Cboe Global Markets, Inc. (CBOE) Q2 2018 Earnings Report, Transcript and Summary

Hello, and welcome to Cboe Global Market’s 2018 Second Quarter Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. Now, I’ll turn the conference over to Debbie Koopman. please go ahead.

Thank you. Good morning, and thank you for joining us for our second quarter earnings conference call. On the call today, Ed Tilly, our Chairman and CEO, will discuss the quarter and provide an update on our strategic initiatives. Then, Brian Schell, our Executive Vice President and CFO, will provide an overview of our second quarter 2018 financial results and updated guidance for certain financial metrics. Following their comments, we will open the call for Q&A. Also joining us for Q&A will be our President and COO, Chris Concannon and our Chief Strategy Officer, John Deters. 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. During our remarks, we will make some 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. Also note that references made to the planned migration of the Cboe Options Exchange is subject to regulatory review. During the course of the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now, I’d like to turn the call over to Ed Tilly.

Thank you, Debbie, and good morning and thank you for joining us today. Before jumping into our quarterly report, I’ll touch on yesterday’s announcement of our plans to transfer the primary listing of our company’s stock on our own exchange on September 17, 2018 under our existing ticker symbol, “CBOE.” The move leverages the strengths of Cboe Global Markets and, as a leading equities market operator, it is a point of pride internally to exclusively list our stock on our own venue. I’m pleased now to report on a strong second quarter 2018 at Cboe Global Markets, where we increased our adjusted earnings per share by 21% year-over-year to $1.05, with net revenue of $284 million, which was up 6%. Additionally, as we announced earlier this week, our board increased our share repurchase authorization by $100 million and raised the third quarter cash dividend by 15%, to $0.31 per share. This marks the eighth consecutive year that our Board has raised our dividend and the second time this year we increased our share repurchase authorization, reflecting our confidence in the future cash flow generating capabilities of our business and our ongoing focus on efficiently allocating capital to create long-term shareholder value. Turning now to volume in the second quarter and a look at the environment going forward. We continued to see notable success in our FX market, growing average daily notional value for the second quarter by 38% from the prior year. In addition, we saw healthy growth in our European Equities, driven primarily by stronger revenue capture. The major growth story for the quarter, of course, was the ongoing double-digit growth in SPX options. Trading in SPX options, the most widely-traded index options complex in the world, increased 18% for the quarter. Together VIX and SPX form a powerful set of risk management tools for investors globally. As we’ve said in the past, traders are becoming increasingly attuned to the unique properties of our products and use them opportunistically to hedge, generate alpha or simply take a position on the direction and volatility in the U.S. stock market. Clearly, market conditions in the second quarter favored SPX options as a more cost effective way to hedge market exposure and to monetize market moves than VIX options on a relative basis. The choppy trading we saw in the weeks following February 5 continued into the second quarter. Daily close-to-close and intraday moves in the S&P 500 were, on average, two times greater than before February, and created opportunities for SPX option traders looking to monetize those price swings. At the same time, our VVIX Index – which reflects the cost of VIX options – continued to trade at historically elevated levels. While market conditions were favorable for SPX trading in the second quarter, the lingering instability in the VIX futures term structure made it difficult for traders to consistently harvest the roll-down premium, measured by the difference between first-and second-month VIX futures prices. This premium is important because it generates returns for short volatility strategies using VIX futures and volatility-related ETPs. As the VIX futures curve moved back and forth between upward-sloping and flat, the average roll-down premium was only about a third of what it was in 2017. Recently, though, we have seen a return to the stable, upward-sloping pattern that is more conducive to short volatility strategies. In July, the VIX futures curve was in contango every day, and the average roll-down premium recovered to just under 2017 levels. With stock prices largely recovering from their February lows, and the ever-present threat of a global trade war, we are seeing growing demand for market hedges. Not only has SPX options volume remained solid, but in May and