Cboe Global Markets, Inc. (CBOE) Q3 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to CBOE 2016 Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would 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 third quarter 2016 earnings conference call. On the call today, Ed Tilly, our CEO, will provide an update on our strategic initiatives for 2016; Alan Dean, our Executive Vice President and CFO, will review our third 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'd like to point out that the 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 regarding intention, beliefs, and expectations or predictions with the future of CBOE Holdings and vast global markets which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Including statements regarding closing optimization of the combined businesses, expected pro forma revenue, anticipated synergies, the expected benefits of the composed transaction and the anticipated timing of the closing. Forward-looking statements represent our current judgment on what the future may hold and while we believe these judgments are reasonable, these forward-looking statements and 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 CBOE's filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. Now, I'd 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 on a solid third quarter 2016 at CBOE Holdings with adjusted earnings per share of $0.58 on revenue of $156 million against a backdrop of choppy volatility and very challenging year-over-year quarterly comparisons. In the third quarter last year, CBOE had record high financial results as well as record highs in SVX and VIX options in futures trading. While Brexit driven spikes in volatility, it drove increased trading in the second quarter of this year. Against those comparisons, overall trading at CBOE for the third quarter declined year-over-year and from the previous quarter. However, year-to-date trading on our index suite is up 5% led by an increase of 14% in VIX future's trading and continues to outpace monthly listed volume traded industry-wide which is down 4%. Throughout the quarter, we made notable progress in advancing our growth strategy beginning with our planned acquisition of vast global markets which we announced on September 26. We are pleased by the very positive response to the acquisition we received from industry participants. We would appreciate the anticipated benefits of combining U.S. and European equities, ETF trading, global FX platform with CBOE's wide array of index options and services and multi-asset volatility products. The acquisition has the potential to significantly expand and diversify our product line, broaden our reach with that market leading European presence and increase our non-transactional revenue stream while enabling us to streamline the combined company's technology and enhance our strong growth and margin profile. We continue to work through the stuffs necessary to complete the transaction in the first half of 2017 and on a parallel track to position the company for optimal success, immediately following the closing. And integration team comprised of CBOE and employees is snapping out plans and efficiently maximizing synergies and revenue opportunities for the combined company. I'm pleased to report that as we work our way through this process, we continue to believe that we are combining two very complementary and like-minded companies. There is mutual respect for the best-in-class innovation that each company brings to the marketplace and we are thrilled by the opportunities that we expect will result from uniting to supremely dynamic and innovative cultures. It is important to note that the multitude of opportunities afforded us by the VAS [ph] deal, squarely fit into our strategy to develop unique products, expand our customer base and leverage alliances that complement our core business. We see the VAS acquisition as an accelerant of our forward momentum that significantly expands the opportunities on our strategic path. We're even more enthusiastic about CBOE's mission to provide innovative products that facilitate and enhance trading in the global marketplace, given the additional strengths we believe we can bring forward once the transaction is completed. Product development remains and will remain key to our value proposition. I'll take a few moments here to highlight recent progress made in that regard. On October 26th, we