Cboe Global Markets, Inc. (CBOE) Q4 2013 Earnings Report, Transcript and Summary

Deborah Koopman - Vice President of Investor Relations and Analyst Edward T. Tilly - Chief Executive Officer, Director, Member of Executive Committee, Chief Executive Officer of Chicago Board Options Exchange (CBOE) and Chief Executive Officer of C2 Options Exchange (C2) Alan J. Dean - Chief Financial Officer, Executive Vice President of Finance & Administration and Treasurer Edward L. Provost - President and Chief Operating Officer

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Michael Carrier - BofA Merrill Lynch, Research Division Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division Jillian Miller - BMO Capital Markets U.S. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Christopher J. Allen - Evercore Partners Inc., Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Alex Kramm - UBS Investment Bank, Research Division Christian Onwugbolu - Crédit Suisse AG, Research Division Alexander Blostein - Goldman Sachs Group Inc., Research Division Gaston F. Ceron - Morningstar Inc., Research Division

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

Thank you. Good morning, and thank you for joining us for our fourth quarter conference call. On the call today, Ed Tilly, our CEO, will discuss the quarter and our strategic initiatives for 2014; then Alan Dean, our Executive Vice President and CFO, will detail our fourth quarter 2013 financial results and provide guidance on certain financial metrics for 2014. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be 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 results and outcomes 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 statement. 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.

