Cboe Global Markets, Inc. (CBOE) Q2 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to CBOE 2006 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Debbie Koopman. Ms. Koopman, please go ahead.

Thank you, good morning and thank you for joining us for our second quarter 2016 earnings conference call. On the call today, Ed Tilly, our CEO will provide an update on our strategic initiatives for 2016, then Alan Dean, our Executive Vice President and CFO will review our second quarter 2016 financial results. Following their comments, we will open the call to Q&A. Also joining us for Q&A are Ed Provost, President and COO; and John Deters, Chief Strategy Officer and Head of Corporate Initiatives. In addition, I would like to point out this presentation will include the use of several slides. We'll 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 and not guarantee 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 publically update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. Now, I would like to turn the call over to Ed Tilley.

Thank you, Debbie. Good morning and thank you for joining us today. I'm pleased to report another strong quarter for CBOE Holdings with increases in revenue and adjusted diluted earnings per share of 10% and 11% respectively. Our second quarter financial results were fueled by the ongoing growth of trading in our proprietary index products led by near record trading in fixed futures. It was the fourth consecutive quarter in which trading on our proprietary products exceeded 40% of our overall trading volume. Average daily volume in futures and indexed options trading rose 20% year-over-year in the second quarter, significantly outpacing the year-over-year increase of 2% for multiply listed options traded industry-wide. Throughout the quarter we also made significant progress in our four-point growth strategy; to develop unique products, expand our customer base, leverage strategic alliances, and define and lead the options in volatility space globally. Our strong financial results were largely fueled by spikes in trading in futures and options on the CBOE volatility Index, VIX, and options on the S&P 500 Index SPX. The VIX Index and SPX are widely viewed as proxies for worldwide volatility and the global stock market respectively. Investors worldwide turn to CBOE's marketplace in the face of increased market uncertainty leading up to and in the aftermath of the Brexit vote. Although the referendum was a European versus U.S. market event, traders were able to hedge their global equity exposures using VIX futures in real-time, hours before European markets opened for trade. VIX futures were available for traders during Asian, European, and U.S. market hours and remained open as stock markets around the world reacted. Reaction to the referendum was vividly seen in non-U.S. trading hours on June 24 as it became increasingly clear that Great Britain had voted to leave the European Union. CBOE's 24 hours VIX futures marketplace functioned as expected with trading in our overnight session soaring to record levels. In excess of 235,000 contracts changed hands in non-U.S. hours surpassing the previous single day record set on August 24, 2015 by 67%. Strong VIX futures trading carried into regular U.S. trading hours as well. Overall, average daily volume in VIX futures reached 258,000 contracts, an increase of 41% over the second quarter last year and 19% over the prior quarter. Average daily volume in VIX options rose 17% over the second quarter 2015 and declined 8% from a very strong first quarter 2016. It's worth noting that last year we added an overnight trading session in VIX and SPX options from 2.00 AM to 8.15 AM Central Time and began dissemination of the spot VIX index during that same timeframe. In addition to increased trading hours, we believe that access to real-time volatility information during European trading hours further elevated VIX and SPX trading among overseas investors as the Brexit news unfolded. We also continued to see increased trading in VIX Weekly's futures and options which launched last July and August respectively. Second quarter average daily volume in VIX weekly has increased 30% over the previous quarter. We attribute the ongoing growth in VIX weekly's trading to the trading precision these products provide in response to breaking news and in anticipation of economic policy announcements. The global shock waves kicked off by the Brexit referendum were also reflected in heavy trading in SPX options which enables investors to efficiently hedge the market with a single transaction. For the month of June, SPX options volume averaged 1.2 million contracts daily, just shy of the all-time monthly record of 1.3 million contracts set in August 