What that does for us globally, Ken, is really raise the awareness of trading volatility as an asset class, separating that risk component called volatility and be able to trade it. It is the same methodology we trade for S&P 500 VIX, the Russell VIX and as Ed pointed out, 9 total exchanges with a license. So as the Australian market becomes more and more aware and focused on the ability to trade volatility, they can't help but look at the global benchmark of volatility that we have here at CBOE and the S&P 500. So again, like Russell, we'll introduce the opportunity to trade pairs volatility trading. You can trade Australia volatility against U.S. So that only helps raise the awareness of volatility when we do have an endorsement on our methodology by foreign markets. And then you said branching out a little bit more, and remind you that last quarter, we announced working with the CME on bringing the 10-year interest rate volatility contract to market. We're still working on that. That's in the pipeline, and I should have mentioned this at the last question on what's in the pipeline. So very, very exciting. That runs the spectrum of users even to a new group to CBOE.

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

I'm just trying to think about the potential for the short-term VIX product, and I believe you mentioned in your comments that the product brings some of the benefits of the SPX Weeklys to the VIX. So I was hoping if you could just kind of expand on that? And then also, if I look at the SPX, about 1/4 of the volume now coming from the Weeklys, would you expect that same type of breakdown with the VIX over time with the short-term versus the regular VIX?

So let's -- because it's -- not everyone is familiar and uses these volatility terms like we do, we kind of take a lot for granted. So first, why don't we just, real quickly, what is VXST? It is a measure of 9-day implied volatility S&P 500. You're dead on on that. So the products -- and what is a little different I think is really key. So when we list the short-term volatility contract, we'll have expirations every Wednesday that's settled into the SPX Weekly 9 days following. So for example, next Wednesday is the 6th, VXST would use SPX options expiring February -- November 15. On November 13, there'll there be an expiration, and we'll use the Friday, November 22 Weeklys. So that's the tie in with the Weekly contract. What VXST is not is the same as the Weekly contract on VIX, which is a 30-day number. So really, it's a brand-new index that's responsive to moving some changes in short-term volatility. So the user base we're able to attract, those current users who are looking out 30 days and want to pinpoint volatility risk in their portfolio shorter term and we're going to use those Weekly contracts. So similar to the expansion that we've seen in bringing new users to the S&P 500 complex in the Weekly contract, similarly, we think we'll find users who just want short-term volatility exposure. So that's kind of the way it works. Now can we predict 25% penetration? I don't know that we would do that at this point, but it is that trajectory, that adaptation and bringing in new users that we're really all about. Some small cannibalization, we think that's fine, but really, at the end of the day, it'll be a growth story and our ability to attract new short-term traders to a volatility complex.

Our next question comes from Mike Carrier with Bank of America.

So just a question on volume expenses and the volume outlook. So it looks like on the expenses ticked up a bit when we look at it as a percentage of related ADV. I think you mentioned something on S&P rates. Just wanted to get an update on that in the outlook because it seems like it had been trending down a bit over the past couple of quarters, just some of the changes. And just on the volume outlook, you mentioned a lot on the user growth, the pipeline on products opportunities with VIX. I guess just curious, when you look at the mix of the business now versus, say, 5, 6 years ago when VIX was more normal, what do you think is the uptick or the increase in volumes when we get back to a more normalized volatility environment?

This is Alan. Specifically, on your royalty fee question. You're correct. We had a rate increase going into effect related to Standard & Poor's in March of this year, and we talked about that before. Standard & Poor's is not the only license agreement that we have. We have a number of them, including other exclusive agreements, semi-exclusive and nonexclusive agreements. And so the mix of products that we trade could impact the relationship between royalty fees and index volume. And -- but I think the metric that we talked about in the past, which is the relationship between index line and royalty fees, is about the best that I can come up with right now to help you look at those for the future. I don't have anything that -- anything better right now, and so mix is the driver in variances from that metric. So let me give you a little -- an answer to the second part of the question, what do we anticipate fixed return to normal historic levels and what would that user base look like? I think it's important as you referenced in the past, and then we overlay that with the VIX user base and how that's changed, and it's changed interestingly in a relatively low volatility market. We've been able to attract, obviously, a much broader user base even at low levels of volatility. VIX futures really started off as a hedge for VIX options traders. VIX options traders tended to be professionals. You can look at the evolution of the contract with the introduction of ETNs and how that's become much more retail. So the user base of a tradable volatility contract has changed albeit in a very low less than historical -- historic level of volatility. What I think is exciting is we of late picked up the more high-frequency trader or the day trader, and that is in also a low level of market volatility. But what we see in months and earlier part of the month of October, primarily, is those day traders and those high-frequency traders really turn up their interest in volatility, as volatility has a higher vol. So what do I mean by that? Current historical level of VIX volatility is about 116. That's low. That's low. VIX volatility is historically higher. So we think we'll increase the interest from high-frequency traders and day traders if we return to a more historic level of volatility. So I think there's more growth to come from that group.