Good morning, and thank you for joining us today. 2013 was a banner year for CBOE Holdings, with records set across key financial metrics, including revenue, earnings and operating margin. These solid financial results enabled us to return nearly $110 million in capital to stockholders through dividends and share repurchases over the year. CBOE Holdings total volume, options and futures was nearly 1.2 billion contracts, making 2013 our second busiest year. Total average daily volume increased 4% from 2012. Options volume rose 3%, outperforming the industry-wide increase of 2%. Index options trading increased by 22%, led by record trading in our SPX complex and in VIX options. Solid fourth quarter results capped 2013's record financial performance with a year-over-year revenue growth of 9% and diluted earnings per share growth of 16%. Fourth quarter ADV rose to 4.9 million contracts, a year-over-year increase of 18%. Alan will discuss our quarterly results in detail, so I'll move ahead with a look at our key initiatives, build on [ph] progress made to date and opportunities on the horizon for 2014. We remain focused on our core mission to create value for stockholders by generating industry-leading profit margins and growth rates through a diversified portfolio of risk management products and services. Ongoing strategic initiatives fall into 3 main categories: Leveraging and developing proprietary products; optimizing revenue in commoditized products; and broadening our customer base, all while maintaining the highest standards in market regulation. I'm pleased to note at the onset that CBOE and our partner, S&P Dow Jones Indices, achieved an important legal victory in the final quarter of 2013 when New York's Federal Court dismissed a competitor's challenge to S&P's rights to license its indexes, validating previous rulings by the Illinois Appellate Court, the Illinois Supreme Court and the U.S. Supreme Court. Significantly, the deadline to appeal the New York Federal Court ruling passed in January, bringing this baseless challenge to an end. We are thrilled to have reached finality and legal certainty in this matter. It is a victory for innovation at CBOE and for our ability to continue to grow the index options marketplace for years to come. Now onto product performance and development. Trading and CBOE's S&P 500 Index Options Complex rose 18% in 2013. Much of the growth was driven by a sharp increase in SPX Weeklys volume, which grew by 98% in 2013, following an increase of 70% in 2012 and a tripling of the volume in 2011. The record pace carried over into January 2014 when SPX Weeklys trading increased 53% over January 2013 and 29% over the prior month, setting a new monthly volume high. I'm pleased to note that Weeklys trading, created by CBOE in 2005, has brought a new base of customers made up of retail investors and semi-pros to our SPX marketplace. Obviously, we believe there's significant potential ahead to further develop this new and growing customer base. Our standard SPX option remains the index option of choice for institutional investors trading large and complex orders. I'm happy to report that trading in our FLEX SPX option, excluding Weeklys, increased by 5%, making 2013 the busiest year in the product's 30-year history. Trading is off to a strong start in 2014, with January SPX volume up 10% over last year and 7% over the prior month. More important, we continue to identify significant opportunities to further grow SPX trading in 2014 and beyond. User groups, where we see considerable untapped potential, include SPY option users who lack awareness of the benefits of SPX relative to SPY options; OTC users, despite implementation delays in Dodd-Frank, we are seeing OTC-type trades come to CBOE; the institutional investors, asset managers, pension funds, insurance companies and financial advisors, some who are only just beginning to trade SPX; and overseas investors who can use SPX to hedge global economic risk or to officially take a position on the U.S. market. We believe that educational and marketing initiatives aimed at these customer segments helped to increase SPX trading in 2013, and we are intensifying those efforts going forward. Turning now to trading VIX options and futures, which continue to grow at record levels. VIX options averaged 567,000 contracts per day in 2013, a new annual record and an increase of 28% over 2012. The record-setting pace continued into the new year. January's average daily volume of 792,000 contracts marked a new monthly high for VIX options trading and represented an increase of 16% over January 2013 and 61% over December 2013. VIX futures averaged nearly 159,000 contracts per day in 2013, an increase of 67% over the previous year. January 2014 average daily volume in VIX futures was 210,000 contracts, a new monthly record and an increase of 52% over January '13 and 38% over December '13. While volume increases in VIX futures and options are predictably more pronounced during periods of greater volatility, such as those we experienced in January, we were particularly gratified that we also saw double-digit increases in VIX trading throughout 2013, which was marked by prolonged periods of low volatility. Each wave of new users brings more liquidity and activity to our VIX marketplace. We believe we are still in the early stages of growing VIX domestically and that we have hardly begun to scratch the surface internationally. We intend to grow the volatility space in 2014 domestically and beyond through 3 major initiatives: Enhanced investor education, broadening access to our volatility marketplace and through new volatility products. Investor education goes hand-in-hand with new products. This is particularly so when it comes to VIX trading, which has created an entirely new marketplace, and as some say, a whole new asset class. There is a tremendous thirst for knowledge about VIX futures and options from investors of every type. Since its inception, VIX trading has captured the immense imagination of trading pros and sophisticated ballplayers. Last year, BlackRock and others endorsed VIX futures for the broader mainstream purpose of asset allocation, confirming a trend that we have long anticipated, given the inverse relationship with VIX and the broader stock market. We have laid out an ambition -- ambitious educational plan for 2014 that responds to the growing demand for VIX information and trading resources. This includes expanding our business development staff as needed and beefing up our VIX educational offerings. We also look forward this year to rolling out a new options and volatility educational app for mobile and tablets users and to unveiling a newly redesigned CBOE.com website, with additional options and volatility resources and enhanced mobile viewing. While we are busy responding to a growing online and mobile world, surprising numbers of investors from around the world still wish to visit CBOE in person to see options and volatility trading firsthand and to attend the CBOE Options Institute. We meet demand for visiting groups and students. We just completed construction of a new and expanded home for the Options Institute overlooking the CBOE trading floor. We're excited about the opportunities the state-of-the-art space provides for us going forward. An expanded 2014 curriculum at the Options Institute, both in our classrooms and online, is heavily weighted toward VIX futures and options, as well as SPX trading. In the fourth quarter of 2013, we extended the trading day for VIX futures by 5 hours and 45 minutes. The extended trading day represents the demand from U.S. customers for additional trading time, while enabling European-based customers to access VIX futures during their local trading hours. Trading for VIX futures now begins at 2:00 a.m. Central Time, which aligns with the 8:00 a.m. open of the London markets. We're pleased with the volume we see thus far during non-U.S. trading hours. As you would expect, there are significant volume spikes in the hours preceding the open of the U.S. markets on particularly volatile days, such as we saw in late January and early February. 8% of VIX futures trading now takes place outside of regular U.S. trading hours, and we expect the percentage to increase going forward. This year, we plan to expand our extended trading hours initiative to nearly 24 hours, which will accommodate Asian market hours and a growing worldwide user base. We also look forward to adding VIX and SPX options to our extended trading hours initiative in 2014. VIX product development continues at CBOE. We are thrilled that next week, on February 13, we will launch futures on our new short-term VIX Index, VXST, with short-term VIX options to follow. VIX -- our short-term VIX futures and options will leverage the most compelling features of SPX Weeklys and VIX futures and options. Our team is currently ramping up a concerted marketing and educational campaign to support and promote the launch of these major new volatility products. Like VIX, our Short-Term Volatility Index is based on real-time prices of SPX options. While VIX is calculated using SPX monthly options, short-term VIX uses S&P 500 options that expire in 1 week. We think the more targeted time horizon sets the stage for compelling trading opportunities, and customer feedback confirms that view. Short-term VIX futures and options will have weekly expirations, enabling traders to fine-tune the timing of their volatility needs. We envision investors using these products to pinpoint and hedge against event-driven market moves, such as corporate earnings and Fed announcements. Short-term VIX futures and options will have the same expiration day and a similar settlement process as VIX futures and options, enabling traders to create strategies using VXST and VIX to capture changes in the volatility term structure. The ability to trade short-term volatility has generated considerable buzz since we announced the new products at CBOE's Risk Management Conference in Portugal last September. We look forward to making the concept a reality with the launch of short-term VIX futures next week. Turning now to market share, where CBOE continues to hold the industry lead. In December 2013, CBOE and C2 accounted for 29.3% of all options trading, excluding dividend trades. CBOE commanded 27.5% of total industry market share, adjusted for dividend trades, just under its 28% total market share at the end of September 2013. In January 2014, CBOE's market share increased another percentage point to 28.5%. In multi-listed options only, CBOE held 20.3% market share in December, down slightly from 20.9% at the end of September. In both cases, CBOE led the 12 options markets by a margin of several percentage points. C2 market share and multi-listed classes, excluding dividend trades, at the end of December was 2%, up slightly from the 1.9% at the end of September. We are pleased with overall performance in the equity marketplace, but are never complacent. We closely monitor the daily changes in this very fluid arena and are prepared to quickly modify our CBOE and C2 models in response to competitive pressures. Going forward, our entire team is excited about the opportunities before us to continue to further define and expand the options in the volatility space in 2014. Our strategy is clear and focused. We will continue to sow the seeds for our company's future growth, with programs aimed at developing new products, optimizing our market share in commoditized products and expanding our user base. And we will continue to capitalize on the favorable operating leverage inherent in our business through disciplined expense management and prudent allocation of capital. On that note, I will turn it over to Alan Dean to report on our financials.