2015. For the quarter, average daily volume in SPX options rose 19% from the second quarter last year, and decreased 5% for the previous quarter. July-to-date SPX options have traded over 1 million contracts per day, about 9% ahead of the second quarter. Strong Weeklys trading also continued to drive volume in our SPX marketplace. Our SPX Weeklys trading increased 18% over last year's second quarter and 7% over the previous quarter fueled in part by the growth of Wednesday Weeklys. Our Wednesday expiring product launched in February complements standard SPX Weeklys which feature end of week expirations. Pending regulatory approval, we plan on August 15 to add Monday expiring SPX Weeklys which will allow investors to hedge their over-the-weekend risks. We expect the addition of a third explorational alternative to further increase SPX Weeklys trading, and to provide customers with additional trading precision and flexibility. We expect the results of the Brexit referendum to continue play out across markets in the months to come as will other macro geopolitical events domestically and abroad. Regardless of how or when market events unfold, our focus remains on systematically expanding our global customer base through targeted initiatives in education, business developments and trading technology. We continue to leverage the efficiencies afforded by a comprehensive suite of index and volatility products through educational programs aimed at helping investors understand the utility of our product line in any market condition. We are fast approaching our fifth annual CBOE Risk Management Conference in Europe which is scheduled to take place, September 26 through 28 in County Wicklow, Ireland. And I'm pleased to say after many years of concentrated business development efforts in Europe, we opened our London office earlier this month. As mentioned, the implementation of extended trading hours at SPX options and VIX options and futures, as well as the overnight dissemination of VIX index values help facilitate trading in these products when global investors most needed them to manage market uncertainty and turmoil. Both were major trading technology initiatives that significantly expanded our customer reach and brought new efficiencies to trading our VIX and SPX product lines globally. Similarly, by establishing connectivity earlier this year between CFE, our futures exchange, and Stellar Trading Systems, a major vendor in Europe and Asia, new customers were connected to our marketplace ahead of June's volatility. We continue to pave the way for future growth through strategic partnerships aimed at responding to emerging challenges and opportunities in the marketplace including new trends in global regulatory reform. In May, CBOE Holdings made a minority equity investment in the Eris Exchange, a U.S. based futures exchange that offers swap futures as a capital efficient alternative to over-the-counter swaps. Our partnership with Eris, like our partnership with KER Global [ph], positions CBOE to capitalize on the continuing convergence of the OTC and listed markets by bringing new products and efficiencies to the interest rate marketplace. The timing of the partnership is especially opportune as it allows our two companies to collaborate on developing product solutions designed to address the impact of pending international regulatory reforms including Basel III and European swap clearing and trading mandates. The partnership also enables us to enhance distribution of Eris interest rate swap futures and related market data. In June, we entered into an exclusive licensing agreement with Social Market Analytics, SMA, a leader in providing actionable intelligence from social media sources. Extracting information from social media represents a promising new frontier in strategy benchmarking, and our research suggests a high correlation between SMA's metrics and price movements in stocks. We welcome the opportunity to develop sentiment-based benchmark indexes based on SMA data and expect to introduce the first of these benchmarks this summer. I'll close here by saying we are obviously pleased with our strong second quarter results on the heels of a similarly strong first quarter. Our solid year-to-date performance was the result of a company-wide commitment to a strategy designed to benefit our customers and shareholders over the long-term. Market events continue to highlight CBOE's growing importance in the global marketplace and for that I thank the entire CBOE team. Their ability to develop unique products, leverage strategic partnerships and expand our customer base enables us to lead options and the volatility space globally and drives our Company's forward momentum. With that, I'll turn it over to Alan Dean.