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

My question is more of a macro question. If you look at the options market more broadly, and I'm talking about the multi-listed market, there's been some volatility. But if we look at kind of volumes over the last couple of years, they just really haven't grown at all. And curious to get your guys' perspective on why you think that is and what maybe it's going to take to actually see some growth in this market again?

Chris, Ed Provost. So clearly, the single equity names market has -- is the most mature of all of the option products. I think it's reflective of general volume levels in the equities and futures markets. In fact, the options markets relative to those other markets did not see the drop-off. We still think, through our educational efforts, both those employed by CBOE and by the options industry in general, will broaden the user base for options. But to a large extent, the future volume levels in the single-name equities is going to be tied to general volume levels in the equities markets themselves. We feel confident that the small investor is trickling back into the market as index levels have risen and volatility has continued to be low. So we continue to be optimistic about the long-term growth of the basic option product.

Let me add. This is Alan, Chris. Fortunately, we become less and less dependent, it seems, each quarter on the revenue that we derive from those single-name option transaction fees. So I agree with everything Ed said, but I want to make sure you keep that focus as well.

And I think what is -- Ed Tilly now. What is CBOE's role then in trying to promote in -- at the growth -- historical growth that Ed mentioned in the product is for CBOE, we still very much believe in the being front and center and leader in options education. We spend a great deal of time web-based and in-classroom, and so we are committed to carrying the majority of that effort for the industry and are optimistic at what we see in both online education and in-class education.

Our next question comes from Ken Leon with S&P Capital IQ. Kenneth M. Leon - S&P Capital IQ Equity Research: A question again related to trading volumes and futures, very high in the second quarter, it's off. And do you see a rebound or even passing the second quarter where with 180,000 contract is more driven just by short-term or HFT traders or potentially different groups, such as portfolio managers or even from Europe? It just seems you had great secular growth, and now it seems we're just looking at cyclical factors more than the uptick of a small base, but a great franchise and volatility.

Let me, Ken, Ed Tilly. Actually, we're -- October for us was second busiest month. So while the quarter might have been better than you're referring to, we are very optimistic, as Alan pointed out, the way we've started this fourth quarter with October volume in both VIX futures and options. So we couldn't be more pleased with the uptick. You mentioned the high-frequency traders, and my response in earlier question was, when volatility increases, we see that new user group really engaging and driving that volume, both futures and options. So yes, the things that we have in Q allow us to attract more and new existing users and new users to the complex, and it's just going to be through a heightened awareness of what this contract affords hedgers and day traders. But that's really the kind of way you see it. So coming off of October, I'm actually very, very encouraged by the volume.

Yes, let me just add, I have the numbers in front of me, Ken. The third quarter in futures, the volume was down. We averaged 180,000 contracts per day in the second quarter this year, 148,000 in the third quarter. But October now, which we finished yesterday, obviously, we averaged 182,000 contracts per day in our futures and the VIX futures for October. So there's a lot of factors that'll drive volume, but we think we're still on that hockey stick curve.

Our next question comes from Akhil Bhatia with Rosenblatt Securities.

Just a follow-on to that last question, can you just talk about the open interest trends in VIX and why we haven't really been seeing open interest grow much?

Sure. It's Ed Tilly. Open interest, we've had a couple of conversations on this, and certainly it came up last quarter and we've certainly looked at open interest. But VIX is a bit different. It's really a tactical tool, not really a buy-and-hold investment. So traders tend to get in and out of positions in response to changing volatility levels. We actually have an index, the tail risk hedge index, that we try to prescribe certain levels of volatility exposure based on the level of volatility. So you would see it at historical low volatility that we find ourselves today that we prescribe trading, let's say, X amount of volatility and having that in your portfolio. And as volatility rises, we suggest leveling off. And when volatility is really picking up, we have suggest that you lighten the exposure to volatility. So that's pretty normal for us to see volatility open interest move around. Also I'd point out that expiration cycles tend to lower the open interest in volatility. But if we look through the month of October, for example, which was very, very busy, and we began the month of October about 350,000 contracts in open interest. As we said, record month, but we'll close the month at about 367,000 contracts in open interest. So relatively flat. And if we look to the expiration date, that was a low. So nothing unusual really when we look at open interest, and we just recognized that the contract acts a little different than a buy-and-hold contract would.

And do you have any statistics on, I guess, customer breakout? How much of it is HFT proprietary trading versus other customers?

Well, the HFT, we know, tend not to build open interest. They are in the day trader category. So open-close same day, not building open interest. Customers and hedgers tend to be those that are building the open interest in the low levels of historic volatility and the ones that we would see, and actually expect to be selling as volatility increases much the way we saw that trip from front month volatility in October moving from 14.5% up to 19.5% or 20%. Not unusual the hedge worked. Couldn't be a better illustration of the power of volatility and exposure to volatility in a market, where overall uncertainty this happened to be around government inaction having a volatility exposure in your portfolio actually pay off. So not surprising that we saw that fluctuation inter-month. As I said, right around expiration low point, but building back up toward the end of the month of where we began October 1.