Thanks, Ed. Good morning, everyone, and thank you for joining us. As Ed mentioned earlier, 2013 was another record year for CBOE Holdings. We ended the year with a strong quarter and accomplished a number of important initiatives that positioned the company for continued growth. This morning, I will take you through our fourth quarter results, as well as provide guidance on certain financial metrics for 2014. As outlined in the press release we issued earlier this morning, operating revenue was $141.8 million in the fourth quarter, up 9% compared with last year's fourth quarter. Operating income was $72.6 million, representing an operating margin of 51.2%, which was 130 basis points higher than the fourth quarter of 2012. Net income allocated to common stockholders was $45.6 million, up 17% compared with the adjusted fourth quarter of 2012, which translates to diluted earnings per share of $0.52. Before I continue, let me point out that our GAAP results reported for the fourth 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. Turning to the details of the quarter, as shown on this chart, the growth in operating revenue was predominantly driven by higher transaction fees. However, we did see increases in each revenue category, with the exception of access fees. As we have seen throughout the year, revenue from access fees was down slightly due to fee modifications implemented in the first half of 2013. For 2014, there were no significant changes made on our fee schedule for trading permits, so revenue in 2014 will primarily be driven by demand for those trading permits. Transaction fees increased $8.2 million or 9% from last year's fourth quarter, driven by a 22% increase in trading volume, offset somewhat by an 11% decrease in the average revenue per contract, or RPC, compared with last year's fourth quarter. In the fourth quarter, we saw increases in trading volume across every product category compared against both the prior year period and the prior quarter. Our blended RPC, including options and futures, was $0.316 compared with $0.355 in the fourth quarter of 2012. This decline was mainly due to an increase in volume-based incentives for certain multiply-listed options traded at CBOE under our Volume Initiative Program or VIP. In addition, the products -- product mix shifted a bit with lower-margin multiply-listed options accounting for a higher percentage of trading volume during the quarter versus the fourth quarter of 2012. As a result, the RPC in our options business declined to $0.275 compared with $0.322 in last year's fourth quarter. The revenue per contract on equity options and exchange traded products declined by 44% and 33%, respectively, while the RPC on index options held steady. To put this decrease in the context, keep in mind that our market share and multiply-listed options in December 2012 hit a low for the year of 17.3% and dropped further in January of 2013. In response, we modified our VIP program in February 2013, and CBOE ended 2013 with market share of 20.3% in multiply-listed options for the month of December, 300 basis points higher than December of 2012. On the futures side, CFE's revenue per contract was about $1.57, up 9% from the $1.44 in the fourth quarter of 2012. As this slide depicts, multiply-listed options accounted for 66.2% of total contracts traded in the fourth quarter of 2013 in comparison with 65.6% in last year's fourth quarter, while the contribution from our highest-margin index options and futures contracts accounted for 33.8% of total volume versus 34.4% in last year's fourth quarter. Converting the volume into transaction fees, you see that index options and futures contracts accounted for 80.1% of transaction fees, up from 71.3% in the fourth quarter of 2012. Regulatory fees for the quarter increased $1.1 million compared with 2012's fourth quarter, but declined $1.4 million versus the prior quarter. As we had pointed out in our prior earnings calls, the revenue derived from these fees is only available to cover expenses we incur to carry out our obligations as a regulator. As a result, we make adjustments as needed to keep the revenue obtained from the options regulatory fee and related expenses in balance. Accordingly, effective September 1, we modified our options regulatory fees for CBOE and C2. In our last earnings call, we stated that we expected regulatory fees to decline by about $1.6 million in the fourth quarter compared with the third quarter, assuming similar trading volume quarter-to-quarter. Industry-wide options volume was a little better in the fourth quarter versus the third quarter, resulting in a slightly lower-than-expected decline. Continuing down the income statement, this next slide details total adjusted operating expense of $69.2 million for the quarter, which was up $4 million or 6% compared with last year's fourth quarter. Turning to core operating expense. This slide details fourth quarter core expense of $43.9 million. This represents a decrease of $2.4 million or 5% compared with the fourth quarter of 2012, primarily due to lower expenses for outside services, offset somewhat by increases in employee costs and travel and promotional expenses. The decrease in outside services was mainly due to lower legal expenses, reflecting lower litigation expenses and the benefit of an insurance reimbursement. The increase in employee cost reflects higher salaries resulting from headcount additions, mainly in regulatory services and systems, as well as increases in stock-based compensation and the provision for employee bonuses. The increase in travel and promotion -- promotional expense was driven by higher advertising cost, which was mostly due to timing of expenses. For the full year, advertising expenditures were relatively flat year-over-year. Looking at core expenses for the full year, we came in at about $186 million, slightly below the low end of our guidance of $189 million, but the difference is primarily a result of lower-than-anticipated legal expenses. Going into the second half of the year, I was concerned that I might have to increase guidance, given the trajectory of legal expenses, but we caught a break in the third and fourth quarters when legal expenses declined, which resulted in a favorable variance. Volume-based expenses, which include royalty fees and Trading Volume Incentives were $16.3 million for the quarter, an increase of $3.6 million or 28% versus last year's fourth quarter, primarily reflecting a $3.4 million increase in royalty fees. This increase is directly related to the volume -- 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 36.1% versus 33.1% in last year's fourth quarter. This variance was due to the recognition of significant discrete items related to prior years in 2012 versus no such prior year adjustments recognized in 2013. The lower tax rate of 36.1% for the fourth quarter of 2013 versus 2012's adjusted tax rate of 39% reflects higher tax benefits recognized for the domestic production activity deduction, also called the Section 199 deduction, resulting from an increase in our qualified production activities income. This slide gives you the details of the tax adjustments to GAAP results. Now a few highlights relating to our balance sheet and capital allocation. 2013, we generated more than $224 million in cash from operating activities, which enabled us to return more than $58 million to the stockholders through dividends and more than $51 million through share repurchases. Our capital position remains strong. We ended 2013 with cash and cash equivalents of $221.3 million and a strong balance sheet. We have and will continue to take a disciplined approach to managing cash, looking first to fund the growth of our business, then to return capital to our stockholders through sustainable quarterly dividends and share repurchases. Based on our strong cash position, in December, our Board declared a special dividend of $0.50 per share, or $43.8 million, that was paid out in January. At the same time, the board... [Technical Difficulty]