Thanks, Ed, and good morning, everyone. I'm pleased to provide an overview of our second quarter's financial results. Positive momentum in our proprietary products carried over into the second quarter resulting in another solid quarter. Our operating revenue came in at $163.3 million, 10% above last year's second quarter. Adjusted operating income was $79.5 million, up 8% versus last year. Adjusted operating margin was 48.7% down 60 basis points compared with 49.3% in the second quarter of 2015. Adjusted net income allocated to common stockholders was $48.7 million, up 9% versus the second quarter of 2015 resulting in adjusted diluted earnings per share of $0.60, an 11% increase compared with the $0.54 per share for the same period last year. Before I continue let me point out that our GAAP results reported for the second quarter of 2016 includes certain unusual items that impact the comparison of our operating performance and that we believe are not indicative of our core operating performance. These items are detailed in our non-GAAP information provided in the press release and in the appendix of our slide deck. Looking at our results further, starting with adjusted operating revenue we reported increases in transaction fees and exchange services and other fees, partially offset by a decrease in other revenue. Transaction fees were up $16.3 million, or 16% compared with the second quarter of 2015 driven by a 10% increase in average revenue per contract, or RPC, and a 6% increase in trading volume versus last year's second quarter. Looking at volume by product category, as shown on this slide, our higher RPC proprietary products significantly outperformed lower RPC multiply listed options with trading in our index options up 19%, and futures up 43% over last year's second quarter. For the multiply listed products, options on exchange traded products increased 3% while equity options declined 10%. Our blended RPC including options and futures increased to $0.405, from $0.368 in last year's second quarter. The increase in RPC primarily reflects a favorable shift in the mix of trading volume with our highest RPC products index options and futures contracts accounting for 42.9% of contracts traded in the second quarter compared with 37.2% in the same period last year. The RPC in our options business increased to $0.328 compared with $0.308 in the second quarter of 2015, again, reflecting the shift in trading volume towards our index options which generate the highest options RPC. Index options accounted for 39.4% of our options trading volume versus 34.4% in last year's second quarter. Somewhat offsetting the increase, RPC for equity options and exchange traded products decreased 24% and 12% respectively, primarily due to the mix of account type and higher volume discounts and incentives. Revenue per contract at CFE our futures exchange decreased 4% to nearly $1.68 from $1.76 in the last year's second quarter reflecting the impact of higher rebates linked to volume and account type. Looking at RPC on a sequential basis, the blended RPC for the second quarter, $0.405 was unchanged from the second quarter, primarily reflecting the positive impact of increased trading from our highest RPC futures contracts which accounted for 5.7% of trading volume versus 4.5% in the first quarter. The revenue contribution from our proprietary products continues to increase as a percentage of total transaction fees. In the second quarter proprietary products accounted for 87.9% of transaction fees, up from 82.4% in the second quarter of 2015 and 85.8% in the first quarter of 2016. Looking at some of the other factors influencing adjusted operating revenue exchange services and other fees increased by $1.6 million. Similar to prior quarters this increase was largely due to revenue contributed from CBOE Livevol technologies which became part of CBOE Holdings on August 7, 2015. Other revenue was down $4.2 million, primarily due to lower revenue from fines. In 2015 revenue from fines was higher than normal resulting in more difficult comparisons this year, a trend we currently expect to continue in the second half of the year. Revenue from fines is pulled with regulatory revenue and is used to support our regulatory functions. Turning to expenses, this next slide details adjusted operating expenses of $83.8 million for the quarter, an increase $8.5 million or 11% compared with the $75.3 million in last year's second quarter. Adjusted operating expenses for the quarter mainly reflect higher costs for compensation and benefits, royalty fees, and professional fees and outside services. Core operating expenses were $52.7 million, an increase of $6 million or 13% compared with the second quarter of 2015. This increase primarily reflects higher costs of $3.5 million in compensation and benefits, and $1.8 million in professional fees and outside services. The variance in compensation and benefits largely reflects higher salaries and incentive-based compensation. The increase in salaries primarily resulted from staffing additions, particularly in our systems and business development groups, as well as the addition of Livevol. The variance in incentive-based compensation is aligned with our improved financial results. The increase in professional fees and outside services primarily reflects higher costs for legal fees and regulatory contract services. We are reaffirming our guidance for core expenses for the year to be in the range of $211 million to $215 million. We do expect core expenses to increase in the second half of the year versus the first and second quarters. As we noted on our previous earnings call, under our regulatory services agreement with FINRA, we completed our migration to FINRA's regulatory software in July which resulted in an increase in fees paid to FINRA. This increase is expected to be offset somewhat by lower depreciation and amortization expenses due to the final write-off of certain regulatory software. However, it shifts some expenses into core going forward that were previously in depreciation and amortization. Looking at volume based expenses, royalty fees increased by $2.5 million or 15% reflecting the higher trading volume of licensed products during the quarter. The royalty rate per licensed contract traded came in at 15.5% this quarter in line with the rate we saw in the first quarter. As I noted in prior quarters, the rate per contract can vary based on the mix of index products traded. On final note on our income statement, included in investment and other income this quarter is revenue of $5.5 million which we received from a settlement for attorney fees and expenses related to a litigation matter. This item is included in our non-GAAP reconciliation. Turning to the balance sheet, we finished the quarter with cash and cash equivalents of $52 million compared to $107 million at the end of the first quarter and $102 million at the end of 2015. The decrease in cash compared to the previous quarter ending March 31 was primarily due to income tax payments made during the quarter, in addition to other uses of cash for dividends and share repurchases. CBOE is a strong cash producing business, through June we generated net cash flows from operating activities of $115 million versus $106 million in the same period last year largely driven by the increase in net income. Capital expenditures to date were $25 million. Looking out to the end of the year we are reaffirming our prior guidance of $47 million to $49 million for capital spending. The majority of our capital spending continues to be systems related particularly with ongoing development of our new trading platform, CBOE Vector. We now expect Vector to be up and running for CFE our futures exchange by the end of this year. After the CFE implementation we plan to continue the development of Vector for CBOE and C2. We remain committed to using our cash flow to optimize shareholder value by first reinvesting in our business and then returning excess cash to shareholders through sustainable dividends and share repurchases. In line with that commitment, year-to-date through June we have used more than $38 million to pay dividends and nearly $65 million to repurchase our stock. At June 30, we had approximately $97 million remaining under our existing share repurchase authorizations. In addition, we continue to invest in long-term growth opportunities such as our minority equity investment in Eris Exchange which Ed mentioned in his remarks. Further on underscoring our commitment to returning capital to shareholders we were pleased to announce yesterday that our board declared an increased quarterly dividend of $0.25 per share. This represents a 9% increase compared with the prior quarterly dividend. This dividend increase marks the sixth consecutive year that our board has increased our dividend representing a compound annual growth rate of 17%. In closing, we will continue to focus on and invest in our long-term growth initiatives. As the industry's leading provider of index and volatility products, CBOE is well-positioned to meet the needs of market participants and drive long-term value for our shareholders. With that, we thank you for your time and your attention this morning. I will turn it back to Debbie for instructions on the Q&A portion of our call.