launched the CBOE S&P 500 Smile index, a premium capture strategy Index constructed to perform in both full and bear markets. The CBOE Smile Index is based on the steaminess of the curve of implied volatilities of the S&P 500 SPX options, which generally looks like a Smile. As with all of our strategy benchmarks, the Smile Index is meant to be used by asset managers as a road map to drive the use of proprietary products -- in this case, SPX options. In September, we expanded our global-based index offerings with the launch of options on the FTSE Emerging Index, which tracks the performance of large and mid-cap companies from advanced and secondary emerging markets. In August, CBOE's asset management affiliate, CBOE VAS Financial launched the CBOE VAS S&P 500 Buffer Protect strategy fund -- the first mutual fund designed to provide investors with index-based buffer protection. The new index-based fund provides a risk manage investment that seeks to protect against some downside losses in the S&P 500 Index, while still participating in potential upside. On October 18th, CBOE VAS launched the CBOE VAS Defined Distribution strategy fund, which seeks to generate consistent monthly distributions while preserving capital over the long term. The fund's strategy is implemented by using proprietary SPX options and is designed to appeal to investors seeking income in low interest rate environment. We view target-based investing as a major trend that will further democratize the use of many of our products as it can offer the benefits of the options stream, while substantially reducing its complexity. Furthermore, our proprietary product offering and expertise in developing options-based strategy performance benchmarks combined with our CBOE Vast partnership uniquely position's CBOE to find and lead target-based outcome investing's in the options space. We continue to expand our global customer base through joint trading and educational services with our index provider partners. Since becoming the sole U.S. provider of options on the MSCI emerging markets index and the MSCI EAFE Index, we have concentrated our business development and educational efforts on growing customer awareness in these products, which add a significant international dimension to our index options franchise. I'm pleased to note that we've begun to see growing traction in MSCI trading. This quarter, we plan to build amass success by broadening distribution of data in this widely-followed indexes through CBOE's market data express service, provide real-time values of the underlying indexes to broker dealers and their customers. Our efforts will supplement those of MSCI's distribution service which are focused on institutional trade indexes. Our MSCI, SPX, FSTE [ph] products were predominantly featured in last month's 5th Annual CBOE RMC Conference in Europe. While many of Europe's foremost volatility and derivatives traders, strategists and researchers, we are now preparing for our second annual RMC ASA, which begins November 30th in Hong Kong. Touching briefly on the successful launch of KER Global on September 26, you'll recall this CBOE partner with the London Stock Exchange Group and major dealer banks in the development of KER Global, which we believe provides customers with an interest rate trading alternative that offers increased trading efficiencies and reduced transaction costs. We are pleased that there has been trading on KER Global from day one and we look forward to potentially developing new products for the platform, introducing it to our U.S. customer base and participating in its expected growth. In closing, I will reiterate that our mission is to provide innovative products and facilitate and enhance trading in the global marketplace. We remain faithful to that vision this quarter by broadening access to our marketplace, developing new products and providing customers with market data to enhance their trading experience. Lastly, we took a major step forward in advancing our global mission with our planned acquisition of VAS global markets. We believe the VAS transaction combined with CBOE's leadership and index trading and global reputation is the go-to place for trading market volatility, will galvanize our company's efforts to develop new training products, opportunities and efficiencies for our customers and to reward stock holders for years to come. With that, I will turn it over to Alan Dean

