Cboe Global Markets, Inc. (CBOE) Q3 2014 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 and Chief Executive Officer of C2 Options Exchange 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 Alex Kramm - UBS Investment Bank, Research Division Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division Kenneth Hill - Barclays Capital, Research Division Christopher J. Allen - Evercore Partners Inc., Research Division Michael Carrier - BofA Merrill Lynch, Research Division Jillian Miller - BMO Capital Markets U.S. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Brian Bedell - Deutsche Bank AG, Research Division Alexander Blostein - Goldman Sachs Group Inc., Research Division Chinedu Christian Onwugbolu - Crédit Suisse AG, Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Neil Stratton - Citigroup Inc, Research Division Robert Rutschow - CLSA Limited, Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Gaston F. Ceron - Morningstar Inc., Research Division

Good morning, everyone, and welcome to the CBOE Holdings Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Debbie Koopman, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us for our third quarter 2014 earnings conference call. On the call today, Ed Tilly, our CEO, will provide an update on our strategic initiatives for 2014; then Alan Dean, our Executive Vice President and CFO, will review our third quarter 2014 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, and thank you for joining us today. I'm pleased to report that CBOE posted solid financial results for the third quarter and continued to deliver long-term value to our stockholders and market participants. Trading volume for the quarter in options and futures at CBOE Holdings averaged nearly 5 million contracts per day, up 2% from the previous quarter and 7% from third quarter in 2013. We subsequently saw a significant uptick in October when volume in futures and options at CBOE Holdings surpassed 7 million contracts daily through the 29th, an increase of 40% over year-to-date average daily volume of 5.13 million contracts through September. I'll circle back to October's increases in a moment. Volatility remained relatively low in the third quarter, but with intermittent spikes as the quarter progressed. We saw CBOE Volatility Index, VIX options volume increase 6% year-over-year and decrease 10% from the previous quarter. Average daily volume in VIX futures rose 35% from the third quarter last year and 19% from the previous quarter. Average daily volume across our S&P 500 Index option complex was up 8% sequentially and 10% from the third quarter in 2013. Average daily volume in SPX Weeklys, the fastest-growing product in that complex, was up 24% from the previous quarter and 54% year-over-year. In last quarter's call, we noted 4 indicators that trading in VIX futures appeared to be poised for invigorated growth as volatility returned to the marketplace; an increased demand for VIX futures market data; a shift in customer mix toward more active participants; an increased number of new trading permit holders at CFE; and increased participation afforded by 24-hour trading in VIX futures. In October, as higher volatility returned to the marketplace, trading volumes soared in index options and futures, including our VIX, SPX and Russell suite of products. VIX future's average daily volume through October 29 jumped to over 339,000 contracts, up 89% month-over-month and 86% year-over-year, setting new monthly, weekly and single-day highs. October to date, VIX options volume increased 62% from the previous month and 22% from October 2013. Year-to-date through October 29, VIX options trading is up 14% and VIX futures are up 25% over last year's record pace. Additionally, trading and options on the Russell 2000 Index rose 36% year-over-year and 49% sequentially in October. SPX options volume in October increased 44% year-over-year, while SPX Weeklys volumes grew 49%. Year-to-date through October, trading on our SPX complex is up 6%, and trading in SPX Weeklys is up 39% from last year's record pace. So now an update on our strategic initiatives for 2014. Leveraging and developing proprietary products, broadening our customer base and optimizing revenue in commoditized products, while maintaining the highest standards in market regulation. In order to cultivate a growing worldwide user base, we extended trading in VIX futures in June to nearly 24 hours. Over 9% of all VIX futures trading now takes place outside of regular U.S. trading hours. On particularly volatile days, we've seen that percentage rise above 20%, a reminder that in the midst of economic or political uncertainty, the global marketplace turns to CBOE to trade volatility. Looking ahead, we plan to extend trading hours for SPX and VIX options in the first quarter of 2015. Although we intended to launch these initiatives by end of this year, additional time was required to complete the regulatory approval process. The new trading session for SPX and VIX options will run from 2 a.m. to 8:15 a.m. Central Time Monday through Friday. Diversifying our Volatility Index product line represents a significant opportunity to expand trading in the CBOE marketplace. I'm happy to report that we're less than 2 weeks out from launching our next tradable VIX product, futures on CBOE/CBOT 10-year U.S. Treasury Note Volatility Index. VXTYN, the first index to measure volatility of U.S. government debt, applies CBOE's fixed methodology to futures options data from CME Group's 10-year U.S. Treasury Note contract, the most actively traded U.S. Treasury futures. VXTYN futures will enable market participants for the first time to target and manage interest rate volatility with the efficiency afforded by a single product. In preparing for the launch, we've worked closely with and received encouraging feedback from market participants most likely to trade VXTYN futures. These include mortgage-backed security investors and other large credit managers, bond funds, hedge funds, volatility, arbitrage firms and global macro participants looking to act on upcoming monetary policy announcements or to capture pricing anomalies between fixed income and equity volatility. We are also encouraged by the interest we're seeing among ETP issuers as well as from European and Asian customers who have exposure to U.S. rates either directly or indirectly. We view the launch of VXTYN futures as the beginning of a significant and ongoing opportunity to grow Volatility Index trading. The market for interest rate derivatives, by far the largest OTC asset class, is estimated to be 40x the size of the equity market in terms of notional value outstanding. While I would caution that making inroads in this market will take time and an ongoing educational push, we're thrilled to begin the journey, which we expect will lead additional avenues for VIX product development going forward. Moving on now to market share. In September 2014, CBOE and C2 accounted for 29.1% of all options traded, down from 30.4% in June. CBOE continues to lead all 12 options market by a margin of several percentage points in both multi-listed options and total options traded, accounting for 27% of total options that traded in September versus 28.4% in June. In multiply-listed options only, CBOE's market share was 20.5% in September, down slightly from 20.7% in June. As announced in the third quarter, we are in discussions with the Financial Industry Regulatory Authority on a potential agreement for FINRA to provide regulatory services for CBOE and C2. FINRA currently provides regulatory services to 10 of the 12 option markets. If CBOE and FINRA reach a final agreement, and subject to regulatory review, it's expected that most of our regulatory services division and certain support staff will transition to FINRA. CBOE would maintain an in-house regulatory team which will work closely with FINRA in an oversight role. Importantly, CBOE and C2 would continue to operate as SROs and to work closely with the SEC. We would remain committed to providing the highest standards and market regulation. In fact, we believe that FINRA's independence and regulatory efficiency, together with CBOE's regulatory oversight experience and options expertise, would further strengthen the integrity of our markets and investor protection. The potential agreement with FINRA is not expected to have a material impact on CBOE's financial results. Given that our regulatory expenses are generally offset by regulatory fees, discussions are ongoing. We expect terms could potentially be finalized within the next few months. As we close in on the end of 2014, we remain focused on the strategic growth initiatives we laid out at the beginning of the year. Our team's discipline and consistent execution of that strategy, despite less favorable trading conditions earlier this year, paved the way for CBOE's continued success when market conditions inevitably changed, as they did most notably this past month. While we're pleased to begin the final quarter on October's high note, we are focused on the opportunities that lie ahead for the remainder of 2014 and beyond. With that, I will turn it over to Alan Dean.