Thanks. At this point, we would be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue and if time permits, we will take a second question. Operator?

Thank you. [Operator Instructions] And the first question comes from Rich Repetto with Sandler O'Neill.

Good morning, Ed. Good morning, Alan. Solid quarter, especially with the proprietary products and my favorite separate, but it's a positive here. VIX futures, open interests come hit a record, at least -- I think we will for the end of month for July. I'm just tried to see, is that a carryover from Brexit? Is it -- can you give us color on it? Is it any new users or bigger positions of existing users? It generally looked at as an indicator of volume going forward. So it's a positive here.

It is tracking higher Rich and volume, as you pointed out in the quarter was traffic; index future. So couple of different -- kind of a two part observation and a two part answer, volume really continues to be driven in markets that we have seen in June and July by an elevated Livevol. So second quarter versus first quarter, each month has been a higher Livevol so a lot of the volume you see is really driven by our higher frequency traders trading an elevated Livevol level. As for open interest, as you know, the ETP, the Exchange Traded Notes, and ETS, that are tracking VIX, tend to hold those positions and then rebalance as the volatility levels move. So as AUM has been increasing -- we're at a recent high of about $5 billion in AUM that are in various notes, and sponsored notes, ETMs and ETFs. So that number causes the open interest in more of these just holding those positions in futures. But I will point out, you asked if it is the existing users, I'll interpret that as the existing notes, or is -- are there new entries? So two new entrants into the note space; one, out of Japan, Nomura sponsored NEXT notes launched in late 2015, that's the largest new user. And then Easy Tracker out of Europe, roughly the same timeframe, another new user. So long answer, new users coming in, existing users finding greater utility but also Rich, if you're going to look at that open interest, we'll have you start looking at the AUM and that we can track for you in various notes by sponsored exchange traded products.