And Ms. Koopman, you may begin now. [Technical Difficulty]

I just want to apologize to everybody. Our service provider for the conference call had some issues. And as you are aware, the call was dropped. We're going to give this another try. And again, I apologize for the issues from our service provider.

Okay. Thank you, Debbie. This is Alan Dean. I'm going to pick up where, I hope, we left off. Let's now move to our 2014 guidance for certain financial metrics. For 2014, we expect core expenses to be in the range of $191 million to $196 million, which represents an increase of 3% to 5% versus 2013. The increase primarily reflects higher expenses for regulatory services as we build on the effort we started in 2013, with a focus on maintaining the highest standards for regulation and compliance. The increased resources devoted to regulatory services primarily include the full year impact of 2013 staff additions, additional hiring in 2014 and further enhancements to our regulatory systems. At the beginning of this year, we increased the actions regulatory fee, which is designed to cover this cost. We expect this -- the additional revenue generated from regulatory fees to offset the incremental cost with no impact to our bottom line. Turning to stock-based compensation. In the first quarter of this year, we will grant additional shares of restricted stock as we did in 2013. As a result, we expect to record about $3 million of accelerated stock-based compensation expense in the first quarter. Accelerated stock-based compensation is not included in core expenses and will be reconciled as a non-GAAP item. Continuing stock-based compensation, which is included in core expenses, is expected to be $13 million for the year. The decrease versus 2013 is due to the final vesting in June of stock awards granted in 2010 following our IPO. Since stock-based compensation will fluctuate a bit quarter-to-quarter due to the timing of vesting of certain stock grants, the appendix includes a slide that provides guidance by quarter. In 2014, capital spending is expected to be between $47 million to $50 million, up versus nearly the $32 million we spent in 2013. This increase primarily reflects additional capital spending to harden our systems, and the continuation of our efforts started in 2013 to enhance our systems and software for regulatory services. In closing, we are very pleased with our results for 2013, and we head into 2014 well positioned for continued growth. We have the financial strength and breadth to execute on our near-term initiatives and to deliver solid results while also continuing to invest for long-term growth. I look forward to updating you on our progress throughout the year. Thank you for your interest and your patience with this call -- during this call. I will now turn the call back to Debbie so we can hopefully take your questions.

Thanks, Alan. At this point, we'd be happy to take your questions. [Operator Instructions] And again, we apologize, and thank you for your patience. Operator?

[Operator Instructions] And our first question comes from the line of Rich Repetto from Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: The -- my question goes to how well the VIX futures and the VIX complex is running. And I'm just trying to see whether can you distinguish -- we know the higher volatility undoubtedly helps the volumes and they're running at record levels. But is there anything that you can distinguish between, say, volatility-driven and incremental base growth? Because we still can see the open interest, it's still -- it's high, but it's not at the peak levels it was at other times of last year.

Yes, I think, back to the open interest question, Rich, that we've had the last couple of quarters, I think, as we pointed out, we see there are users now following CBOE's tail risk hedge strategy in that they're accumulating and buying volatility exposure when volatility is at historic lows. And as volatility increases, they are lightening up on that exposure. So we saw, in the last couple of months, people following that pretty closely. And so open interest, not surprisingly, while it is increasing slightly, did not make a very big jump because we had such a spike in volatility over a short period of time. We did notice for the first time, as volatility -- I'm sorry, as open interest decreased, as is typical around expiration, it built up rather quickly as compared to historical past because of the increase involved. And back to the user base, as we've been telling you, the original users are trading bigger and bigger and looking for more volatile exposure and more volatile exposure. The high-frequency traders tend to like the higher-volatility volatility, and I think we saw a great deal of that over the last 2 months, specifically. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Great. The numbers certainly look good.