Thanks, Ed, and good morning, everyone. CBOE's third quarter results demonstrated strong financial performance for both year-over-year and sequentially. I'll start with a summary of the quarterly results. Operating revenue came in at $148.9 million, 9% ahead of last year's third quarter. Operating income was $75.1 million, representing an operating margin of 50.4%, up 40 basis points compared with the third quarter of 2013. Net income allocated to common stockholders was $48.1 million, an increase of 17% versus the third quarter of 2013, resulting in diluted earnings per share of $0.57, a 21% increase compared with the $0.47 per share for the same period last year. There were no non-GAAP adjustments in the third quarter of this year or last year, so all the numbers I will be referencing are on a GAAP basis. Turning to the details of the quarter, as shown on this chart. The increase in operating revenue is primarily driven by higher transaction fees and market data revenue. Transaction fees increased $11.3 million or 12% compared with the third quarter of 2013, reflecting a 7% increase in trading volume and a 4% increase in the average revenue per contract or RPC versus last year's third quarter. Trading volume increased year-over-year in each product category. Equity options increased 5%. Options on exchange-traded products were up 8%. Index options increased 7%, and our highest RPC products, futures contracts, were up 34%. Our blended RPC, including options and futures, increased to $0.329 from $0.315 in last year's third quarter. The RPC increase was mainly due to a shift in the volume mix with higher-margin index options and futures contracts accounting for a higher percentage of trading volume in the quarter versus last year's third quarter. In addition, the RPC for index options and futures contracts increased due to price adjustments made at the beginning of the year and the mix of volume by account type within each of these product categories. Overall, the RPC in our options business increased to $0.275 compared with $0.273 in the third quarter of 2013 and was unchanged from the second quarter of this year. On a year-over-year comparison, the revenue per contract was up 2% for index options, unchanged for equity options and declined by 7% for options on exchange-traded products. Revenue per contract at CFE, our futures exchange, increased 4% to $1.63 from $1.56 in last year's third quarter. As depicted on this slide, in the third quarter, trading on our highest-margin index options and futures contracts represented 33.8% of total contracts traded, up from 33.1% in last year's third quarter. The difference represents trading on multiply-listed options, which accounted for 66.2% of total contracts traded versus 66.9% in the third quarter of 2013. Converting the volume into transaction fees, you see that in the third quarter of 2014, index options and futures contracts accounted for 81% of our transaction fees, up from 79% in the third quarter of 2013. Revenue generated from market data fees increased by $1.1 million as a result of higher revenue from CBOE's market data services, primarily resulting from an increase in subscribers and rate adjustments. Market data revenue from OPRA was flat year-over-year while CBOE and C2's share of OPRA revenue increased to 24.7% from 23.6% in last year's third quarter. The revenue distributable from OPRA was down because last year's third quarter included a onetime entrance fee from a new exchange. Regulatory fees for the quarter were relatively even with last year's third quarter, but down about $800,000 compared with the second quarter. As we told you on our prior earnings call, effective August 1, we reduced the rate per contract assessed for CBOE and C2's options regulatory fees in an effort to align the revenue we collect from regulatory fees with our regulatory expenses for the year. As a result, option regulatory fees declined sequentially. In addition, other fees related to regulatory services were down compared to the prior quarter, primarily due to an accrual adjustment. Moving down the income statement to expenses. This next slide details total operating expense of $73.8 million for the quarter, up $5.5 million or 8% versus last year's third quarter. The increase primarily reflects higher expenses for depreciation and amortization, royalty fees and employee costs. The higher depreciation and amortization expenses directly related to our increased capital spending this year, which I will come back to later. Core operating expense of $46.3 million increased by $1.5 million or 3% compared with the third quarter of 2013, primarily driven by higher expenses for employee costs and outside services. The increase in employee costs reflects an increase in salaries resulting from annual salary adjustments as well as increases in severance expense and the provision for incentive compensation, offset somewhat by a reduction in stock-based compensation. As we communicated on our second quarter earnings call, we took measures during the third quarter to trim expenses for the remainder of the year, which we generally do when we see lackluster trading volume over a prolonged period. In early September, we provided some additional color on how we expected our cost savings to line up between the third and fourth quarter, stating that we expected core expenses in the fourth quarter to be about $1.5 million to $2.5 million lower than third quarter core expenses. As it turns out, we now estimate that the difference will be about $1 million, which would put us at the midpoint of our guidance range for core expenses of $186 million to $190 million for the year. Looking at volume-based expenses. Royalty fees increased by $2.2 million or 14%. The increase was primarily due to higher trading volume in licensed products, which include index options and VIX futures. In addition, royalty fees include higher fees associated with our market data sales and fees linked to certain order flow for multiply-listed options contracts directed to CBOE. Our GAAP effective tax rate for the quarter was 35.4% versus 39.1% in last year's third quarter. The lower tax rate for the quarter reflects changes in our tax provision, primarily resulting from adjustments to our state tax provision versus prior estimates. Our cumulative effective tax rate through September is 37.8%, which is below our full year guidance of 38.5% to 39.5%. We now expect our tax rate for the full year to be slightly below the low end of our guidance range. Turning to the balance sheet. We finished the quarter with cash and cash equivalents of $127 million compared to $145 million at the end of June and $221 million at the end of December. The decrease in cash quarter-over-quarter primarily reflects cash use for share repurchases, dividend payments and tax payments made during the quarter. Our business continues to generate significant -- a significant amount of cash. Year-to-date, we've generated net cash flows from operating activities of over $184 million versus $172 million in the same period last year. More importantly, we remain disciplined in how we use this cash. We also have a strong track record of returning available cash to our shareholders in the form of dividends and share buybacks. Through the first 9 months of this year, we have used $49 million to pay regular dividend, nearly $44 million for special dividend payment and another $148 million to purchase our stock. Capital expenditures through September were $40 million, double our spending through the same period in 2013, as we continue to invest in hardening and enhancing our systems. This increase accounts for the higher depreciation and amortization expense I mentioned earlier. We expect our capital expenditures in the fourth quarter to result in spending that is in line with our guidance of $47 million to $50 million for the full year, so we are reaffirming our guidance. During the third quarter of 2014, we repurchased over 1 million shares of common stock, under our share repurchase program, at an average price of $50.64 per share totaling $51.3 million. Since the inception of our plan, through September 30, we used over $282 million to repurchase nearly 7.4 million shares at an average price of $38.24, representing an 8% reduction in outstanding shares. At September 30, we had approximately $118 million available under our share repurchase authorization. When you consider the growth opportunities we believe we have and the cash we return to our investors, we believe our company is set up to provide a compelling total shareholder return over the long run. With that, I will turn the call back over to Debbie.