June, we began to see more large trades in VIX options, as the VIX Index trended below 15 for the first time since February and averaging just over 13 in July. We’ve said many times before that we expect market conditions to change, and we expect a shift in how traders use our products when markets move and opportunities change. We are confident that our SPX and VIX products offer a complementary set of trading tools to manage risk in any market environment. I’ll note here that, in the face of recent liquidity challenge in other global markets, we are particularly encouraged by growth in the displayed size in our proprietary SPX and VIX options, which in each of the past two months has exceeded every month in 2017. Since moving SPX options to our hybrid trading platform at the end of April, displayed size has increased significantly, and currently averages over 500 contracts. With consistent volume growth, and now displayed size of $150 million notional value on average, our SPX option complex offers a robust set of trading tools for traders around the world, and continues to be the go-to market for hedging U.S. equities. Regardless of market conditions, we remain laser focused on our commitments to product innovation, seamless trading solutions and leading-edge technology. I’ll take a few moments here to provide an update on strategic initiatives. As traders regroup on the volatility front and as we come out of a typically quieter summer trading season, we are gearing up to expand our Risk Management Conference program this fall with the addition of a mini-RMC to be held in Tel Aviv in November. Our Tel Aviv event will follow this year’s annual RMC Europe in Ireland and will precede our annual RMC Asia in Hong Kong. We have seen strong trading and growing interest in VIX futures and options in the Israeli market and look forward to introducing RMC to the region. We will continue to use this one-day mini-RMC format based on customer demand and where we see strong potential to increase trading in our proprietary products around the globe. We leveraged our product innovation expertise to tap into the growing corporate bond marketplace with the creation of Cboe iBoxx futures, which we plan to launch later this quarter, subject to regulatory review. Cboe iBoxx futures are expected to allow market participants globally to efficiently participate in the $8.5 trillion U.S. corporate bond market and to hedge the corporate bond credit risk of ETFs or U.S. Treasury bonds with a standardized, centrally-cleared trading vehicle. We have received very positive customer feedback on this product, which will be the first exchange-listed futures product linked to a broad-based corporate bond index. We are pleased to be working with BlackRock and Markit to take iBoxx futures from product concept to tradable reality. IBHY futures represent a significant first step for Cboe into the credit space, and we intend to further expand our presence in that space through ongoing collaboration with Markit. We are also working diligently to prepare our business for a post-Brexit world. On July 3rd, we announced plans to establish a new venue in Amsterdam, which leaves us well positioned to continue to serve customers across Europe after the UK’s planned exit from the European Union. We believe the Netherlands is supportive of competitive and open financial market infrastructures, and Amsterdam is a well-known location for us given our ownership stake in pan-European clearinghouse EuroCCP, which is also based there. Additionally, we have longstanding, good relations with the Dutch Authority for the Financial Markets (AFM) and central bank, which we believe share a deep understanding of the equities and derivatives markets. We will continue to operate our existing Recognised Investment Exchange in the UK, and our intention is to offer similar services in both the UK and EU venues. Mark Hemsley and team are working closely with our European customers, who are also busy executing Brexit plans, to ensure preparedness. Turning now to the migration of Cboe exchanges onto Bats proprietary technology. We successfully completed our on-time migration of C2 Options Exchange on May 14th and are now fully engaged in our migration of Cboe Options Exchange, targeted for October 7, 2019. The completion of the CFE and C2 migrations, and the introduction of several technical enhancements in preparation for the Cboe migration, leave us well on track to our ultimate goal of providing our customers with a common, world-class trading experience across all our equities, options and futures markets. In closing, I would like thank our team for another strong quarter. We continued to lay the groundwork for future growth with our planned roll out of Cboe iBoxx futures, by expanding our global educational efforts and by advancing our technology integration. I look forward to all that we can accomplish to power the potential of our customers and shareholders in the coming months and quarters. With that, I will now turn it over to Brian.