Our next question comes from Alex Kramm with UBS.

Quick follow-up. Actually, coming back to the first question that Rich asked on the expense side. Just maybe, Alan, you can be a little bit more specific in terms of the fourth quarter here because the guidance is fairly wide, and obviously, implies pretty big step-up. So you mentioned the legal fees, and if I look back just a couple of quarters, I think the highest ever were, I think, $11 million in outside services. So you're at $8 million right now. So you went back to the highest level ever, that's $3 million there which gets to $190 million, I think, for the full year. Are there any -- is there anything else you would point to, I mean, on the comp side perhaps? I mean, you're having a great year. Is there anything else that you haven't accrued for? I mean, you change your shareholder comp outlook. So anything else where line items that you would point to where that delta to the low and high end could be coming from?

I understand -- I think I understand what you're trying to do. You're -- with that range of $189 million to $194 million, I think it is -- that leaves a lot of room for where expenses could be in the fourth quarter. If I hit the middle of that range, Alex, that would be where I'd want to be and where I think you'd want me to be, given that the range I gave you for the year back in February, and I don't have any particular information that guides me either way from the middle of that range right now. Does that help at all?

Yes, so -- but I mean, is there any like year-end [indiscernible] on the comp? Is that a big variability, or is that kind of like a good run rate that we're having right now, given how you're doing this, I guess, is the point?

Say that one more time, Alex.

I mean, is one of the -- is there a variable on the compensation side that could...

No, no, the comp shouldn't vary. That's where we think we do a pretty good job of that throughout the year, so I don't see any fluctuations coming out of that or -- the things that are really hard for me to predict and as many times a surprise for me from quarter-to-quarter or for month-to-month is things like legal fees, things that I can't -- although, I, of course, talked to our legal department and what they're using outside law firms. But if the rates that were -- that outside law firms can charge, that can add up pretty quick. So there's a number of things that I cannot predict with the level of certainty that I would like. And if I wind up for the year in the middle of the expense range, that would be good as far as I'm concerned.

Our next question comes from Howard Chen with Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: All of it was answered. I'm all set.

Our next question comes from Niamh Alexander with KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: If I could try again, Alan, with the capital, because you've built it up, the repurchases are kind of a little smaller than we thought, because you have made the point during the summer that you were back actively at share repurchases. But I guess, what I thought was kind of interesting is that, you seemed a little bit more open to a very -- an annual variable dividends similar to many swaps on competitor exchanges that are cash generative. Did I -- I understood the board's disposition in the past has been like regular dividend or repurchases, the special was really around expected tax changes rather than kind of something. So am I right in interpreting that the board is a little bit more open to thinking about an annual variable dividend going forward, because it is very different than a special or something that you kind of -- you have to kind of -- every year, you're going to come up and come up with something in terms of paying back to the shareholders?

Sure, I don't think the board has really changed its view on capital allocations at all, how we get cash back to our shareholders. The reason why maybe I talked about a little bit more is because cash is building up on our balance sheet. So if the board is committing -- committed to returning excess cash to shareholders, then you have to do something. And so either increase the rate that we're doing share repurchases or a special or variable, that's the reason why you -- it may sound like I'm saying that they're more open to it. They still prefer regular dividends, seeing those grow with our businesses, stock repurchases, making sure we have enough money to invest in our business as needed, that's their preferred path, but nothing is off the table. And again, the overarching foundation of this is returning excess cash to shareholders. That hasn't changed. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. I guess just to follow up a little bit. You've lowered your CapEx guidance. Why didn't you buy back more in the third quarter then?

Well, we started late in the third quarter. It was -- I don't have the...

Early September.

That was early September. Debbie was helping me. So we were out of the market for a long time. It wasn't a July 1 start. So I think what we did, we were, of course, we're opportunistic on how we buy back our stock, but I think we're pretty aggressive as well.

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

Clarify one thing. Do you guys have a sense for when the board might decide on some of those capital issues? Like if we're -- if they're thinking about potentially accelerating the buyback doing a special order, the variable, do you have a time frame for when we'd know which path we're going to be going down?

Yes, it's tied to our quarterly earnings review and release cycle is -- so last week, our board met. Right after the board met at that meeting, they approved the dividend for the quarter. Press release came out. Our finance and strategy committee meets the day before of the board meeting. They talked about it. So the kind of the cycle that would be tied to the dividend announcement in the future is what I'd expect to happen in the future. That's what has happened in the past. Things could change, but that's the way I see it right now.

I'm not showing any further questions at this time. I'd like to hand the conference back over to our host for closing remarks.

Thank you, everybody, for joining us on this Friday after Halloween. That completes our call this morning. I'll be around for any follow-up questions, so feel free to contact me. Thanks a lot.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.