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

[Operator Instructions] The first question comes from Rich Repetto of Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: I got a question on open interest -- no, I don't. Obviously, the VIX futures complex is going off the charts in October. And I'm still trying to crack the code on this, and we appreciate all the color you gave on Slide 8 and the drivers. But as I looked at it, there was a period right in the middle of October, from the 9th to about the 17th where the VIX futures volume really -- it averaged almost 500,000 contracts a day, and volatility was up -- your VIX was up over 20. So I guess the question is, is there any lessons learned, as you saw the volume surge, was it more high-frequency trading? Was a greater proportion of volume coming from more hedging rather than speculators? Or anything you can give us -- the insights that you gained as this volume just surged in October.

Sure, Rich. As we do look at the different segments that had been participating in both VIX futures index options, what really stands out in that number that I like to use with you is that VVIX, we saw volatility of VIX in the low hundreds, that's a big, big change from what we had seen over the summer time, as you remember. So it does attract that day trader, whether he's high-frequency or whether the strategy is just to trade and participate all day as volatilities bouncing around. But yes, that segment of higher-frequency trader loves that move when VVIX is up over 100. So we saw lot of participate -- a lot of participation from that class of user. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Okay. And it seemed like -- not that it was a big, but it was 10% and up to 9% that Europe -- that non-U.S. So it seemed like U.S. was scaling up as fast or faster than outside. It wasn't the outside U.S.

Yes. So this round of higher volatility, it was really U.S.-driven, and that's really where we get the biggest bang between 8:30 Central and 3:15 Central, but we did have a huge participation throughout October in that ETH. Percentage-wise, it's a little misleading. It's 10% of 0.5 million, to use your number, 10% of 0.5 million contracts. That's pretty substantial. We couldn't be more pleased with Extended Trading Hours and what it's delivered so far. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Great. Understood. And I'm still voting to change the name here to the Chicago Volatility Exchange.

Your vote is registered here in Chicago 2 times, Rich.

The next question comes from Alex Kramm of UBS.

Ed, you gave a lot of good color on the Treasury VIX in terms of customer groups you're engaging with. So hoping that you could give a little bit more in terms of where are you particularly excited when it comes to -- or to customers. Do you have any commitments? And how do you feel about people actually showing up on day 1? And then, related to that, maybe in terms of the ETP providers, maybe you can give a little bit more color there in terms of how many you're talking to, if you actually think there will be some product launches announced fairly soon and marketed aggressively.