Thanks Ed. And good morning, everyone. Before I begin, I want to remind everyone that unless specifically noted, my comments relate to 2Q18 as compared to 2Q17 and are based on our non-GAAP adjusted results. As Ed already noted, we reported solid financial results for the quarter. In summary, our net revenue grew 6%, with net transaction fees up 5% and non-transaction revenue up 8%; adjusted operating expenses increased 5%, adjusted EBITDA of $188 million grew 5%. And finally, our adjusted diluted earnings per share grew 21% to $1.05. The press release we issued this morning and our slide deck provide the key operating metrics on volume and revenue capture for each of our segments, as well as an overview of key revenue variances. Additional disclosures can also be found in our Form 10-Q filed this morning. At this point, I’d like to briefly highlight some of the key drivers influencing our performance in each segment. In our options segment, the 8% increase in net revenue was primarily driven by higher net transaction fees from our index options, which resulted from a 9% increase in revenue per contract, offset slightly by a 1% decrease in average daily volume. The increased RPC primarily reflects a shift in the mix of index products traded – with more coming from SPX options, as well as pricing changes implemented at the beginning of the year. While market share was down in our multiply-listed options business, this was more than offset primarily by higher RPC, as we attracted more profitable flow to our options market; as well as, higher industry volumes. Turning to futures, the 13% decrease in net revenue resulted from a 16% decrease in ADV and a 7% decline in RPC – with the latter reflecting a shift in the volume mix towards participants qualifying for lower trading fees. To enhance revenue capture, we recently modified the fee schedule for VIX Futures, with changes effective August 1st. Turning to U.S. Equities, net revenue grew 4%, primarily driven by higher market data revenues, which was up 8% in the second quarter, with SIP market data revenue up 4% and proprietary market data up 22%. The increase in SIP revenue was primarily due to audit recoveries. Looking at the growth in our proprietary market data revenue, the majority came from pricing changes implemented at the beginning of the year; however, about 20% of the increase this quarter came from subscription growth. We expect continued growth in proprietary market data in 2018 as we benefit from pricing changes and customer response to our Cboe One product and, absent any additional audit recoveries, which are unpredictable, as well as any pricing changes, we expect downward pressure on SIP market data revenue due to industry consolidation. Net revenue for European Equities increased 26% on a U.S. dollar basis, reflecting growth in both net transaction and non-transaction revenues, as well as strength of the pound sterling versus the U.S. dollar. On a local currency basis, net revenue increased a healthy 12%. Higher net transaction fees were the key growth driver, reflecting favorable net capture, despite a 2% decline in market volumes. The higher capture resulted from strong periodic auctions volume, which has a higher relative net capture as well as price changes implemented January 1st. And given the better-than-expected response to our periodic auctions and assuming no significant mix shift, we do expect the capture rate for the second half of the year to be in line with the strong rate we reported for the second quarter. The increase in market data fees and access fees was primarily due to price changes implemented on January 1st. Net revenue for Global FX grew 33% this quarter, with revenue nearly matching our record first quarter. While second quarter volumes declined modestly versus the first quarter, it grew 38% year-over-year and our market share remained strong at 14.9%. While growth in the overall FX spot market has been favorable, we continue to believe our market share is the result of our ongoing technology enhancements as well as more effective liquidity provisioning. Turning to expenses, total adjusted operating expenses were $106 million for the quarter, up 5% compared with last year’s second quarter. The key expense variance was in compensation and benefits, resulting from 1) higher salaries, primarily a result of annual salary adjustments and lower capitalization of wages relating to software development; and 2) higher incentive compensation, which is aligned with our year-to-date financial performance and differences in the timing of expense recognition versus last year as we harmonized bonus programs under the combined company. As we pointed out on our last earnings call, there are several incremental expenses impacting our year-over-year comparability, such as expenses associated with the Silexx acquisition, the increased strength of the pound sterling and the gross-up of OPRA-related expenses. In total, these items accounted for about $3.5 million in incremental expenses this quarter, with the currency impact being the largest. If you also adjust for those items, expenses would be up about 1%. We are reconfirming our full-year expense guidance to be in the range of $420 million to $428 million. For the second quarter, we realized $4.2 million in pre-tax expense synergies, primarily from compensation and benefits, bringing year-to-date expense synergies to $7.2 million. Turning to income taxes, our effective tax rate on adjusted earnings in the quarter was approximately 29%, above the high end of our annual guidance range of 26.5% to 28.5%, but in line with guidance we provided on our last earnings call. The effective tax rate on adjusted earnings in the second quarter of 2017 was 36.2%. The decline primarily reflects the favorable impact of corporate tax reform. We are reaffirming that we expect the annual effective tax rate on adjusted earnings to be in a range of 26.5% to 28.5% for 2018, with the tax rate for the third and fourth quarters expected to be at the higher end, but within our guidance range. In addition, we are lowering our guidance for CapEx and for depreciation and amortization. We now expect CapEx to be $35 million to $40 million versus our previous guidance of $45 million to $50 million. This change reflects more efficient technology spending and lower software development capitalization. We are also lowering our guidance for depreciation and amortization to $43 million to $48 million, versus our previous guidance of $53 million to $58 million, reflecting, in part, the lower CapEx. Moving to capital allocation, our strong financial results, cash flow generation and financial position enabled us to reprioritize our capital deployment this quarter in favor of share repurchases, while also investing in the growth of business and making dividend payments. We returned nearly $79 million to our shareholders this quarter through more than $48 million of share repurchases of our common stock and $31 million of dividends. In addition, as Ed mentioned, our Board increased our share repurchase authorization by $100 million and raised our third quarter cash dividend by 15% to $0.31 per share, underscoring our unwavering commitment to enhancing value for our shareholders – in part by returning capital directly to them. Year-to-date through July 31st, we have repurchased approximately 1.1 million shares of Cboe common stock for nearly $122 million. We ended the quarter with adjusted cash and investments of $116 million with our leverage ratio – and our leverage ratio was unchanged from last quarter at 1.6 times. In summary, Cboe delivered solid quarterly results and continued to demonstrate our focus on growing our proprietary index products, as we prepare to expand into a new asset class by launching the first broad-based U.S. corporate bond index futures, growth in a diverse set of revenue streams, disciplined expense management, leveraging the scale of our business, producing higher profit margins, an integration plan on track, and ongoing focus on capital allocation by continuing to return capital to shareholders though quarterly dividends and share repurchases and even raising the quarterly dividend. And with that, I’ll turn it over to Debbie, for instructions on the Q&A portion of the call.