Thanks, Ed, and good morning to everyone. I'm pleased to provide an overview of our third quarter financial results. Although overall results were below last year's record-setting quarter, it was a solid quarter. Our operating revenue came in at $156.2 million versus $187 million on last year's third quarter. Adjusted operating income was $74.8 million compared with $101.1 million last year. Adjusted operating margin was 47.9% against 54.1% in the third quarter of 2015. Adjusted diluted earnings per share came in at $0.58 per share versus $0.76 per share for the same period last year. Before I continue, let me point out that our GAAP results reported for the third quarter of 2016 includes certain unusual items that impact the comparison of our financial results 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 in our results further starting with our operating revenue, the main driver of the year-over-year variance was more muted trading volume across our suite of products. Transaction fees were down $32.9 million or 23% compared with the third quarter of 2015, driven by a 12% decrease in both the average revenue per contract or RPC and total trading volume. Looking at volume by product category, our higher RPC proprietary products index fashions in futures were down 21% and 7% respectively, compared with last year's third quarter. For the multiple listed products, options on exchange rate of products decreased 11% while equity options were relatively unchanged. However, as Ed pointed out, year-to-date trading volume and index options are up 5% while VIX futures are at 14%. Our blended RPC including options in futures was $0.0378 versus $0.0431 in last year's third quarter and $0.0405 in the second quarter. The decrease in RPC primarily reflects a shift in the mix of trading volume with our largest RPC products, index options and metrics accounting for 40.7% of cash [ph] traded in this year's third quarter compared with 44.6% in last year's third quarter and 42.9% the previous quarter. Furthermore, the RPC from multiply listed options, equity options and exchange rate of products decreased 49% versus last year's third quarter and 25% compared with the prior quarter, primarily due to the mix of account type and higher volume discounts and incentives. Revenue for contract at CFE, our futures exchange increased 4% to nearly $1.71 from $1.65 in last year's third quarter, reflecting lower rebates linked to volume and account type. Despite the shift in trading volume, the revenue contribution from our proprietary products increased accounting for 90% of total transaction fees in the quarter, up from 84% in the third quarter of 2015 and 87.9% in the second quarter of 2016. Looking at some of the other factors influencing operating revenue, market data revenue increased by $1.1 million, regulatory fees were up $900,000 and exchange services and other fees increased by $600,000 while other revenue was down $400,000. The increase of market data revenue was primarily driven by CBOE's higher share of Opera market data, as well as continued growth in market data revenue to derived from proprietary index values, the increase in exchange services and other fees was largely due to revenue contributed from CBOE Livevol technology services, a 2015 acquisition we anniversary it in early August. Turning to expenses; this next slide details adjusted operating expenses of $81.4 million for the third quarter, a decrease of 4.5 million or 5% compared with $85.9 million in last year's third quarter. The decrease largely reflects lower cost with composition of benefit, depreciation and amortization and loyalty fees, the decline in amortization and depreciation expenses mainly due to the final right-off of certain regulatory software. Core operating expenses were $51.6 million, an increase of $500,000 of 1% compared with the third quarter of 2015; this change primarily reflects increases of $1.2 million in travel and promotional expenses and $400,000 of facilities costs, primarily offset by a decrease of $1.5 million in compensation and benefits, the decline of compensation of benefits was largely due to lower incentive based compensation expenses, which are aligned with our financial performance, the increase in travel promotional expenses primarily reflects higher costs for advertising, special events versus last year's third quarter. Working out our guidance for core expenses, we now expect to be slightly below the guidance range of $211 million to $215 million for the year, in addition, we expect to be slightly below our guidance range of $46 million to $48 million for depreciation and amortization. Looking at volume based expenses, royalty fees decreased by $2.4 million or 11% compared with the same period last year primarily due to lower trading volume and licensed index products which were down 19% versus last year's third quarter volume. In addition, the royalty rate license contract traded increased to $0.601 this quarter up from $0.146 in last year's third quarter of $0.155 in the previous quarter, due to a shift in the mix of licensed index products traded. Turning to the balance sheet; we finished the quarter with cash and cash equivalents of $73 million compared to $52 million at the end of the second quarter and $102 million at the end of 2015. Through the first nine months of the year which generated net cash flows from operating activities of $174 million down from $194 million in the same period last year, primarily due to a decline in that income. As we continue our efforts to effectively allocate our resources to drive shareholder value, year-to-date for September 30, we issued -- we used $36 million for capital expenditures, $58 million to pay dividends of $65 million to repurchase our stock, at September 30, we had approximately $97 million remaining under our existing share repurchase authorizations which is unchanged from June 30. We suspended our share with purchase program of connection with our pending transaction with Bats, going forward we may make opportunistic share repurchases, although we attend to direct our capital resources towards paying down the $1.65 billion of debt, we plan to take down as a part of the Bats transaction. Looking at capital expenditures through the end of the year, we expect to be slightly below our guidance range of 47 to $49 million for the year. The majority of our capital spending continues to be system related, particularly with the ongoing development of the CBOE factor trading platform. Previously we notified our market participants that we expected factor to be up and running for CFE [ph] our futures exchange and March of 2017, in line with our planned acquisition of Bats we have suspended the launch a factor for CFE, while we are continuing the development of CBOE factor until the Bats transaction closes, under the combined company we plan to incorporate the functionality offered by both platforms and migrate into the proprietary Bats technology, ultimately allowing customers to trade through a single platform. Going forward we expect to maintain a strong balance sheet and we plan to keep debt levels in line with our investment grade profile to maintain the flexibility for capital expenditures dividend payments opportunistic share repurchases and other strategic initiatives. In closing, we will continue to take a balanced improved approach or capital allocation strategy which includes evaluating all alternatives to create long-term value for our shareholders. With that, we thank you for your time and attention this morning. And I will turn this Debbie for instructions on the Q&A portion of the call.