Got it. Very helpful. Thanks, Ed.

Thank you. And the next question comes from Michael Carrier from Bank of America, Merrill Lynch.

Good morning. This is Sameer Murukutla on for Michael Carrier. I guess I was going to focus my question on the equity options space. The competition is very intense and RPC ended the quarter around $0.07 in 2Q. How much lower is the company willing to going to go to maintain market share? And overall, what causes competition in the industry to abate a bit?

This is Ed Provost, I'll take a shot at that. The equity option market share battle continues, it is a battle largely driven by pricing and technology. We saw some favorable shifts in market share this quarter, both on the retail side and on the institutional side. Some of the consolidators who managed a lot of the retail flow found opportunities to direct some of that business to CBOE. And our very strong flow of broker community drew a lot of the institutional large block process to CBOE and we're very, very pleased with the. There were no substantial price changes in the industry over the last several months, and we look at the shifts being more of the results of the assessment across multiple exchanges and where our pricing schedules allowed certain firms to optimize fee schedules at CBOE rather than another exchange they shifted business. It will always come down to pricing, for the most part; and we believe that that competition will continue. Alan has commented off and then RPC and multiply listed space will continue to go down gradually overtime. But we're very pleased with our current position in the multiply traded space.

And this is Alan. Just to expand a few items that I'd referred to; a couple of points that you should keep in mind. First, we are committed to maintaining a market leading or near market leading position in the multiply listed options space. There are more than just transaction fees that we're concerned about as there are other revenue line items, like access fees and market data and exchange services and other fees that are supported by that market leading position. So we're committed to that position. Secondly, I think there is a bottom in RPC in the multiply listed side, $0.04, $0.05, $0.06; I'm not sure, somewhere in that range. But it's higher than what I think we were seeing in the cash equity side of our business, primarily because of market data revenue. On the options side we have a consolidated take, there is market data revenue, and that's divided up by market share. But the pool of revenue that we divide up on the options side is a lot smaller than you see on the cash equity side. So you need to support your multiply listed options business with transaction fees, not just market data revenue. So I think the floor for options RPC is a little bit higher than on the cash equity side. I hope that helps.

I appreciate that. Thanks for the detailed response.

Thank you. And the next question comes from Kyle Voigt with KBW.

Good morning, thanks for taking my question. Just another question on pricing I guess, stay on topic. I believe you made some present changes or incentive changes in the quarter for proprietary products, I think VIX specifically. So could you give some more color on what adjustments you made and what the outlook is for the proprietary side of the business? Thank you.

I don't think we made any pricing changes that had a material effect at all on the index side, either on the futures side or on the options side. I'm trying to think of my notes and think about changes that we made. Debbie is whispering to me, she said frequent trader program. I don't consider that to be a significant event.

No, but I think that's what he might be referring to.

So that didn't have a material impact. So I guess the deterioration of in the quarter -- quarter-on-quarter sequentially, was that mostly due to customer mix or maybe you can give some more color there? Thanks.

The change -- take futures for example, that's an easy answer so I'll take that one first. The RPC in futures is lower in the second quarter of 2016 than it was in 2015. Think about the volume that we were experiencing a year ago compared to volumes that we're seeing now. So this year the market participants on the future side, we had high frequency traders involved in the market who pay less per contract when they trade compared to other participants in the market and that helped drive down the RPC on the future side. Now the impact on the options side, the $0.70 per contract -- I think it was $0.72 a year ago or maybe even last quarter, it's down a little bit. And there is a couple of things there; it's market participants driven by volume so maximizing their volume discounts and their high volume environment, also impacted by what we're trading; where SPX and VIX and not the same they are different. So when the mix of products traded changes that can impact our RPC on the options side. So the change that I saw, that we experienced in RPC on the options side was insignificant and expected.