Thanks, Brian. 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’ll take a second question. Operator?

Yes, thank you. [Operator Instructions]. And this morning, first question comes from Rich Repetto with Sandler O’Neill.

Yes. Good morning, guys. I guess the first question is what is on everybody’s mind, but can you give us comfort that the volume slowdown, I guess, in July, is seasonal or cyclical rather than anything that’s more permanent? And I guess how do you – can you give us any anecdotal what you’re hearing from clients et cetera, because we’re seeing this across the board, I guess the low volumes?

Yes, Rich. Thanks. It’s Ed, and good morning. Thanks for the question. We have seen across the board, I think for us and what we’re hearing from the marketplace and feedback is the strategies that have been employed over the last couple of years and this really gets to, Rich, probably a second part that you’re thinking how much of this is just the major market in cyclical and how much of this is actually structural in the marketplace. I’d point out a bright spot right out of the gate and SPX continues to really draw the attention of those hedgers and those who are looking for position in the U.S. market. So, if we kind of keep SPX to the side and just talk about volumes in general, I think what we’re expecting in this market is a return to a lot of the strategies that were present prior to February 5. And what do I mean by that? We purposely showed you roll-down strategies in premium harvesting that have just basically gone away and are now with the structure, in the VIX terms structure coming back. I would expect to see those trades coming back into our marketplace showing off in VIX options and VIX Futures. I can’t guarantee it, but the market is setting up for the reemployment of those cyclical strategies that are really coming to market when we have a term structure, a risk profile that our customers are used to seeing. So, I would expect in this market condition to see a return on that. As for the market in general, we’ve seen some shifting in volume. We’ve seen some pretty good uptake in multi-list options. I think that shows where the retail heart is, basic option strategies that perform well in any marketplace. Retailers going back to the basics with pure and simple override strategies. So while we can’t predict exactly what will happen in the months to come, the way the market is setting up is favorable to trades that we have seen in the past. So again, impossible for us to predict volumes going forward. We’ve never been good at it, but we will tell you that this – the structure of the marketplace is setting up for a continuation or further – some of the strategies that we’ve seen in the past. Chris, anything to add?

No. Just I think the SPX growth that we’ve seen year-over-year in the quarter and then year-over-year even in July is reflective of the liquidity in the SPX and some of that is related to the re-platforming to hybrid. So, I think it’s important to point out that we have made structural changes to the product and we’re really feeling the benefit of those structural changes.

And I think those changes cause to your point; it really shows up in that liquidity. And so when there is a need to employ the strategies, various strategies, the liquidity is in the marketplace, it’s certainly in SPX, to Chris’ point, and we see it also in VIX options. So, there is liquidity ready and when there is the demand coming from the customers, we’re confident that our market will be able to satisfy those needs.

Thank you. I know Chris is working on his volume generation machine. You’ve got to get that cranked up as well.

Yes. If he can make it so, he would, Rich.

Thank you.

It’s working in FX, Rich.

Definitely.

Yes, thank you. And the next question comes from Ken Worthington with JPMorgan.

Hi, thank you for taking the question, and I apologize for the background noise. You’ve pursued a number of pricing changes this quarter, and I guess you are always producing – pursuing pricing changes. But you changed prices for permanent holders in VIX. I apologize if I missed it, what’s the impact do you see on RPC there? And in the past, I think you said that VIX was working well and you didn’t want to muck with the pricing. Why is now the right time to make changes there? And then you made changes in core in disaster recovery fees. As you think about the pricing power you have in connectivity and data, and given the press activity levels broadly, what are your thoughts on now being the right time to be more aggressive on pricing there? Thank you.

So, Ken, it’s Brian. The first part is obviously, we can’t give a prediction on the pricing, where that will look. I think what we talked about as far as the second quarter reflects were a couple of things as far as the dynamics of a lower RPC during the quarter with seeing some of the block trading volume going away, somewhat related to some of the ETPs that were associated with some of that volume in the VIX Futures market, which without that can generate a lower capture of what we’ll see. And we also saw with some of the volume mix we saw some of those more significant players, who were actually qualified at the lower tier. So that was the mix. The overall change absent some of that, we would expect to see an increase to recall that some level of baseline up from where we saw obviously in the last quarter. But absent some of the other mix changes that I’ve previously referenced, I wouldn’t set the expectation that we’ll be back to where we were, say, 2Q of last year when we had that different mix of client volumes.

And Ken, it’s Chris. I’ll just add, we have been looking to change the VIX pricing – VIX Futures pricing. We looked originally to change it at the beginning of the year with some of our other annual pricing adjustments. We chose to delay that, because we were migrating the VIX platform on COC. We wanted to look at the behavioral changes post that migration and what we saw was quite attractive for a pricing adjustment. So this pricing adjustment is, I would say, long overdue. It was really to eliminate the day-trader rebate that we had that would create some of the mix from quarter-to-quarter. So this should create a much more stable RPC, a much more attractive RPC overtime. And more importantly, it – we paused because of that migration and now we’re happy with the results of that migration. With regard to your question around what I call non-transaction revenue, we have a very healthy balance with our clients to not overcharge, but continue to grow that business – that area of our business, where we charge for access, we charge for data, and we charge for connectivity. So it’s a careful balance that we have. Certainly, our proprietary market data continues to outperform in terms of growth, new clients, new subscriptions and that’s the best way to grow that revenue is really adding new clients. And so we’re very excited about that.

Ken, this is John. I’d definitely look at Page 31 when we break out that mix that Chris was talking about in terms of our segments and for the segment that has kind of the greatest volume headwinds of Futures segment, really mark non-transaction revenue with more opportunity than it is risk.

Great. Thank you very much.

Thank you. And the next question comes from Alex Kramm with UBS.