We're pretty pleased with what's happening.

And our next question comes from the line of Mike Carrier from Bank of America Merrill Lynch.

Alan, just on the expenses. I guess, just 2 questions on that. Just in terms of the reimbursement in the fourth quarter, just whether that's significant that you want to call it out? And then, I think just going forward, I think I understand everything you went through. I just kind of want to get a sense -- because I understand the regulatory offset in terms of revenues and expenses, but when we think about sort of the run rate that we were at in 2013 going into '14, is there any big adjustment? I know it's based on activity levels and stuff, but I just want to get a sense on how much of that is the increase versus sort of core new investment?

Okay, Mike. The returns for reimbursement was $1.5 million. So for us, that's kind of significant. And going forward, looking at our expenses for 2013 and what were -- our guidance for 2014, that's a 3% to 5% increase, that range, that $191 million to $196 million. And there's a couple of things going on here. First of all, we've got a -- the last vesting of our 2010 stock grant occurs in June of this year. So the amortization will end, and so that's reducing expenses. On the other hand, on the regulatory side, I've got a couple of things going on. I've got all the staff additions that occurred in 2013. I now have full year impact to 2014. In addition to that regulation is continuing to add staff, although not at the rate that we saw in 2013. And then we have systems adding staff in our efforts to harden our systems, as well as to modify, enhance, create applications for regulation. And so when you roll that in together, that's how we get to the 3% to 5% increase and guidance over what we're seeing in 2013.

And our next question comes from the line of Patrick O'Shaughnessy from Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: Can you just talk a little bit about the different use cases that you're communicating in trying to educate investors between VIX and the SPX options? Kind of in what circumstances folks would want to use SPX, and in what circumstances folks would want to use VIX, and the extent that you think VIX is incremental versus cannibalizing some of the SPX volume?

I think what you find is a pure volatility play. So if we look at risk in a portfolio, we can distinguish between a linear risk, long, short, and then Greek risk, which, as we're trying to pinpoint with a VIX contract, specifically volatility. So certainly, there are those that are looking to protect tail risk by using out-of-the-money SPX splits, but with those come Greek risks. So as the market moves down, obviously, those, "We're out of the money; put some in SPX," become, "In-the-money or out-the-money," and with that requires a much more constant hedging. By using a VIX contract, we're isolating that component of volatility -- of risk, called volatility, and you're able to take a position, long or short volatility, without all of the other Greek risk. So those are the 2 different users. I'm sure there has been some cannibalization of the out-of-the-money puts in SPX for example. But what we really think we've done here is by isolating the component of volatility, really attracted new users to a complex and new users with a completely different way to hedge their risks. That's the primary difference. So yes, some cannibalization, but growing a completely new user base who's simply interested in isolating the component volatility.

And our next question comes from the line of Jillian Miller from BMO Capital Markets.

You've got 8%, I think, you said of your VIX futures coming from the non-U.S. hours. And it's exciting to think you still have the rollout for the VIX options and S&P options in 2014, which are clearly much larger products. But what I'm trying to figure out is whether that 8% of volume is like incremental new volume that wouldn't have been there if you didn't have the extended hours, or whether it's volume that would have been there otherwise in the regular hours but it's just more convenient for your clients coming in at different times. So I'm just wondering how you guys think about it; if you have any way of tracking that or any visibility into whether this is truly incremental volume?

Yes, I'll give you one example, I think, where the timing is really directed toward the user and the users finding the extended time and trading at that time and may not be willing to wait until the open, and I'll have -- Ed will give you some -- what our guys in the street are hearing and who the user base is. Let's take the January 31 as an example, where you're right, we averaged around 8%, but a very, very volatile overnight day like the 31st, where we traded 52,000 contracts in the non-U.S. trading day. That percentage is closer to 15% of a day. So we know that we are answering the demand of overnight risk, where someone isn't willing to wait for the open of the U.S. market. So I think that, that's an example of accommodating the demand that would not be met unless we were open for those extended trading hours. But Ed's got different insight from our business development guys as to who actually is accessing these markets in non-U.S. trading days -- hours.

Jo-Ann -- Julian, I apologize. So yes, we actually just had a group in London within the last 2 weeks, and we were engaged in a conversation with users of our VIX futures, and specifically, they were addressing the extended trading hours. And they specifically noted that they had users using the products from the opening of the London market at 2:00 a.m. Chicago time. So it was evident to us that while it's always difficult to understand how much of that would have come into our marketplace had we not been open earlier, there is certainly a portion of that, that is incremental, and of course, some of that, which is cannibalized. We're fine with that. We believe, as we extend the hours later this year to nearly 24 hours, we will pick up additional incremental business. So we're very optimistic that it is not just cannibalization, but rather expanding the broader user base.