Thank you. 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 into the queue and if time permit we will take a second question, operator.

Thank you will now begin question and answer session. [Operator Instructions] And this morning's first question comes from Rich Repetto with Sandler O'Neill.

Yes, good morning Ed and good morning Alan. Yes, I guess the question, well first can I humbly ask two questions and you just pick the one you want.

No Rich, you have to choose.

We'll get both of them.

No, just one question. It's been a little bit over a month since that Bats acquisition was announced. And we talked about on the on the call then what the potential multiple compression and you have seen the stock come go down by about 11.5% from that the September 26, I believe. So I guess the question is. What has is the feedback been I guess from the investment community and how -- is this in your range of slight multiple compression for the transaction.

Rich, this is Alan. Largely the response from our shareholders the investment community has been extremely positive, towards the Bats transaction, they'll likely -- fulfillment of our strategic objectives, the potential synergies that what we can become the revenue opportunities that the lie before us, so with few exceptions very positive. On the stock price, we were concerned about PE compression and our stock prices dropped from the announcement, but the entire sector with the exception of Bats, it is dropped in that period of time since September 28 or 26 whatever that that date was. Our PE -- our forward PE is holding, it did drop slightly over that period of time but so did every other exchanges. So, I wish business was a little bit stronger in October but I don't see the drop in our share price being really dependent and or the result of our announcement of the Bats transaction.

Okay, fair enough, thanks I will get back in the queue.

Thank you. And the next question comes from Chris Allen from Buckingham.

Good morning everyone. I just want to ask on Bats as well, so you working through just a different choirs get the deal closed, I am wondering like what are the requirements, any potential the closed bit sooner than first of 2017, now just given the quick turnaround time we saw with the NASDAQ CBOE transaction.

Great question. There is obviously with the frost it's being ready from an integration perspective as well, so the teams are working diligently on being prepared, should we be able to close earlier so while we maintain that we are ready for the second half of 2017 and our planning is really -- sorry, first half of 2017 our planning is perhaps much more aggressive than that. Now that said, it is very difficult to predict the various examinations and primarily an antitrust. And the rule filings are required for both Bats in CBOE's perspective so why we think things will go smoothly, and eventually we will get through whatever the requirements are in an antitrust inspection, we will be ready to hit the ground running with an integration team that is preparing for an early earlier close. So again can't get more specific other than to tell you we will be ready.

Thanks.

Maybe one more point as for the on procedural mechanics, this is John by the way, the procedure on mechanics just remind people on what we discussed on the initial announcement call, we have shareholder goals from both companies, we anticipate those occurring. Likely in early in 2017 prior to that, obviously joint proxy statement of registration -- the registration statement to be filed, and we're currently making the full host of a regulatory approvals applications for those approvals in U.S. and Europe, and on the 19, of October so just recently both CBOE an Bats, further notification report forms under HSR [ph] to the FTC and the department of justice, so things are moving along as anticipated.

Thanks, helpful.

Thank you. And the next question comes from [indiscernible] with Goldman Sachs.

Hey guys, good morning, so appreciated the growth that you guys highlighted across various products in the volumes said, but I guess taking a step back, total revenues year-to-date up in 1% and operating income is down a couple percent, so when you take a step back and you spend a little bit more time, just given, give us a sense, what kind of organic growth opportunities you guys can see on the top line with the Bats combination?