Yes. Hey, good morning, everyone. Actually, thanks for the segue just there, because I – the one thing I wanted to ask about is actually on Page 31. Maybe to small number to do harp on, but in the Futures segment, I did notice that the exchange services and other fees, which are only $1.7 million, but they were down 50% quarter-over-quarter. So, when I look at that number and I look at what’s going on in your VIX franchise, it looks like some clients are massively paying you less for something, which is quite connectivity or whatever. So maybe, if you just flush it out a little bit and maybe, in particular, say, what client types of scene pull back in that area, because, obviously, that’s something that people has been wondering about for a while. Thank you.

So, Alex, it’s Brian. So, I think that to Chris, it’s kind of a – it is a nice segue from Chris’s earlier point about. We look at different parts of the business collectively to look at non-transaction fees and as we’ve looked in a shifting of the new technologies implemented and the services we provide and with the underlying Bats technology, some of that non-transaction revenue may fall in the different buckets of where we’d categorize it from just kind of a pure accounting standpoint. So in a way, we look at access fees and exchange services and other fees very collectively. So I wouldn’t get too focused on the differentiation of growth from one category to another. So, this is really of how we ended up implementing some of the tech and how we charge for it kind of falling into the different bucket, shifting more into the access fees and how we deliver that value. If you look at the stats and look at the capacity that our clients now have on the CFE platform and the speed, and what they’re able to do, some of that is reflective in those services. So that’s showing up more in access fees versus a decline of people running away from exchange services and other fees.

You really just need to look at that page and add together at least the two access fees and exchange services, I even add together market data fees to point out again that there’s more opportunity than risk in these items for CFE.

Okay. Thank you.

Thank you. And the next question comes from Ben Herbert with Citi.

Hey, good morning. Thanks for taking my question. I appreciate a lot of the discussion around mix in VIX Futures complex, but I just wanted to go back to there was a slide last quarter on CFE new user accounts, and if you could just kind of give us some update around growth there quarter-over-quarter and then anything you’re seeing there?

Thanks. It’s Chris, I’ll take this. Obviously, we’ve focused on the user accounts, really the active user accounts in and around our migration. The most important thing we were studying was making sure that the story continued from the active users prior to migration and active users post-migration. So that’s why – that was the story that we were trying to convey in the last quarter, because it was strictly around the CFE migration. We also looked at our activity on the C2 migration and the mix certainly was successful in the migration of C2. So that it was really more focused around the immigration and continuing the activity around that migration.

I think Chris, to your point, bringing that up was very important. We had a lot of CFE users, who had never written to Bats tech different than C2. So, very important and mindful of that number as for the first time, some of those customers were writing to and using Bats tech.

Thank you.

And the next question comes from Jeremy Campbell with Barclays.

Hey, thanks. Just back to VIX, I guess for a second here. And we've talked that in all of them, about a lot of the issues happened in February. but if we kind of put some of the structural issues around ETPs and the shape of the curve aside, where there’s kind of visibility in volumes, I guess, how do you think about the secular demand for your VIX products that will kind of move volumes higher? And where do you think – where do you see that next level of kind of incremental demand coming from? Is it global users? Retail adoption now that ETP has been delevered a little bit or something else? How are you thinking about that?

Well, it’s a great question. I think what we’ll see in these marketplaces, and I’d say it’s, we’re setting up and have begun to see, if you remember, the $0.50 premium option hedging strategy that was really, really, common for us last year. Those trades are coming back into the marketplace, where – and I reference VVIX is a really good look for you all into the relative price of hedging with VIX versus a SKU, which might give you a pretty good look of the relative cost of hedging with SPX. We see the VVIX lining up and then we’ve seen the 50,000 lot trader come back into the marketplace. What still missing is that million contract trade that we saw at the end of last year and into and up to February. The market’s setting up for that trade as well. I don’t know if they’ll come back, but I would anticipate in this market environment that the structure is perfect for those strategies. And as you know, there are tagalong or copycat strategies that go along with the 50,000 lot trade and a smaller version of the million contract hedge for the unknown unknowns. So, I expect to see that volume either come back and then grow as a result. As for structurally in retail, what we’re noticing with a really simple strategy and that rolled down, I’ll go back to that roll-down premium and how that’s changed, really easy to take a position that you collect money, that roll-down collection and inverse ETPs, that was really simple. The ETP that won’t be named that went away and then the delevered S60 [ph], it was really a buy, forget and take advantage of the roll down. What we’re noticing is the most sophisticated ETP traders, that retail customer base showing up and shorting VXX. It’s the same position and collection opportunity in the roll down is being wrongly inverted. So, as the user is looking to employ the same strategies that were very successful in a normal volatility structure that you pointed out, that pivot in the VXX is the same exposure to roll down and we’ve seen the short interest in VXX grow. So that’s our answer. It takes education and persistence and we’re best at what out there doing, but we need a marketplace that’s something to point to and we’re finally coming into the market, where we can go back to the street and say, “hey, this is pretty familiar. It’s what you are used to.” And from there, I think, I would expect to see some of those strategies coming back.