And our next question comes from the line of Ken Worthington from JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: My question, definitely a similar theme. You've been expanding the business, new products, new geographies. I'd love to get just a better indication of overall organic growth, trying to separate the volume growth that you're seeing, open interest growth that you're seeing based on new customers versus kind of the beta of the market. So is it possible to estimate the growth in the number of new users of that you're getting? Or are there any proxies for the growth of new users that you're looking at to kind of judge yourself and maybe that you could share with us to evaluate organic growth?

Kenneth, it's difficult. Because again, we don't have access to the detail at the customer account level. Obviously, all contracts are cleared through the options clearing operations, which is a separate organization from CBOE. But I will tell you that as we travel the globe and we engage clients both in the conferences which we organize, some of which we participate as speakers and then our one-on-one visits, the dialogue does reveal to us who among those clients we're speaking to are historically using our product, who -- which ones have been using, say, for example, SPX and maybe just transitioning to VIX, and others who have not been engaged in any of our proprietary products. So I can tell you, and the best example is our risk management conferences, which we run both here and in Europe. A significant component of those attendees are people that are brand-new to our product. So there's every reason to believe that we are engaging and bringing new clients into the business. That being said, we have clients who have been involved from Day 1 who are looking at different and new strategies, and we see them as increasing their use of the products as well. So it's a mix of both. It's a great question because we struggle to have as much precision around that question as possible, but it's really -- the answer really comes from a lot of different sources and a lot of dialogue.

Yes, Ken, I think it's also -- from our perspective, we think we'll attract even another new user base when we launch the short term contract next week, similarly to new SPX users. So as SPX Weeklys really took off over the last 1.5 years or so, we know that those are new users who've come to the SPX complex looking for shorter-term trading opportunities. We think the same thing and the same opportunity holds for us beginning next week when we launch VXST. So we continue to grow the base by slightly changing the contract specs, and in this case, a shorter duration. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: So what's the punchline? Based on your different sources, is it like -- does it feel like it's 10%? Does it feel like it's closer to 20%? Does it feel like it might even be bigger than that? Like do you have just a way to frame it with a number?

Unfortunately, with this trajectory, as we've said in the past, that until we see a sustained plateau and we can identify where the penetration has been, this growth, as evidenced with the return to more historic levels of volatility, shows the increase in the potential going forward. So I wouldn't dare make a prediction on the penetration yet, when we're coming off of 2 record months just as we return to more historic levels of vol [volatility]. So no, I won't give you that number. But as we've always said in the past, if we see a plateau, it'll be easier for us to identify the next circle of users, if you will. But right now, we're still building this original user group.

And our next question comes from the line of Chris Allen from Evercore.

You mentioned the increased CapEx spending to harden the systems. I'm just wondering if you can give us some color and details around that, and what prompted the new investments there?

This is Ed Provost. So yes, last year, for the securities industry as a whole, the -- we had both on the stock side of the business and on the option side of the businesses, outages related to national market systems, to -- related to failures within broker-dealer systems that sent orders into the exchanges. And then, of course, the exchanges themselves, including CBOE, had its own issues. Ours was around our 40th anniversary celebration last April. So under the overall umbrella of Reg SCI, which will ultimately lay out regulatory requirements for things like disaster recovery and the timing that you will be allowed to recover that way, we are jumping ahead of that and making investments in our infrastructure. Examples of that being taking some of the hardware, which we utilize for multiple purposes and separating it out, even though it's designed to do multiple functions. But in order to reduce single points of failure, making investments in hardware to separate those functions so as to reduce the likelihood of any outage. Other kinds of things including enhanced testing, upgrading operating software and other things that we can do to ensure that our systems are as close to 100% over the course of 2014 as possible. Our track record really has been fabulous through the years. But last year, for the industry as a whole, and even for us in a couple of isolated instances, we had some outages. So we believe an investment in our technology will go a long way towards moving us toward that 100% mark, if at all that can be achieved. And we're optimistic that it can. One point I'll make is we had a very, very successful industry test just last weekend, in which we, on a Saturday, transitioned from our primary to our back-up data center in a matter of minutes. We had most all of our major liquidity providers connected. So we already feel great confidence in things we have accomplished in the time since we began making these investments. So we're very committed toward achieving this, and it does involve some expense.

And our next question comes from the line of Chris Harris from Wells Fargo Securities.

Question on competition. So I guess the ISE is going to give up their legal fight now; you guys talked about that already on the call. But just curious to get your thoughts. It looks like these guys are exploring launching their own volatility-related products based on a different index. And just wondering how you guys think about your defenses, given, obviously, you are the early leader there. And how important do you think branding is for a product like this?

A couple of questions in there, Chris, and I appreciate it. Yes, we believe branding is very, very important. We are the first mover. The open interest is with our VIX contracts, both futures and options. There has been volatility trading for as long as I can remember. I've been on the trading floor 25 years ago, and we traded volatility. We did not have a way to accurately measure and trade volatility on its own. VIX is the only contract that is tradable with an underline that can be replicated with the component parts that derive the volatility contract. That's very special. That's why the Globe has endorsed our methodology and why there are many licenses and other exchanges that use CBOE's methodology. So there will be other contracts coming out, I'm sure. I'm sure that the ISE's contract will not be the last. But we're very, very comfortable with where we find ourselves with the open interest and the growth in VIX. I will point out, if there's any success in that contract, in ISE, it will be because the users of those contracts have to hedge, and the only hedge is VIX futures and VIX options.