Yes. Great question, Alex. In order, what we rely on, and looking back over our most successful product launches in history, have been building the base of liquidity providers. And when we launched ETH, it was important for us to have a core committed group that was going to show up right when we started Extended Trading Hours and continue through the start of the U.S. trading day. We think we've got that core group of ready for volatility on VXTYN futures. That will be our anchor tenants, those most active traders, who understand volatility futures in general and who certainly understand the term structure of interest rate volatility. We need those guys to show up first. ETPs will then follow, but they need a liquidity base that they can count on to hedge and replicate when they're issuing their ETPs. Now you can read all of their prospectus when they issue an ETP. It's going to rely on a base of liquidity in that futures contracts first. So we need to get that dedicated group in, those anchor tenants, then engage the ETP community. Not surprisingly, there's a roadmap out there. So everyone who launched ETPs on VIX, we know what to expect, we know what volume triggers we need to have and the underlying futures, and everyone's lining up, and we're expecting -- while slow and steady, we're expecting this to unfold as we planned.

The next question comes from Patrick O'Shaughnessy of Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: I wanted to ask you about the Collins Amendment and the market maker capital rules that the Collins Amendment would bring. I think -- I guess, mentioned in the press this past week. What are your thoughts on that in terms of what the potential impact could be on trading volumes and if you think it's actually going to go into effect as currently anticipated?

Just a little correction. It's not purely a market maker capital. As a result, there may be a change for market maker capital requirements and the fees that they are charged by their clearing members, but the actual Collins Amendment to Dodd-Frank is really directed at the banks and some -- therefore some of the -- of OCCs largest clearing members. They are the ones that estimate that their capital requirements could increase significantly. And then as a result, market makers' fees in turn would -- that would be increased to match the newer demands. So I think it's unfortunate, again similar to what we saw in the Camp tax proposal, but this is an unintended consequence of the Collins Amendment. What we think -- and one of the fundamental tenets of Dodd-Frank is to promote central clearing derivatives. But unfortunately, the increased cost to market makers and the diminished liquidity could affect and ultimately hurt investors. That's the message we're getting out there. That's what we'll be working on and educating The Hill, educating the Fed and really trying even going all the way to Collins to making sure that the intention was not really what we were facing in potential reality. So could it affect volumes in the future? Absolutely, it could, but we're comforted somewhat that this is unintended, and we think we can get to the bottom of the intention.

Your next question comes from Kenneth Hill of Barclays.

Wanted to touch on the technology backbone there for a second. You've clearly been adding a lot of customers. You've got a lot of new products coming on there, and you've been expanding the time zones as well. October looked like you had a few days where you had some halts and maybe some delayed opens on the futures exchange. Wanted to see how you're thinking about the stress on the platform going forward, especially if we're moving to a higher-volatility environment, maybe what that might mean for 2015 spending?

Ken, this is Ed Provost. So yes, we did have a few glitches in October. It was in the week that we had the extreme volatility. It was directly related to our Extended Trading Hours and a very narrow window, in fact, 15 minutes between the end of day, that being 3:15 Chicago time and the restart of next day, which is 3:30. That 15-minute window is substantially narrower than any other futures contract, typically that breaks about 45 minutes. So in that 15 minutes, what we do, among other things, is clean the book out of the day orders, which by definition are terminated at that point, while retaining the GTC orders and a number of other processes. That process typically takes a few minutes to do given the increase in volume and substantial increase in order flow. That process took longer than we would have anticipated. We have made changes to the process of clearing out that book and doing that end of day processing. We're running some processes in parallel. So at least at this volume level, it's now taking seconds not minutes. We believe that under the same market conditions, we would be fine, but we are looking at some longer-term solutions, and the possibility exists that we might expand the 15-minute break to a slightly longer period. That decision has not been made yet, but we believe we solved the problem as of now.

So I want to stress then, to your point on high volume. The operation, the day-to-day, the trade, the matching of orders, which is what we do with record-setting volume, went flawlessly. And this was really, as Ed points out, around establishing the book and the start of the next day Extended Trading Hours.

The next question comes from Chris Allen of Evercore.

Just a -- on the royalty fees, Alan, you mentioned some of the drivers that resulted in sequential increase this quarter. We tend to model it as a percentage of index-related revenues, and it bumped up from that perspective. I'm just wondering if some of these drivers you talked about, the order flow, the higher fees with some of the market [ph] data sales, is there a continuity there? Or are these kind of one-off anomalies? How to think about it moving forward?

Yes. It's great question, Chris, and you identified something that we saw right away when results for the quarter came out. And so just to reiterate what happened, in the past, royalty fees is -- the correlation's been extremely high to our index and futures volume on which we pay royalty fees. So you would expect that to happen. And what we've seen in 2014 this year, and certainly, as it came up in this quarter, is that the correlation got slightly out of whack and that royalty fees were higher than we expected. And so what caused that? It was market data fees -- so we had an increase of market data fees by $1.1 million quarter-over-quarter. And part of that increase of revenue caused an increase in expense on the royalty fee line item. And so the revenue was there more than offsetting the higher-than-expected expense on royalty fees, but the metric of index in futures volume didn't perfectly match up as we would've liked. What we're doing is thinking about different ways in the future to, for all of you, for analysts, for us, to model royalty fees going forward. Right now for the fourth quarter, I'd say, use the metric that we saw in the third quarter for the fourth quarter and maybe -- for next year, we might have better intelligence and going forward. So that's how I see it right now.