I think – this is John, to the point of secular shift, this is the way to think about our – this premium captured that Ed was talking about. It’s an insurance marketplace. So, you’ve got insurers, who are buying insurance and you’ve got insurance writers, and we had a hurricane event in February and Ed used the word regroup earlier in the prepared remarks. And you’ve got always after an event like that, there’s a regrouping, where the insurance writers assess their participation in the marketplace, the insurer reads, asses their needs for insurance, but the risk, the volatility risk that our traders hedge in our marketplace, that is a constant. There’s nothing secular about that and we’ve got every confidence that when people do go through the regrouping process, the needs that we provide in the marketplace exclusively will really resonate.

Great. Thanks a lot.

Thank you. And the next question comes from Michael Carrier with Bank of America.

Hi. Thanks guys. Brian, maybe starting to some of the guidance you gave, two maybe clarifications. So, first, just on the market data. You mentioned the SIP will be likely trending lower, but proprietary, you’re still seeing growth. I guess, just on a net basis, do you still see some growth in that overall business? And then on the expense guidance, you guys kept the same, but depreciation and amortization was slower. So I just wanted to understand sort of what was the offset to that and if we do remain in a kind of a muted volume backdrop, do you have some flexibility, I guess, particularly on the comp, just given that we saw some increase there.

All right. Good question. So, let’s talk about the market data first. So, the big unknown, obviously, with the SIP is – are there – what’s been somewhat of a variance has been in the auto recovers that have, like I said earlier in the comments that they are somewhat unpredictable. But overall, we’d still be optimistic about that growth just given the success of the proprietary and that’s actually been kind of outpacing, obviously, outpacing on a percentage basis in the overall dollar contribution on the quarter. Our year- over-year basis for each quarter has been actually helping to carry that category, even though the SIP revenues may be flattish and given where they are. So, we still remain optimistic given the both subscriptions, flash user growth and the pricing changes that have been implemented. So, we still see the growth there. We’re still optimistic and that really hasn’t changed. Any variance on the upside has been the audit recoveries and certainly that we’ve seen so far in 2018. On the expense guidance, and again, the proprietary, like I said, is with that 22% growth rate we had, that’s been the trend the last several quarters. So like I said, we continue to be excited about the work that we’re doing there as that expands geographically and across other asset classes. On the expense side, a couple of dynamics that are going on there. With respect to the comp, if volumes, say, for example, in that scenario, talked about our muted, they don’t necessarily grow to the level of expectations, one of the self-correcting mechanisms we have within comp is the bonus element, which a lot of times is based on expectations at the beginning of the year of how we're going to do and various measures with respect to revenue growth or earnings growth. And as that becomes potentially more muted, that amount will fall. And so that accrual will be less and actually may even reverse itself. So you will see some – you would see some contraction in that number. The other thing that's actually potentially driving it up a little bit is the capitalized wages that I mentioned earlier is – the technology team on the upside is as if they are doing a very good job from an efficiency standpoint of spending less dollars from a cash flow standpoint. But some that goes into how they're actually capitalizing and how we look at, they're actually capitalizing less wages than they did last year. So it has a slightly negative GAAP impact, but it shows up, obviously, in a slightly higher expense. But net-net, as far as overall results, it ends up being a more efficient cash flow spend. So that's maybe elevating that a little bit more than what you might have expected as well.

Okay. Thanks a lot.

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

Great. Thanks. Good morning folks. Maybe just to go back to the set up that you talked about, Ed, in terms of the increasing usage of short- vol strategies. We are seeing a little bit of pickup in VIX futures just in the last few days. But if you can talk about maybe the interplay between the SPX options complex and the VIX options complex and whether all of the RPC increase in the second quarter versus the first quarter was due to the premium RPC on the SPX. And then I guess, as we move forward into this quarter, to the extent people embrace VIX options more, will we see a substitution effect back to the VIX options? Or do you think – a lot of things you talked about, Chris, with the SPX options, do you think that would be independent and we could see an environment where we could see an improvement in SPX options volumes this quarter in conjunction with increasing usage of the short-vol strategies?

So, let me try to maybe ask it one other way and see if I'm capturing your intention. I'll ask Brian to speak to specifically the mix and how we benefited from a pivot on some of the S&P 500 hedging moving into SPX and the difference there. But I think if I can maybe make it – what I'm hearing is, if we see a change to the normal-term structure, does all of the increased volume we see in SPX, does that just go back into VIX and the entire complex just remain flat? Is that kind of a simple way…

Yes. It's a two-part question. It's one on the durability of the short- vol strategies and then yes, exactly what you just said on – in terms of that mix.