Okay, thanks.

Thank you. And the next question comes from Brian Bedell with Deutsche Bank.

Good morning. And maybe Ed, let me just switch gears a little bit; maybe you try and elaborate a little bit on the number of partnerships you've been working on – you've been extremely busy and announced several things over the last few quarters. Maybe just sort of an update on what you see as the potential financial impact from the collection of these? So what I'm referring to would be the Eris Exchange, Curve Global, you announced the American Financial Exchange partnership a little while back, Bolton acquisition and now the Social Media partnership. And I know these take a long time to develop or just trying to sort of see how we can gauge this over this long-term?

Before we get into the specifics, let me kind of just set you up because the organic growth we've enjoyed for our 43 years here at CBOE will continue, that's our primary focus. The Bolton acquisitions that you're referring to, we are excited about. We think that -- or you've said that perfectly, we think these are years in the making and really promising to second leg to the growth story for CBOE and it certainly will be continue on. I'll ask John Deters who is here this morning to walk down a few of those for you, kind of give the highlights, the reason behind them and what we expect to see over the next months and then year or so. I don't think we will give you the five-year plan, but certainly we would like to tell you how things are going to date, what we expect to see. So I'll turn it over to John.

Thanks, Ed. I'll just be upfront, in the near term, we don't expect these partnerships to have a material impact on our results. But obviously, we build our business looking for growth and we see great potential in all of these partnerships. I'll start briefly with Eris because it's the precious in our portfolio. What we see is in Eris is a really versatile proprietary product set, specifically designed to solve problems in capital markets, in particular, problems with challenges in terms of capital cost, in terms of counter-party risk, in terms of transparency in the traditional swaps market, RPC swaps market. And so the benefits that swaps users through Eris are clear; it's lower execution costs, lower initial margins, lower capital positions; and for the dealer community, larger block sizes. So our objective is to support the growth of Eris going forward, we think it has a very, very strong potential and proprietary products like Eris and the potential of those products. We will support Eris in product development, marketing and promotion, data commercialization and certainly technologies support as well. So we think -- by the way, the timing couldn't be better. We've seen Eris set a series of open interest, particularly in their standards product over the past month alone. So we're excited to put that platform to see it grow. I'll also talk just briefly about Curve because there is a bit of profile around Curve. There has also been a bit of noise in Europe and in the exchange base in Europe in particular, and I just want to highlight Andy Ross, the new CEO of Curve and his team have been executing impressively throughout that noise. And Andy has continued to solidify his team with key milestones in terms of technology, in terms of market participant readiness. We call it as a full range with market participants committed by launch which we expect in September. And Andy's vision which aligns with ours is that Curve will be a truly distinctive platform in terms of functionality, in terms of seamless portfolio marketing, it benefits with LTA [ph] which we talked about. And I want to highlight that in particular in terms of the suite ultimately of innovative products, rate related products and this is where CBOE's capabilities come into full play. So business is on track and the business is clear and we're excited about the upcoming launch in September. One more point, I mean investments we've made earlier this year, just to remind folks there is a funds business with best and a technology business. The funds business is focused on listed options based, indexed packaged products, and we're pleased to report that VAS received approval on filing for its first mutual fund and we expect the launch of that fund to becoming up very soon. On the technology side, some real encouraging developments there as well, that team is the best team, it continues to execute terms of using their technology to help our AAs craft separately managed accounts for their end-users. And also collaborate with brokers, the team recently signed an agreement in Europe with one of the largest e-brokers there to help feed in technology that helps our customers create options. So we believe it's an investment and really the democratization investment benefits to a mass-market globally. Those are some of the long-term perspectives we have on three of the key initiatives we've done recently.