The next question comes from Michael Carrier of Bank of America Merrill Lynch.

Just wanted to get a sense, when you've seen more recently like the pickup in volatility, based on some of the investments that you made, maybe whether it's on the international side, the distribution side or the new products, have you noticed like any shift in users or activity or any traction on some of the newer initiatives that you've been working on that maybe you were hoping for or you were planning on once volatility picked up, but we haven't seen that for a few years?

I'd let Ed describe I think the effort in really the globalization of volatility. But as I mentioned in the ETH comments, the participants in the non-U.S. trading hours, while we can't see the origination or the destination that a trade -- where it starts, the fact that it's coming in the non-U.S. trading hour, and that's increasing as volatility or surprises are coming to the marketplace. We know that we have a broader reach. We know anecdotally that there are traders engaged in looking at fixed futures 24 hours a day now, but it is difficult to pinpoint, and our efforts are to go out and capture as much of that untapped demand that we possibly can. I'll let Ed kind of describe what we've done this year and how that's going to continue going forward.

Hi Mike. Ed Provost. So as Ed mentioned, we continue our business development efforts both domestically and internationally, having wrapped up our Third European Risk Management Conference in September, very, very successful event, planning to do an Asian-based RMC in 2015. The international interest in this product is significant. In fact, we got a report this morning from our representative attending some conferences in China, where there were 2 particular seminars making specific focus, specific reference and focus on our VIX benchmark and the products related to that. So we're very optimistic that we will continue to see international growth. We continue to be a bit disappointed with the developments in our VXST short-term product, but we see a continuing interest and a weekly expiration on volatility. So we'll continue to pursue that. We believe we will be able to develop some greater success in that product in the future. But all in all, we couldn't be more optimistic about the future growth prospects.

The next question comes from Jillian Miller of BMO Capital.

So in January, you typically kind of tweak your pricing across your markets and try to think about the give-and-take between fee rates and market share. So I just wanted to get an update from you as we're nearing the end of year, I expect you're starting to think about it, are you generally happy with where your market share is now? Do you think you might be looking to make changes to pricing? And if so, do you kind of have the ability to raise pricing in proprietary products again this year like you've done in the past?

From a market share perspective, I think we're very pleased and our comments, and what we've always maintained is that we will be a leader in market share, and our competitors are not going to beat us on price. And I think we've maintained that. The share is very stable, as we reported. But as you point out, we're faced with the January and that's typically where the industry looks at fees. So I'll turn it over to Alan to speak on fees.

Yes, thanks, Ed. Market share, Jillian, just to remind you, drives not only transaction fees on those multi-list categories, but it also drives access fees and market data revenue and exchange services and other fees. So it's extremely important for us to, as Ed [indiscernible] to remain at or near the top in market share. Now in terms of fees by product category, this -- it's an ongoing saga, and we always look at fees across the multi-list side, the futures side, the index side. And if we see an opportunity to increase fees, we'll do that. If we need to lower fees to remain competitive, we'll do that. I don't have anything specific for you right now on how things look for 2015 since we're right in the middle of that process. Of course, all of our fees that we do change are public immediately. Long term, if I was building a model on the multi-list side, even though fees have been stable now for 2 years, I would expect that long term, that the multi-list fees will decline slowly. And I think there's opportunity to go up on the future side, just because of the notional size of that contract. And on the index side, stable pricing, I think, seems reasonable. So even though I don't have anything specific for you on 2015, that's how it's looking right now. And Ed Provost, you wanted to add something?

Yes, Jillian, I would just add that we are evaluating our C2 pricing model, where we've had some very good success in the ETN space, that being the Spider, Qs and other of the more actively traded ETNs, and we have, over the last couple of years, had in place a somewhat unique and we thought what would be very successful spread-based pricing mechanism. It hasn't taken to the market, and so we will evaluate changing to a more traditional pricing scheme in the single-stock names. And so that's one area where we may be changing our pricing mechanism, not necessarily raising or lowering price, but changing the way we do it.

The next question comes from Ken Worthington of JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: As you expand the trading hours for more products and attract more non-U.S. clients, what is the impact you expect to see in market data? Now obviously, as market share goes up, there's a positive impact. But are there other components of data that will drive a more direct benefit from a bigger foreign client base?

John, this is Alan. Absolutely. Although the change that we've been seeing now, although it's been wonderful to take, it hasn't been tremendously material. And so we've seen increases in our CFE market data revenue, and especially as the globalization of that product continues, and it was one of the drivers in our market data revenue this quarter when you compare it to the same quarter last year. The total change was $1.1 million. So I'm happy to take it, and it could become more significant as we go forward. We are seeing increased subscribers. And certainly, as that product expands worldwide, I expect that to continue.

And Ken, I would just say that while we love the market data revenue, what we're really hopeful is that those new subscribers end up being active traders, and our real revenue comes from transaction fees.

The next question comes from Brian Bedell of Deutsche Bank.

If -- Alan, maybe can you talk a little bit about -- we've seen the surge in volumes so far in fourth quarter, and even if that dissipates a little bit, how that might impact the RPC on the future side in terms of the additional volumes? And then, if you can talk about how you think about incremental margins on these higher volumes? I guess taking into account, first of all, the fourth quarter with your sort of steady-state expense look. And then, as we look into 2015, if we really do have a higher volume -- volatility environment, how you think about incremental margins maybe inclusive of spending a little bit more on the international growth campaign?