Good. So I do expect some movement. If you're hedging the S&P 500 today with SPX and you've not gone into VIX basically because VIX call options are historically at a higher level than they have been, so you need to hedge your 500 and you've gone into the SPX, I think we will see some shift back into VIX. But what is completely missing – so it is just the opinion on volatility and the strategies around vol, those come back and they don't come from typical SPX users. That is an opinion on the term structure. There is a trade up and down the term structure that just goes away when it's flat. So there are those strategies that are now sidelined or have been on the sideline, and that is taking a position in the difference between a front month that might be 13 and that month that's trending to the average trending to the average of roughly 17.5. So all of that trade is not dependent on the 500. That this – those are rolled down in premium harvesting strategies found in the term structure, found in option positions in the VIX complex. So there are strategies that are just not in the market today. So I hope that gives you a little look in what – and the $0.50 is a great example of that, right? And so is the $1 million contract trade that is using volatility to express – to take an expression in a look forward in vol. As for the mix shift in the benefits, Brian, I think maybe you can take the second part of the question.

Yes. And that may have been whether – I think when people looked at the results and the kind of the growth in the Options segment, while some of the index options volume was somewhat muted from a year-over- year contract growth rate, you saw the RPC increase 9%, largely reflecting – and all this will become a high level of numbers. If you think about the – just the pure VIX, SPX mix of going 60% SPX and VIX being roughly 40% from a year ago period to this period of more of a 70-30 mix, SPX to VIX, you'll see that 9% improvement or roughly a $0.06 improvement on a rate per contract. So you can see how just that pure mix shift was very favorable, obviously, to the top line and bottom line results as well I think it can be very powerful from that extent despite the, we'll call it, more of the flattish volume on a year-over-year basis.

Great. Yes, that’s perfect. Thanks.

Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Thanks. Hey, good morning, guys. Question for you around the multi-listed options business. So it looks like the volume there really kind of buck into trend year-over-year if you kind of look at third quarter results so far. Any sense what's driving that? Is it retail or is it something else? And then maybe hit on the Cboe Bats combined market share is still slipping, in particular, on the Cboe side. What's driving that?

Great, question. Really in the multi-list we’ve been very excited about seeing the overall market grow for the first time in a number of years. And it's really driven by retail demand, retail stepping back into options and the use of options, even in this environment. That's impressive to see given global volume challenges that we're seeing in other markets. So we're excited about multi-list. We made a capture decision at the beginning of 2018 around our various markets. Obviously, we have four of them all offering very different products to our clients. That capture did impact our market share relative to the market. But overall, I'm very happy with the outcome of adjusting capture up to the detriment of market share. And we're very comfortable with our position going forward. And obviously, we have one major migration left. That's our C1 platform. We're excited about what the performance of C2 and EDGX because it's carrying many of the different features and functionalities. So we continue to be excited around our market share and our capture prior to our migration in 2019.

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

OCC is under investigation by a few regulatory agencies. I wonder if you guys could comment as to whether there's any potential negative implications for Cboe?

We obviously, as is on the board of OCC, we're not going to comment on any speculation around investigations from a regulator, just in general. So until there's actually print from a regulator, we'll have no opinion on articles written in speculation around OCC.

And I'll just add. I think it's important, we just recently saw an SEC approval of an OCC clearing fund filing, which is an important indicator that the SEC has recognized how the formula works. And there is a reduction – an expected reduction in the clearing fund going forward. That is beneficial to all of our products, our multi-list products as well as our proprietary products.

Okay. Thank you.

And the next question comes from Kyle Voigt with KBW.

Hi, good morning. Sorry if I missed this, but just a question on moving your listing from NASDAQ to your own exchange. I think Bats previously targeted entering the corporate listing space at one point, but then shelved those ambitions and focused on ETP listings. Should we be correct in thinking that Cboe Global Markets isn't the only corporate listing you'd expect to eventually list on your exchange? And maybe just some updated thoughts on strategy. Thanks. A - Chris Concannon No, it's great question. Look, we've been highly focused on the ETP listing market. We think our opportunity to continue to grow that market and continue the success we've had in listing ETPs we now count some of the largest issuers of ETPs across our market. We just recently added First Trust, one of the larger ETP issuers. So we're excited about the ETP listing business being listed on both Cboe’s exchange as well as NASDAQ isn’t the way we wanted to sell our ETP listings to our favorite issuers. We wanted to reflect our belief in our ability to be a primary listing by switching our listing to be primary with Cboe Exchange. As we look at the lack of success that IEX has had in the corporate listing area, we would expect a very challenging business opportunity in corporate listings. We don’t sit here very excited about corporate listings, and all of our focus is on ETP listings and the success, just the continued success we can have there.

But we’re happy to list NASDAQ if they’d like us.

True.

Hope that answers your question?

Okay. Yes, thanks.

Thank you. And the next question comes from Patrick O’Shaughnessy with Raymond James. Patrick O’Shaughnessy: Hey, good morning. Can you speak to the feedback you’ve received from market participants on your planned corporate bond index futures contract? And on a somewhat related note, whether you have plans to build a presence from the credit space or whether your plans to build a presence in the credit space extend to play a role in the cash credit market?