And our next question comes from the line of Alex Kramm from UBS.

Just, I guess, a quick one on the non-transaction items on the revenue. I don't think you gave, really, a guidance outside of regulatory fees, but are there any things you can pinpoint? In particular, on the access fees, I think, Allen, you talked about the pricing hasn't changed, so it's really all a matter of the number of, I guess, licenses still. Any view there? I think that's been surprising to a lot of the people that, that continues to be so high and people continue to want to access the market and that hasn't gone away, and you have the power -- pricing power there. And also how is that changing with some of the European access, maybe, 24 hours trading in the future? Can this actually start growing as new users connect to the exchange? And maybe you can give us a little bit of a magnitude here.

Yes, it's a great question, Alex. We didn't change fees in 2014 for access fees. So I didn't point out any guidance or point you to any change in that line item. I really expect that line item to be close to flat year-over-year. But you're right, certain things can affect access fees, primarily volume. And so if we see volume in the industry or in our proprietary or licensed products that will increase demand, it could come domestically. It could come elsewhere. And so there could be a surprise there in terms of access fees going forward, pointing that up. But where I sit right now, I'm -- maybe it's a conservative view, but I'm looking at flat year-over-year. Going down the P&L, at other revenue items, exchange services and other fees, again, no major changes of fees in there, so that will be a demand-driven thing, and I don't see demand changing beyond where we're at right now. Again, that could change if new participants come to our market and want more log-ins or lines or a different way to come into us that -- so that could be a factor there. Market data fees, as you know, is market share-driven, so I'm thrilled with our market share right now on the multi-list side. But if VIX and SPX takes off next year, and we, at the same time, hold our market share on the multi-list side, that would -- could have the effect of driving additional revenue in the market data fees. Regulatory fees, I did talk about that, so I won't go over that. And then Other, I didn't talk about, I really don't know of anything that is material or extraordinary happening in that line item in 2014. So is that good?

Maybe just to clarify. In the access fees, just as you're expanding to Europe, there are no fee waivers or anything like that for new people signing up and using the exchange for the first time, right? So any new -- this system should be theoretically drive access fees higher?

That is correct. There are no fee waivers or incremental fees for new people. No changes at all from the way we -- what we charge for an access fees for May 1 of last year through right now, and as far as I can see forward, no changes.

And our next question comes from the line of Christian Onwugbolu from Credit Suisse. Christian Onwugbolu - Crédit Suisse AG, Research Division: The OCC recently announced that it received regulatory approval to clear OTC equity index options. Just curious on your thoughts on any impacts to CBOE.

So sure. Let me bring you back a little bit and kind of outline our approach to OTC, and it's really one that we described pretty thoroughly way back on our roadshow, and it's just taken this long for the third leg to finally be approved at OCC. But initially, what we believed was exchanged look-alike contracts, those OTC contracts that trade OTC that are most like what's listed on the exchange, we needed to accommodate those. So we automated an SPXpm contract, which really lines up with the convention of OTC, a pm-settled contract. So with SPX, it's the traditional SPX. SPXpm and our Weeklys, we really satisfied the first users of the most exchanged look-alike contracts and then we automated our FLEX contracts, so that is the contract that allows users to customize the terms of a contract. By automating FLEX, we think we satisfied the second user, one OTC user, one that needs slightly more customization in their needs. And now finally, we told you on our roadshow that we clarified our agreement with Standard & Poor's that allows them to license to OCC the clearing of S&P 500 trades. It's very important to point out that CBOE benefits economically similarly in that the fees that OCC generates, CBOE receives something as if those trades occurred at CBOE. So we're optimistic that OTC users will clear at OCC, and very specific guidelines as to the contracts that will qualify for OCC clearing, and you can find that at the SEC.gov website. There are size and duration restrictions as to the type of contracts that can be cleared at OCC. So all in all, we think it's in the final prong to this approach that we outlined quite some time ago. And I think, importantly, from our perspective, we see the benefit not just in that first print, that first big OTC trade that clears at OCC, but rather, in the velocity of hedging of that trade that we think will occur in the traditional SPX on our floor or the SPXpm contract. So that's really what we think the opportunity is, even though we'll benefit from the economics of that trade that clears at OCC.

And our next question comes from the line of Alex Blostein from Goldman Sachs.

Okay, Ed, so I wanted to follow-up on the comment you made about BlackRock and sort of the endorsement and some of the VIX product that they're starting to use. When you guys talked to those -- some of the larger asset managers, can you give us a sense, I guess, which type of product strategies are picking up the product and gaining a little bit of traction with you guys? And also on the flip side, when you talk to end users with respect to adoption of the product, what are some of the bigger hurdles that you guys are facing from their side?