So, sure, so what we've really been focused on is part of the deal is really what these companies can do together, and the transaction is really bringing the complementary strengths of both of the companies, if we look at those product lines and the opportunity, is really maintaining the core, what is CBOE what have we done in the past and that is to bring to the marketplace, all of the products services benchmarks that we have done in the past, we will not lose side of that. Bats as the of second largest U.S. operator in U.S. equities, operating a platform in Europe, that combination allows us from a business developer perspective, to reach a cross to cross sell to develop new products and services that we wouldn't be able to do together. I love to give you a great example of businesses that we have been involved with in the past, and specifically, we've been very much partners with ETP providers, and I think the greatest example of that for us, is partnering with Barclays and the VXX the most successful for us, when we look at volatility ETP's that been brought to the market. In partnering and helping design at being an integral part in bringing it at concept like ETP to market, or ETN to market, we haven't participated in the volume related to that ETN or ETP training, with Bats listing platform, conceptually we can take the idea of a new ETN or ETP, right from the force of that idea, developed with our partner list that ETN or ETP on our new listing exchange, participate that in the volume resulting from the trading of the ETP, the construction and the index services around that ETN or ETP, and that is a back end, participate on the market data as a result, so this ecosystem for CBOE and product development now beginning with the concept moving to listing all the way to market data, changes because of this combination. Both of our companies really couldn't do this alone, but that's an example of some of the opportunities that we look forward to working with our new partner.

Alex, this is the Alan, I want to add little bit more collar on the year-over-year comparison that you started out was in -- you have to keep in mind that 2015 included the blow out third quarter, which included August of 2015, it was continuing drops in oil prices, questions about the economy in China we set many volume records in the third quarter of last year, and so that's a tough comparison and to be equal to the net this year compared to last year, when last year has that quarter long , I'd like to be a head, but we have on hand the blow-out quarter this year, yet I hope it's in the fourth quarter, you never know when it's going to happen, but it always does so, I think it's a little unfair just take the three quarter comparison last of this year, and then to draw any conclusions from it. We believe our core products SPX and VIX are continuing to grow and customers and users and we're doing of education to facilitate their growth. So I want to throw that out there and make sure that you understand the third quarter 2015 is something that has to be considered.

Thanks, I will jump back in queue.

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

Hi, good morning folks. Just maybe along the lines of Bats, maybe Ed, if you can talk a little bit more now that you're past the announcement on the multi list strategy, obviously Bats is wanting the auction mechanism later this quarter and then, I think the game plan is to launch a complex order of business in the middle of next year, maybe if you could just comment on if that still in the predicted timeline, and how the CBOE team is involved in that launch.

So to be really clear as our attorneys are staring me down right now; we're not involved in in the Bats decision on how to time the rollouts of their planed auction mechanism and or spread book. But now part of the deal which we're very much mindful of, is the opportunity to operate these different medallions with different strategies, so we definitely part of the diligence appreciate the time on that Bats has already been public on. So our planning in the integration is certainly mindful of that. So this goal as and what we have said on September 26, is to take CBOEs very successful traditional market model and through them the acquisition be able to offer alongside of that Bats has been very successful maker-taker time price priorities algorithm, and having our two other medallions at the end of the acquisition, be able to offer services and pricing schemes that are different -- that are very smart are each of our most successful exchanges. So we are mindful of that rollout schedule, at the end of the day whose goal is obviously to migrate all of these auctions, excuse the word of auctions, all of these platforms onto one proven technology that is the Bats platform and looking very much forward to explaining those differences and different schemes algorithms in pricing to our combined customer base.

Very good great, thank you.

Thank you and the next question from Kyle Voigt with KBW.

Hi good morning, thanks for taking my question. Just a broad question I guess on U.S. options industry wide volume, is multi list side is down 3.5% year-over-year so far in 2016 after declined and last year 3% even less elevated volatility last year, and I appreciate the index options volumes are faring a bit better and I think a growth of something like 3% this year. But the growth rates risen are still significantly below historical norms, so I am just wondering if you can give an update thoughts as to what's going on in the options industry to cause this and what it might take for the industry to return to more normal historical growth rates.