Great question, because you brought up our – one of our favorite recent products, the iBoxx futures – iBoxx iShares futures product. The feedback we’ve gotten since the announcement has been exceptional. It’s the first time that Cboe is talking to some of the credit funds in the market. So it’s a very exciting conversation for us. The demand has been quite high from, not only the end users finding some benefit to the product, but also our bank partners seeing a great opportunity in having a cleared corporate bond of index futures. So overall, we also – the other benefit that we’ve seen and demand we’ve seen is proprietary market makers that are making markets in the iBoxx ETFs are excited about having a hedging instrument in the futures market as well. And these are really the identical players that are in our VIX futures and in the VIX ETPs. So we know them quite well, and they see it as a huge benefit. John, do you want to add anything?

Yes, yes. Thanks, Chris. Patrick, I think this is a – I’m glad you asked about it, because it’s an interesting one for us. It’s been inspiring for the team, for the product development team to receive the feedback they have. I think it’s different and contrast quite markedly from our ETP futures launch, where the word spread largely through a press-driven process. Here, word is really spread by word-of-mouth. It’s almost been viral in its distribution in terms of how people learned about it because this is – there hadn’t been a lot of pickup in the press. And it’s, I think, because we’ve created a very elegant structure that taps into the ETP ecosystem, and we’re catering to a massive underserved credit market. And so I think we’ve tapped into something really special with this product design. And we look forward to launching it this summer. We’re right on track with development. As we said during our announcement, we expect a summer launch.

I’ll just add Our partners have been exceptional in this launch, both market as well as iShares, BlackRock. They’re excited about the product. They’re side by side with us reaching out to the clients. Their distribution network is quite impressive, and certainly, our early days of discussion through their distribution network and the skill set of their sales force is quite helpful. So we’re excited about the partnership, we’re excited about the product and we’re very excited about stepping into this space, this credit space that today, we haven’t really dabbled in, in a big way.

Okay. Thank you. And the next question is a follow-up from Brian Bedell.

Great, thanks very much. Maybe, just moving to the stock buyback, just looking at your evaluation, it’s the cheapest I’ve seen in almost ever. It looks like about two standard deviations below it’s average on a relative PE basis, say, with S&P, certainly, the peers. Maybe, if you can just talk, Brian, about the capacity to accelerate the pace of the buyback into that $225 million remaining authorization and particularly, if you think the volume story on the VIX and the index side might actually improve in the near-term?

Yes. So, on the buyback, I think we’ve been very clear certainly reflective of the first quarter and second quarter as well as dialogue conversations we have with our board as far as their point of view. We do think that the share repurchase is a very good opportunity to deploy capital, certainly at these levels. So absent anything else or something that we’d expect, we continue to see that trend continue. I will say though that – and we’ve been, from a kind of leverage standpoint, as far as with the aggressiveness and accelerating it, we’ve obviously done it with, obviously, cash on hand that we – as we’ve been able to grow it and cash flow from operations. So, I don’t think there’s any expectations unless you’d see something differently that we’d go out and borrow, significantly increasing our leverage to be able to do that, all else being equal. But like I said, we’ve said and consistent with what we’ve said and what you’ve seen also in the first couple of quarters is that this is a good place to deploy the capital. And certainly at this level, that would be no change.

Okay, great. thank you.

Thank you. And the next question comes from Chris Allen with Compass Point.

Good morning, everyone. I wanted to ask on some recent SEC actions on July 31, they issued a stay against the fee changes proposed by the consolidated tape. And this, I think, follows June when they pushed back on a fee increase request, asking for more information. So I was wondering how you’re thinking about – your view on how the SEC’s thinking about market data fees. Is that factored into how you’re thinking about SIP data moving forward? And is there any impact for proprietary data fees as well?

Chris, it’s Chris. I’ll answer that. Really, as we think about it, first, we look at our proprietary market data and continue to see organic growth there. That’s the result of zero fee adjustments. So we’re excited that our fees set a while ago, which is an aggressive fee, much lower than the competition continues to attract new users and new subscribers, not only here in the U.S., but obviously, internationally as well. So when we think about our growth prospects in market data, we first look at the proprietary and really think about the proprietary market data across all of our platforms, both futures, options, European and FX. Really, with regard to the SEC and their activity around the SIP, there continues to be discussions around the prior rule filing that is being discussed with the SEC on the SIP. The recent action around the CTA, it’s really around an interpretation around an interpretation, kind of in the weeds interpretation of the CTA and how you interpret around display and non-display functions in the CTA plan. So I don’t – we don’t look at the CTA and the SIP as being a huge growth engine for market data. We certainly see them as flat to down over time. And all of our focus is on the proprietary data side. But really, the stress is the proprietary data from all of our platforms across all the various asset classes. We continue to see healthy growth across all those platforms. But back to the SEC discussion, I think those discussions will continue to play out. But again, the recent action on the CTA is really around an interpretation on how to treat certain platforms that distribute the CTA market data.

Got it. Thanks, guys.

Thank you. And as that was the last question, I would like to return the floor to Debbie Koopman for any closing comments.

Thank you, Keith. That concludes our call this morning. We appreciate your continued interest in our company. Thank you.