Any sense of the materiality to 2017? I know in near terms it's too close in but…

I think 2017 I'd give you the same guidance, I know you will have to build models, we're going to tell you this is a long-term build on all these products.

This is Alan. I will say that if any of these initiatives become material to our is results, we'll certainly communicate that and give you an outlook if we think it is material.

Thank you so much for the color.

And the next question comes Chris Harris of Wells Fargo.

I just want to follow-up on discussion on Eris. I think you guys are making a bit of a bet about the success of swap futures as a product and you laid out the benefits of why users want to utilize those products. But, this products has been around a little while and there hasn't been a huge uptake yet. And you talked about open interest being on record but we are talking about a pretty low base overall. So maybe if you could just talk to us about why this has the potential to be good product? How big do you think the market is for this? And then we saw a pretty big decline in cash on your balance sheet quarter-on-quarter, I assume this was Eris, but maybe you guys could eliminate if it wasn't. Thank you.

Let's do the second part first. Yes, cash did decline. Really it wasn't Eris, it was more tax payments than anything else during the quarter. Our cash position wasn't extraordinarily low, I guess as a comparison to year end or the end of last quarter, it is lower but our philosophy on capital allocation hasn't changed. Dividends, like to see those grow, whether dividends stock repurchases keep on doing that. First and foremost, continue to reinvest in our business to ensure future growth. So nothing has changed, I don't think there is nothing to read into that $50 million cash balance sheet at the end of the quarter.

I'll circle back to the first for that question. The timeframe from launch to ultimate commercialization of Eris is dependent in large part on the regulatory regime. The design of Eris is meant to address a lot of the changes that have happened in the regulatory framework, that's U.S. and Europe. And while Dollar-Franc [ph] was passed in 2010 -- method two in Europe came somewhat later. The implementation of those related rules has been a long drawn out process and continues to be. We're just now seeing, in Europe, the implementation of some of those more important capital rules. And that's going to be the catalyst, always has been viewed as the ultimate catalyst for the product. We see in the clear swaps market that a transition has already taken place in terms of the uptake in swaps trading on sub-platforms in terms of new participants, non-bank participants like Citadel entering that market in a big way. And we view that same transition to go over into the swaps future platform in the coming years as well.

I appreciate it.

Thank you. And the next question comes from Andrew Wong with RBC Capital.

Now that CBOE is truly global exchange with opening the London office, can you give us some perspective on the kind of growth opportunity in Europe and beyond? Obviously, we saw the growth potential in Brexit but overtime what product do you think will benefit most from your presence overseas? I guess outside of VIX, do you expect to see more growth or what is the potential from your other indexing in non-transaction products? And who are primary end users, is it similar to the U.S. in Europe?

Andrew, thanks, good question. Before I turn over to Ed Provost, I'm kind of why didn't we speak in and how the office opened in London. I think it is important to stress the fact that what we did see in June and the continuation into July, just to remind everyone this was a non-U.S. event and the world looked to CBOE for hedging needs. And for us, most impressive for us and being able to deliver a liquid market to those looking for a hedge in the non-U.S. trading day. Setting a record in that 2 AM to 7 AM timeframe for VIX futures was so telling and really illustrates what we have been told all along and what we've been sharing with you is that this VIX contract is truly the global hedge for volatility, both during U.S. trading hours and non-U.S. trading hours. As for the opportunity and the business development prospects, I'll turn to Ed Provost.

Continuing with what Ed said, in addition to expanding the user base for our U.S. based indexes, VIX and SPX, we have over the last several years added additional international indexes including the FTSE100, the FTSE China 50, the MFCI Indexes. Again, we're not only are attempting to appeal to the international community with great products that help to manage their risk using products tied to the U.S. market but we are bringing forth products that are tied to market outside of the United States as well. The office in London, of course is significant because it is literal boots on the ground full time. But we've been engaged in Europe, and quite frankly, globally for the last 25 years and we are continuing to see an increase in the use of our proprietary products, in particular are broad-based index products by a global marketplace. And again, Brexit was a great example, but on ongoing basis, we believe the in those products 20% to 30% of the user base is from outside the United States. We attempt through our various efforts to understand exactly the size of that. We are engaged in the program to give the economic incentive for users to identify themselves. And that has so far worked well and allowing us to identify users, their geographical locations and which products they are using. So our ability to look through that data and identify current users is being enhanced every day. So we're very pleased with our efforts internationally and are going to expand that over the years.