Yes. Good question, Brian. CFE fees, the fees on the VIX futures product, is pretty stable. Although in high-volume periods, like we saw in October, the day trader discount that we have in place, probably will have a little bit more of an impact on fees than it would have had in periods where we have low volatility, but nothing that should knock your socks off at this point. And so that's how I view pricing for -- in October and going forward, a slight decline in high-volume periods. Now when it comes to margin, the wonderful thing about exchanges, and CBOE is no exception, is that when we trade an incremental contract, whether it's a multi-list contract or a future or one of our index options, pretty much all that revenue goes right to our bottom line, and so our -- one of our big focus this year, as you know, is controlling expenses so that when that volume comes, we see a lot of that revenue, most of that revenue going to our bottom line, which should expand our margins. The only uncontrollable part of that, if you will, is the royalty fee expense, which is pretty much tied to our index and futures volumes. So if 2015 is a volatile period and we see big volume, margins should expand. We need to do the job on expenses. I expect that we will, and that will result in increased value to our shareholders. So that's how I see it.

Okay, that's great. And any, I guess, any -- if you've got that very strong volume environment, does that make you think differently about some of your growth initiatives, especially internationally in terms of more RMCs or higher up, bigger sales force headcount to get the message out, especially on the VXTYN?

In fact, Brian, we've allocated additional resources in our business development area to push not only our current VIX set of products but to penetrate this new marketplace of fixed income traders. So there's no question that when business is better, you can make bigger commitments in many areas. And certainly, our business development efforts and our personnel related to that is one of them.

The next question comes from Alex Blostein of Goldman Sachs.

Just a quick one on capital management. Clearly, as you enter stronger volatility environment, you guys are a very high-margin business, you continue to print cash, and I was just wondering if you could update us on what you think the minimum cash amount you feel like you need to run with? And essentially, give us a sense of how we think about things like special dividends, increased buybacks, et cetera, as we head into year end?

Yes. Great question, Alex. The minimum cash that we need still hasn't changed. I think 4 years ago, I said $40 million to $60 million, and then, I sort of hedged up to maybe $50 million to $70 million. I'm still on that range. It hasn't changed. And what allows me to be so low relative to the size of company that we are on cash that I need is, because of our ability to realize cash so quickly. Looking forward, since -- I'm just going to throw out some facts for you that Debbie helped prepare for me, but it's phenomenal. So since our IPO, we have returned more than $1 billion to our shareholders, which is amazing, and we've more than doubled our regular dividend. We started out at $0.10 in August of 2010, and of course, we're at $0.21 now. We're very proud of that. We've also, I think, been very transparent with our shareholders about our intentions on what we're doing with that cash. And so just to reiterate that, invest in our business as we need to, to ensure our future growth. We pay regular dividends. We like to see that regular dividend increase year after year after year along with our business and then use the excess cash for stock repurchases, and I think we've really done that this year. Now mixed in with that, we've had a couple of special dividends. The tax-focused special dividend in December of 2012. And then, last year, we weren't as aggressive as we could have been on the stock market cash buildup. So we -- and earlier this year, we paid out a $0.50 dividend. So going forward, special dividends are still a possibility. Nothing is off the table. Even the variable dividend methodology is something that we consider and talk about going forward. But first, before we get to that point, we want to return cash to our shareholders through regular dividends and share repurchases. And if that isn't enough, then you could expect us to look at other opportunities.

The next question comes from Christian Onwugbolu of Crédit Suisse. Chinedu Christian Onwugbolu - Crédit Suisse AG, Research Division: So multi-list market share has picked up nicely through October. Just curious as to -- for your view as to what's driving this, and more broadly, what you see in the competitive landscape? And on a similar topic also, SPX growth in October at least has also outpaced SPY. I know you guys have a done a lot on the educational front, but curious is there anything new or different you're seeing on the educational front or kind of the user base?

Why don't I take these in reverse, and I'll ask Ed to comment on the multi-list. But what we do see in any market downturn and higher volatility are investors that are used to trading single name, really go to the high notional contract SPX, whether it's Weekly or Third Friday. The amount of hedging that you get out of that large notional contract, taking away the risk of physical settlement and American exercise, really draws people into SPX Weekly and Third Friday traditional SPX trading away from single name, even if that single name is Spider. You don't need or want the uncertainty in a high volatile market trending down on American exercise options and the requirement to manage physical settlement. So cash settled large notional is really where the marketplace goes to hedge when there's the most uncertainty in the marketplace. So not surprisingly in October, we saw a lot of interest in traditional SPX and SPX Weekly. We think that would continue in any high volatility environment. And as for multi-list, I'll turn it over to Ed.

So Christian, thanks for the question. It's interesting. Throughout the year, we have a constant dialogue with all of the players who control order flow in the industry. We didn't have any substantial pricing changes during the year, but we are constantly making modifications to our market model. We have a very, very functional system. Sometimes, it takes participants in the markets to make changes in their own systems to take full advantage of the systems that are available here, and we've had a few larger players complete some of their internal systems enhancements so that they can take advantage of some of the functionality at CBOE, which has been available. So there's been a few large players that have made some shifts. So all in all, I would say we've had some success with some significant players, but it's nothing beyond that. Again, a constant and ongoing dialogue with all the participants in the marketplace. Chinedu Christian Onwugbolu - Crédit Suisse AG, Research Division: That's great color. So I would assume some of the share shift that probably is more structural in nature, given the traction with larger players?