Hey Kyle, this is Ed Provost. I'll take a shot at that, it's tough to try to discern the macro trends of the marketplace in general, but I think as was noted in this week's Barrens [ph], Steve's article about the increase in passive investing, there is a general shift away from single stock trading toward more index like trading, and passive investing. I think it's the combination of the lower volatility and those trends, those general trends in the marketplace it may explain why the overall option volume and multiply was that classes is more muted [ph] that point is muted in ATF options and certainly as we've seen in our index products, we have seen great growth. So I'm going to -- I'm going to say that the general trend toward passive investing and that generally muted volatility overall is probably the best explanations but truthfully I don't know that any of us can know with 100% certainty. I can assure you that the OCC isn't very actively engaged in their educational activities around the multiply traded options, while we focus very heavily on our proprietary products.

Thanks.

Thank you and the next question comes from Alice [ph] with UBS.

Hey, good morning. Just very quick for Alan, I guess. On the expense, this clearly you lowered the guidance maybe can talk a little bit more about -- just thinking is this kind of like the industry volume environments is little bit tougher, so you started by cutting expense a little bit in the third quarter. Is it the Bats is saying; hey we're cutting some of these projects or -- and the just connected to that you still have a pretty decent ramp I think in the fourth quarter, when you look at the low end of your guidance, it was below that. So just to remind us what's coming in the fourth quarter here that bring that up.

So our approach towards expanses is the same in the third quarter, fourth quarter as was a year ago we are very careful about how we spend money. The $211 million the $215 million spent, the guidance that would that we gave you earlier this year and that we maintain this year's expenses that we fully expected to spend. It -- a part of the reduction from that guidance is incentive compensation, which is there is a core expenses but it is somewhat variable because it's tied to our net income. So that's down a bit compared to what I thought it would be. It's hard for me to point any one item or a group of items that would be going up in the fourth quarter compared to earlier this year. Other than it's consistent with our business plan, what we're thinking on expenses and so to come in slightly below the guidance that we gave you earlier this year, I feel pretty good about. And there isn't a whole lot more clarity that I can give you beyond that.

I want to make a comment, this is Ed, Alice good morning. I want to make a comment that the planning and that looking forward that to Bats and the combination. That does not sideline the core business that we've begun here, so our projects and in that we had outlined as far as education and next services a new product creation, that remains on track. We know what we're good at here that's going to be part of this business going forward with that. So all of the products that we have targeted for this year, our online and that we know that's going to core of this is going forward.

All right, very good. I will jump back in the queue, thanks.

Thank you and the next question comes from Mike Carrier from Bank of America, Merrill Lynch.

Good morning guys. This is actually Steve [ph] on Mike Carrier, thanks for taking my question. I just want to focus on the balance sheet a bit and the capital management I know in the near term we share repurchases, will be put on hold until leverage comes down. However, Alan, giving updates of what you think your future minimum cash needs will be post to deal.

And then that's not far different from what we told you before, in the past I've said a $40 million to $70 million, I would move that up to maybe $50 million to $100 million, but so not a significant change. And certainly not impactful on how we approach capital allocation or it wouldn't be impact upon our ability to pay down debt or grow dividends as our business grows, or reinvest in our business, or take advantage of strategic initiative sell. The -- our cash requirements really are changing that watch.

Perfect thanks, Alan.

Thank you and our next question from Christian [ph] from Credit Suisse.

Good morning guys. On target based invest in, feels like a very interesting opportunity for you. Maybe can you speak to what the bottom line contribution is today. From the index is that you what you have already launched. And then if you are trying to sell these indexes to asset managers, maybe speak to some of the push back what challenges you are hearing from them.

Chris, this is John Deters, I will take this one. So we you really gave a wide range of indexes, many are proprietary CBOE so basically CBOE inventions like the VIX, like the [indiscernible] index. Those indexes we license and we've got robust activity around licensing those indexes. And for other indexes we provide custom index services to third parties, who come with ideas and need a sophisticated calculations services provider. We find that are independence in the index world certainly does position us well to be an index services provided to asset managers. And at the same time we really understand the strategies applying because we we've utilized index products in our markets, in the form of future's auctions. And now with our own asset management affiliate with CMOE Bats we're utilizing many of those strategies, index based strategies and package part of our loan. So we think touching on all parts of the of the index and package part -- ecosystem given -- ecosystem gives us kind of unique insight into the uses, the needs of asset managers.