Thank you. And the next question comes from Patrick Roshan [ph] with Raymond James.

So as we look at the volumes in SPX, they generally seem to be outpacing what I would consider to be closest alternatives, whether that's SPY or S&P500 futures. Can you talk to some of the drivers that -- I think in particular, how much comes down to allow the product innovation that you're rolling out? How much comes down to maybe a different customer base or maybe other factors?

I think there is a number of drivers and we certainly can't ignore the impact of adding listed extensions to SPX product line. If we look at just the regular Friday weekly, what an amazing story. Have Wednesday Weeklys trade and offering yet another point of precision on hedging and then pending regulatory approval, looking to a Monday exploration which allows sure over the weekend hedging is really has been pretty terrific for us. What we have found, and what we've been tracked is the sophisticated retail investor who may have been trading spiders, and maybe trading spiders in a big way. That has been really the growth in Weeklys and in particular, Wednesday Weeklys. So you are right, there has been terrific growth in outpacing the market. I think in my prepared remarks, if you recall, multi-listed options classes, industrywide up about 2% in our Index complex, up 20. We continue to tell the story. The utility of trading a large notional macro contract, all of the benefits of a macro market hedged with 60/40 tax treatment, a European exercise. So we continue to tell the story encouraged by the uptake in Wednesday and looking forward to it on a Monday list. I'm happy to add more color on a follow-up if you have one.

That's great. Thank you very much.

And the next question comes from Robert Redshaw [ph] with CLSA.

Good morning. Just a question on expense -- your operating expense growth has been a little above average and there has been a lot of puts and takes, and I think for the first five years you were probably more in the mid-single digits in terms of growth rate for operating expenses. So I think the guidance implies that you're going to normalize back to that little but I want to get some thoughts what you think long term or rather the intermediate term operating expense growth rate should be for the rest of this year and into next year?

Good question, Rob. 2016 we're seeing core expense growth higher than we've seen in our prior 5 or 6 years as a public company. And in the past, we've been anywhere from 1%, 2%, 3% growth in core expense, really low-single digits. But what happened in 2016, especially this quarter, a number of things. First off, we have -- the comparison is hard, and if you think back to the second quarter of last year, volume was anemic. We were in cost-cutting mode and so -- in this quarter, it was a good quarter. So was the first quarter, so we work in that cost-cutting. So the comparisons are tough quarter-over-quarter, number one. Number two, we have two things being folded in our core expenses that are increasing the expense for this year as compared to last year. First, is Livevol; so that whole business that we bought last August is in for the fourth quarter this year but wasn't even in our expense reporting last year. So that's a significant item. And then secondly, regulatory expenses are up this year as compared to last year. It doesn't bother me because we have regulatory revenue to offset the increased regulatory expenses. And just like Livevol, even though those expenses are flown into our P&L, there is offset in revenue to offset those expenses. So our -- the culture, the attitude towards expenses set by -- has not changed here at CBOE. We like the operating leverage that we have in our P&L and the way to maximize that leverage is to make sure we control expenses. And that -- so that hasn't changed and there is no difference in attitude or the way we look at our business.

And it's just a matter of anniversary [ph], things look little more like the past.

I'm maintaining the guidance that we have of $211 million to $215 million in core expenses. We will touch under that if you annualized our year-to-date core expenses against that number. What I'm saying is that I expect a few line items, namely compensation and benefits and professional fees and outside services to go up a little bit in the second half.

Okay. Thank you.

Thank you. As there are no more questions at the present time. We would like to turn the call back over to management for any closing comments.

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

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