Correct.

The next question comes from Chris Harris of Wells Fargo.

So quick question on the expenses. I know we're not in a position to really talk about guidance for 2015. So this is more of a kind of a broader philosophical question. If you look at the peers, CME is now guiding to flat expenses next year. You've got ICE in a position to actually have declining expenses. I know they're going through an M&A transaction. And understood that you guys have really the best organic growth in the space, but if we think more broadly, what is it about your expense base maybe that should be going up faster maybe than peers? Is it kind of the new products that you're rolling out? Or is it the new penetration that you're trying to kind of build out in other markets, maybe that drives the cost creep a little bit higher? Or any color that you can just share on your expense base maybe relative to competitors would be helpful.

Okay, Chris. Guess I'm kind of taken aback at your question because we are all very proud here about our expense management at CBOE. If you look at core operating expenses for us over the 4 years, it's, I think we stack up well against any company. We -- this isn't a new -- cost management, expense management is not something new for us. We've been doing it from the beginning. And so I don't think that expense management should be a focus. And certainly, to compare us against the Merck and situation that they're in or ICE after trying to absorb the New York Stock Exchange and wondering why there aren't similarities, I think that's the issue. The only expense item that's gone up significantly in the 4 years is the one that I'm happy to see go up, and want to go up, and that's royalty fees. So when royalty fees goes up, that means I've got more volume, I've got more transaction fees. And for us to pay out whatever we pay out to Standard & Poor's on an SPX or a VIX contract is just a fraction of the transaction fees that we realize, and it does contribute to our overall margin. So I -- Chris, I think that if you take a closer look at us, I think you might agree with the point I'm trying to make.

No, understood. And I hope you didn't take it negatively. It was just more of just kind of a philosophical question. I agree that you guys have done a great job managing expenses over the years.

Yes. Not at all, Chris. I appreciate the question.

The next question comes from Neil Stratton of Citi.

I just wanted to ask a follow-up question about capital management. You continue to be pretty active in the market buying your own stock, but I also think you've mentioned being opportunistic in the past. So just at the margin, is there any change in the thought process with respect to buyback at this juncture and even on the likelihood of a special dividend?

Yes, Neil, Alan again. No, no change. We have been opportunistic in the past in our stock repurchase activity, but that's colored by the fact that we all here and our board believes in CBOE's future, and I think our -- the best is yet to come. So we were active in the -- all throughout this year, first, second and third quarter. I expect that to continue. And in terms of a special dividend, if something causes us to not be in the market as much as we would like buying back our stock, then again, we'll go back to our original and consistent commitment of not holding on to shareholder cash and finding ways to get that value back to our owners. That good, Neil?

The next question comes from Rob Rutschow of CLSA.

One additional follow-up on the cash balances. You've talked about dividends and buybacks, I think, pretty extensively. The one variable that we don't really have a feel for going forward is maybe CapEx. So are you viewing that as elevated here? And can you give us any sense for directionally, how you're thinking about it going forward?

Great question, Rob. And we're right in the middle of the business plan process, the planning effort for 2015. And the way it looks to me now, let me set the stage a little bit. The $47 million to $50 million of CapEx guidance that we have for this year, and I've said that, that's where I expect to be for this year. That's a lot higher than the $30 million to $35 million, $37 million range we've been at in the past for CapEx. So looking forward, in 2015, I would expect to be somewhere in between that -- the range -- the guidance that I'm giving you for this year and where we have been in the past, maybe not in the middle, maybe a little bit higher than the middle, but it -- that's how 2015 looks to me now. But let me reassure you that we will invest whatever we need to invest, whether it's in systems, hardware, software, facilities to make sure that CBOE is the best exchange that we can be.

That's very helpful. One follow-up also on VIX trading. Can you give us the sense for how the percentage of volume has changed for exchange-traded products relative to, I guess, more traditional traders and market participants?

So when you say more traditional, let's make sure we're talking about more traditional futures traders, different than traditional option traders. So yes, as we've seen the greatest increase, not just October, but over the last -- I would say now the last 18 months, the growth has really come from pure future traditional futures traders who tend to trade with higher frequency. And that's really leading and -- the greatest increase by class or segment in VIX futures trading. ETP's still a very, very important component of our trading, but what has really scaled up is that higher frequency futures trader.

The next question comes from Niamh Alexander of KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: If I could just go back to the Weekly product. That's been phenomenal part of the S&P Index growth. I know most of the growth has been in VIX, but help me think about where maybe you think you are, that product is in the growth cycle, even in the multi-listed is there still a lot more that could come out just as Weeklys and that continue to grow? And how far penetrated do you think you are with the customer group [ph] for those Weekly products?