With that am not sure exactly what you had in mind Chris, when you say push back from asset managers.

What kind of any challenges that the asset managers are talking about, that's prevented them from using these products more?

Yes, well I mean one of the first challenges is really in -- as index strategies become more complex, for example index strategies that incorporate options overlay components, in various derivative overlays. There are a very small handful of index calculation services providers globally who can pull widely, reliably service that they need, so we're actually because selling into accommodative market if you will, because we provide those services for a good many years, and we're very confident our team ability to perform those services.

Thank you. Great, thanks for the color, very helpful.

Thank you. And the next question comes from [indiscernible].

Hey, good morning, just a question of compensation I believe the incentive tied to pretax income level, so wandering if you changed your accrue in the third quarter? If there is any reversals or whether that would be a catch up at the end of the year if you come below that target?

Great question, route that right -- to describe that tied to pre-tax income goals that we set at the beginning of the year. The reversals of instead I'd say we didn't know accrue as much as we would have liked to because on the year-to-date basis pretax income is lower than our goal so. I don't see a catch up in the fourth quarter and last pretax income is wonderful I hope it is, I hope I miss our core -- of incentive compensation being a lot higher than I expect right now.

Okay, thank you.

Thank you. And the last question comes from Chris Harris from Wells Fargo.

Thanks. Hey guys, sorry I got in late, so apologies if this was asked, so the expense growth for this year and on a core basis around 70% or so maybe, I know we're not giving official guidance on 2017 yet. But if you think about the trajectory were there some things that were included expense base this year that maybe not be flowing into next year, I think that there might be one, so kind of any thoughts is that how we should maybe be thinking about that the trajectory expense growth going into next year.

Great question. No, Vector [ph] factor was not a factor in our expense growth this year versus last year everything we've done on Vector [ph] director so far, with the exception of someone up front planning is all been capitalized in this resting on our balance sheet. So no, that what happened this year what accounts for the 7% growth which is higher than the inflationary rate that we are which is our goal of growth year-over-year. What's happened this year is couple of things we had Growth in the regulatory expenses tied to outsourcing of what we do over to fend run that was contractual that but that was offset by our ability to increase revenue so that but that was part of it the other part was Livevol we purchase Livevol august of last year, so we have a full year of expenses of Livevol this year versus only with four months last year. That's another reason for the -- outside expense growth. And then the last one, it's [indiscernible] which are completely offset the expense, so no impact. VAS [ph] is adding two expenses to us this year. We started consolidating the results into our financial statements earlier this year, I think it was February. And so that's having a minor impact in our expense growth this year. So next year our goal and expense growth year-over-year is that inflationary rate that 3% to 5% -- actually I feel lot better at 3% than I do at 5% but that's our goal. That hasn't changed in the 6.5 years that we've been a public company, that's always been our goal because if you don't control expenses, then operating leverage that exchanges and certainly we do as well, you lose out on some of that it you lose control of expenses. So we were mindful of that and -- so now should be no surprises next year, if there are -- then they have revenue attached to them or some other mitigating factor.

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

Good morning, guys. And question about what you're seeing out there from retail right now because we've had a couple of interesting, consolidating deals in the retail broker space and their trades really want to cross-sell it, options capability to trade customers, you trade once the leverage option house to join more options traded from its customers, so that seems like it will be a positive but then maybe the headwind -- it seems like maybe we're seeing future as an alternative to options, little bit more in the retail space and CME is talking about a big retail initiative. So what are you seeing out there from retail right now?