Well, so I'll answer your last question first, Alex. This is Ed Provost. The big end users, the traditional managed money, in particular, the pension space, the biggest hurdle is always whether or not the fund is allowed to trade options, and more broadly, to use derivatives. So that's always a challenge, has been for the 40-year history of the CBOE. We've made great progress, but it is still the case. In fact, we have a pension plan here in the CBOE building today that we're speaking to educating them about the use of option products. Not even as far down the line as VIX, but the basic SPX product, trying to help them understand not only how the product works, how it can increase their returns, but how to convince their board that they should be allowed to use options and other derivative products like options to manage their portfolio. So we still, to this day, have the hurdles at the institutional level, especially in the pension area, in getting them to be able to utilize the product. And then once we get past that, educating them on how to use it and then taking them down to using more advanced products like the VIX. So as to the specific strategies that hedge funds use, they're a bright group of people, and they have developed all kinds of different strategies that we have monitored. The BlackRock paper, which we often have referred to, talked about writing VIX options against long portfolios to generate the premium that would increase the return. So that's a very common strategy. We see multiple-legged spreads coming in, lots of sophisticated uses of the products. So again, it's -- this is a product that is still is in its infancy, we believe, not only in terms of the number of people using it, but the kinds of strategies that are being utilized by even the current users that are using the product. So we're feeling very confident. We speak about all of these at our conferences. And oftentimes, we end up learning a lot from our very sophisticated users about how they are using the product.

And our next question comes from the line of Gaston Ceron from Morningstar Equity.

I just wanted to go back to the CapEx. You guys gave some great detail and color on exactly what's driving that. I just have a quick follow-up on that, which is, I mean, with all the attention given to systems issues within exchange industry, do you expect this to be a 1-year bump in CapEx? Or do you think that we're going to be at these elevated levels for a while for a few years going forward? Or if they come down, that they may not come down back to where they were kind of going into this year?

Gaston, that's a good question. I'm going to say, I think it'll be somewhere in the middle. I don't think it'll be back to where we were in 2013 or 2012. But in a lot of respects, I look at what were the hardware that we're purchasing in 2014 and the systems application changes that we're making in 2014. Some of them are onetime or might just require enhancements going forward. So the way I'm looking at it right now, it's probably somewhere in the middle, maybe a little higher than the middle going forward. But that's how I see it right now.

Gaston, Ed Provost. Just to add that once Reg SCI comes out in final, and presumably, that will happen later this year, it will give us a better understanding of what the SEC requirements will be. As I've mentioned earlier on, we're running ahead of what we expect the SEC will require and doing things that we think are in the best interest of our company. So I would agree with Alan. It's a little hard to predict. My sense is we will have greater investment continued going forward, but probably, we'll have just -- this bump in 2014 will hopefully be a bump, and that's something that will be sustained at that high level in the years coming.

And our next question comes from the line of Patrick O'Shaughnessy from Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: So Alan, quick follow-up question for you. I know you love to predict legal expenses. So the lawsuit from the bad eye [ph] is finally over with. Are your professional expenses going to be kind of reset to a newer lower level?

Yes. I do think that legal expenses, which is in outside services, will be lower in 2014. Maybe the run rate that we saw in the third and fourth quarter may continue into 2014, but there's another aspect of outside services you need to be aware of, and that's contract programmers, which is also in that line item. And so any expense related to contract programming, so any development, enhancement of existing applications that gets expensed in that, capitalized, run through that line item, and consistent with our system's hardening theme and regulatory systems creation, I see increases there in 2014.

And our next question comes from the line of Jillian Miller from BMO Capital Markets.

Given some of the volatility we've been seeing in REITs products, I was just wondering if we can get an update on your Treasury VIX that you were working on with CME, like what's the expected launch date, what are your expectations of the product and users? And then I was also hoping you might be able to give us an idea for what type of revenue share you have with CME on that.

So first, I mean, in order, the things that we're really looking forward to as far as the calendar goes, next week is going to be a big one for us. We're probably most optimistic on the VXST launch. Then expanding the trading hours to include, as Ed Provost pointed out, a near 24 hours a day toward midyear. And then I think, if you look for the calendar, I think the best case for our venture with the CME would be late fourth quarter into -- and perhaps, 2015. That's actually how I think you should look at it. And then as far as the sharing, Alan's really against sharing specifics on those deals, so I won't go around him on that. But that's how -- when you look at it, it's really a fourth quarter, maybe beginning of next year.

Okay. And then on your market share, I apologize if you mentioned this in the call and I didn't hear it. But I was just wondering if there is anything going on in January. I mean, we've seen an increase across multi-list products, and I don't think you changed pricing or anything. So I was just wondering kind of why the improvement's there, if you have an idea for that.

I think -- Jillian, Ed Provost. I think it really does, at the beginning of the year, caused firms to relook at the various complicated fee schedules across the exchanges. And I think I can say with confidence that there has been some greater focus by some large firms as the new year has begun on the opportunities to consolidate their order flow and take advantage of some favorable pricing at CBOE. So I think that, in conjunction with the higher volatility, has benefited CBOE's market share, and hopefully, that will be sustained through the year.

And I'm showing no further questions at this time. I would now like to turn the call back over to Deborah Koopman for any further remarks.

Thank you. And again, I want to thank everybody for their patience, and we appreciate your time and your continued interest in our company. Good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Have a great day, everyone.