Well, Weeklys, in general, I think is an industry phenomenon. I think the lower premiums are really attracting the active investor. But for us, the big story is, as you teed it up, is the SPX Weekly contract, and that's benefiting from an extremely concentrated educational process here at CBOE. We are all about educating the higher frequency, most active SPY trader. I think there's a lot of runway left. It's what we concentrate on is the migration of that SPY trader into the more efficient SPX Weekly contract. And that's education, that's promotion, it's handholding. It's every opportunity we get we tell that story of why SPX Weeklys is the most -- is the next level of trading for a SPY trader. And we'll continue to do that. So I think there's terrific runway. Now in a hedging market, I think kind of my comments before, whenever you're looking at risk and the market is moving with incredible volatility, going toward and using the highest notional contract on the market with the easiest access, we benefited from that really, really well. I'll punch that point again in October. So I don't think that's going to change, but that actually requires a bit more volatility in the marketplace for the true benefit of the SPX in general, and more specifically, the SPX Weekly with its easy access. So continued education, continued focus and continued ad concentration in that SPX Weekly. That's going to continue through '15. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And just you're pushing some more extended hours now in options and SPX as well as the VIX and as well as the futures. Will that be in the Weekly products as well?

So the suite in the rollout, what we look at initially in rollout is getting those VIX options to be able to complement the VIX futures contract that is so successful, and that should not be a tough reach for us. There's volatility traders who need to hedge volatility 24 hours a day, as evidenced by the VIX -- the futures in the VIX -- the success in the VIX futures. The SPX suite will follow, but that's going to be a little different educational process for us. The current hedge for S&P 500 risk is de mini [ph]. We know there are users out there, so we're going to get to them as well. So that's a whole suite added, probably more phased-in approach.

No question. But clearly, the plan is to have the SPX Weekly as a part of that. It's a very attractive product and it will be part of our Extended Trading Hours.

The next question comes from Gaston Ceron of Morningstar Equity Research.

Just wanted to go back to the issue of pricing for a second. I think, Alan, I think you spoke about futures pricing possibly having room to kind of go higher over time, which will make sense. Just curious about, talk philosophically about how you -- when you think about exactly how to position pricing for this product over the long term, how you sort of balance out your desire to get higher fees and the greatest value for the product versus your desire to keep volume at healthy levels and not attract competition?

Good question, Gaston. It is kind of an art, especially with the product that is proprietary, doesn't trade anywhere else. So for us to find the right pricing level is -- we trade very carefully. I've said this before in multiple venues, I'd much rather have a 10% increase in volume, drive a 10% increase in revenue than have flat volume and 10% increase of revenue caused by increased prices. That's not where we want to be in this product that is really running. The growth rate's been fantastic. So we're very deliberate and cautious in what we do, and the steps that we take I think will be small going forward.

And we have a follow-up from Alex Kramm of UBS.

Just wanted to come back, Alan, sorry, if I missed this before. But on the tax rate, obviously, running lower this year. Is the 30% or maybe a little bit higher something good to use going forward in '15? Or is this just a '14 event here?

Well, we've -- we modified our guidance for 2014 saying that we think we'll end up slightly below the low end of our range for the year, and that's really driven by third quarter. For 2015, at this point, Alex, I'm not prepared to give you that guidance or range. It is just too early for me to be able to do that. So if I were doing your model, I'd say no change, but stay tuned for when we have our next earnings call, and we'll have a much more definitive range for you.

And we have a follow-up from Neil Stratton of Citi.

My question was asked and answered.

And we have a follow-up from Jillian Miller of BMO Capital.

I'm sorry if you guys already talked about this and I missed it. But the slight pullback we've seen in the percentage of VIX volume that's coming from outside U.S. hours in the past couple of months, I was just wondering kind of what drove that? And I think last time I talked to you guys about it, you were kind of telegraphing a long-term range of 15% to 20% for your non-U.S. business. Is that kind of still where you think we should be heading longer-term?

Yes, I think -- we've touched on it, but you're right. We didn't really attack this directly. While the percentage didn't explode, and we only have peaks of nearly 20%, the total volume in VIX futures in a month like October, boy, it makes it almost impossible for us to maintain a growth rate that would also increase in percentage. So what am I saying? So in a month where we can -- where we see spikes in days of 400,000 or 500,000 contracts, a 10% penetration or 15% penetration is pretty terrific. That growth in ETH has just been amazing. Go ahead, Alan.

I want to add, we've looked at the overnight trading, the Extended Trading Hours, it's somewhat event-driven. And what we wanted to capture in that overnight trading was when something happened at 3:00 Chicago time, in the past, we weren't open. A customer had a need, could use our volatility product, but wasn't able to. And then, maybe by the time we opened at 8:30, the need was gone or mitigated in some way and we lost a trade. So I would expect spikes in that percentage, Jillian, in overnight hours to occur when the events are internationally-driven. What we saw in October was pretty much a U.S.-driven event and so I was thrilled with it. The -- just 8%, 9%, 10% overnight share, and that was fantastic. We all were looking on our iPhones on the way home at night before we went to bed and first thing in the morning, watching the volume and we were, as Ed said earlier, we couldn't be more pleased with the results so far in ETH, Extended Trading Hours, but it's really event-driven is when you'll see changes in the percentage.

So just to highlight, in October, busiest month ever for Extended Trading Hours. Over 600,000 contracts will have traded in the Extended Trading Hours session. So it's a 30% increase over the previous monthly volume record of August, which was more international, to Alan's point. So couldn't be more pleased with the number, over 600,000 contracts. Just a terrific start to ETH.

This concludes our question-and-answer session. I would like to turn the conference back over to Debbie Koopman, Vice President, Investor Relations. Please go ahead.

Thank you. That completes our call this morning. We appreciate everyone's participation today and your interest in CBOE. Look forward to speaking with you on our next call, and I'll be available for any follow-up questions, and Happy Halloween.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.