Yes, those mergers and consolidations we've seen as having options in derivatives as significant driving force. We know that the brokerage firm see these products as we provide here as significant contributors to their bottom line, looking to optimize both technology and clients under a single trading platform. So we look at that as all very positive for our business and we see and support the promotion of our products through those firms. So we're very, very pleased with that. As to the future's initiatives and options, the future exchanges; we are aware of that. We monitor that, we engage with our clients about the use of that. We do not see any degradation of our volume or movement of our volume from our products on the security side to the CFTC side. We actually think it can be complementary to our business, whether it's cross-hedging and opportunities like that. So all of what we're seeing in the brokerage business in terms of the consolidation we think speaks very positively to our products and we think the growth of our products has something to do with those transitions taking place.

I want to add, this is Ed. I'd like to add a little bit to that. So the way we view any educational -- change in education or focus in education, it's moving into broad-based trading and hedging. We're in favor, any opportunity to grow this pie as opposed to just moving [indiscernible] flow around and market share around, we are very much the educators, we align ourselves and partner with the retail firms, so we can bring new users to the marketplace, that's what we will be participating and helping our retail partners with.

That's very helpful. Thank you.

Thank you. And we have a follow-up question from Alice [ph] with UBS.

Thanks. Just one quick one -- I think -- but when you think about things that are happening outside of your control, I think there is a couple of items that are possible notable for the options industry, one is the OCC's raising fees I think in December so maybe that did see some friction. And then I think at the beginning of next year, although maybe that's getting pushed out as the tax change at 871M, I guess. So just wondering if there is any commentary on both those items, how they impact the industry and is there something we should be worried about or is there any opportunities around that? Thanks.

So each of the one -- just to remind everyone, else it's really the -- in position of the U.S. tax and dividend equivalents for foreign investors, so you can't get us into the weeks that are out, straight question. We think it's extremely complicated. We think it will be very, very difficult to monitor from a retail perspective and really what this is, is the combination of option, strategies that result in 80 delta combinations or standalone option strategies and the effective withholding from a foreign investor as a stock equivalent to avoid paying taxes on dividends. The monitoring and implementation of this is extremely costly. CBOE has partnered with OCC and we've been very vocal and written a number of letters on this. So we are concerned but at the end of the day, this from CVV's perspective -- you know our mix, you know our breakdown and where our revenues come from. We don't think this will as material to CBOEs, it might be from some of our other competitors who are much more reliant on single name options in their dividend flow. So we're doing the majority of the lift with our partners at OCC, we're partnered with the retailers who have all made comments in this. So complying is going to be difficult, we've asked for extensions on this so that we can all get ready to monitor and track through combinations in single option strategy maintaining and watching this AV delta threshold. So as provided I was just going to say as to your -- the portion of your question Alex on the -- any accretion fees, whether it be an OCC fee and exchange fee. It's never a positive to the customer experience, all that being said, the industry affords a very low cost of doing business. The brokerage firms who are highly focused in this area of the business are very, very competitive in the conditions that end-user customers ultimately pay. We don't think that those fees will have any material impact on customer business going forward but certainly we would rather not see fee increases because cost of doing business is always going to have some impact on the amount of business being done.

Very good. Thank you again.

Thank you. Next is another follow-up, this is from Chris Allen with Buckingham.

I wanted to ask about the -- your synergies you guys laid off for the bad steel, you obviously have the integration planning going on board. I'm just wondering if there is -- you have any kind of updated thoughts. So we kind of look at the trade technology moving over from that and over half of your headcount in trading support development and then a sizeable amount of consulting fees would the technology in services; it seems like there could be upside to the synergies?

Chris, this is Alan. At this point I don't have any updates for you on synergies. We are in the middle of integration, the planning process right now and so it's really premature for me to update that for you. I -- we'll reiterate that I'm highly confident that the synergy numbers that we came out with when we announced the transaction with bets are -- were highly achievable. I still believe that hasn't changed. And they are focused on IT as you mentioned. As I get more clarity, if there is something material, I'll certainly update you and other analysts as we go through this but right now nothing new other than to reiterate -- I feel good about those numbers.

Got it, thanks.

Thank you. And as there are no more questions at the present time, I would like to return the call 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 you at future calls and I will be available today for any follow-up questions. Thanks again.

Thank you.

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