Good morning, and welcome to the Cboe Global Markets 2019 First 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. Now, I'd like to turn the conference over to your host today, Debbie Koopman. Please go ahead.

Thank you, Keith. Good morning and thank you for joining us for our first quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO will discuss the quarter and provide an update on our strategic initiative. Then Brian Schell, our Executive Vice President and CFO will provide an overview of our first quarter 2019 financial results and updated guidance for certain financial metrics. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our Chief Operating Officer, Chris Isaacson 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 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 material. Now, I'd like to turn the call over to Ed Tilly.

Thank you, Debbie. Good morning and thank you for joining us today. I'm pleased to report on the financial results for the first quarter 2019 at Cboe Global Markets. As you know, market conditions were challenging throughout the quarter, negatively impacting volume across our business lines. As we have in previous low-volume cycles, we have used this less-volatile period to seed potential future growth in our proprietary index products through increased customer outreach and education efforts. As a result, we are confident we are even better positioned to grow our business and to define markets globally to deliver value to our customers and shareholders. I will highlight those initiatives today after touching on market volatility. In a reversal from the sharp downturn in fourth quarter 2018, the S&P 500 rallied more than 12% in the first quarter and is now up more than 16% year-to-date. We believe the rally was led by the Federal Reserve's shift away from monetary tightening, generally positive corporate earnings and growing stability in U.S.-China trade talks. As the markets are once again hitting all-time highs implied volatility levels have fallen across all asset classes and the VIX term structure has steepened. We see that investors are looking for ways to reestablish upside positions. And with realized volatility levels back near eight-month lows, industry strategists are pointing to trades in SPX and VIX, as ways to take a position in the market. Others are turning to VIX futures and volatility-linked ETPs to express a view on implied volatility. Volatility-linked ETP, AUM which bottomed out at the start of 2019 has been steadily building and is now back over $3.5 billion quickly approaching pre-February 5, 2018 levels. In the last three months, the ETP complex has gained approximately $130 million of long vega exposure. This has translated…

Thanks, Ed, and good morning everyone. Before I begin I want to remind everyone that unless specifically noted, my comments relate to 1Q 2019 as compared to 1Q 2018 and are based on our non-GAAP adjusted results. As Ed mentioned, we had difficult comparisons given the strength of the first quarter last year and weaker trading volumes this year. Overall, our net revenue was down 15% with net transaction fees down 24%, non-transaction revenue, up 2%.; adjusted operating expenses decreased 14%; adjusted operating margin of 66.5% was unchanged; and finally our adjusted diluted earnings per share declined 20% to $1.11. Our first quarter results reflect lower trading volume industry-wide and across each of our business segments. In addition, our results included an $8.8 million charge, the equivalent of a $0.06 EPS impact to reverse the OCC dividend we recognized in 4Q 2018 due to the SEC's rejection of the OCC capital plan. Despite the tough environment and comparisons, our focus on disciplined expense management allowed us to achieve solid margins matching 1Q 2018's adjusted operating margin. 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. I'd like to briefly highlight some of the key revenue -- key drivers influencing our performance in each segment. Before I get started, let me point out a change we made in our income statement reporting. We combined access fees and exchange services and other fees into one line item access and capacity fees. We believe this enhances comparability and better captures the overall revenue associated with accessing and obtaining desired level of capacity to trade in our markets. Despite the lower trading volume in the first quarter, our…

Thanks Brian. At this point, we’d 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 your second question. Keith?

Thank you. We will now begin the question and answer session. [Operator Instructions] And this morning's first question comes from Richard Repetto with Sandler O'Neill. Q – Richard Repetto: Yeah, good morning Ed, good morning Brian and I saw the comp decreased quarter-to-quarter the $13 million. I didn't know we paid Chris Concannon that much this quarter. Anyway, my question is again, you mentioned M&A right at the end of the prepared remarks, Brian. It sort of brings out fodder or more questions on it. And I guess I would say can you give us any more color since it has been mentioned again publicly in prepared remarks? Are we looking to expand it in new -- from what we got from priors it's not as small transaction? It's a sizable. Is it some additive? Can you talk about what the strategic -- is it the expand asset classes or added on to asset classes? Can you give us any more details since it was brought up earlier? A – Brian Schell: So I think there were multiple questions there. So let me talk about -- and this will probably address -- and I apologize for anyone else in the queue who will have a related question that might be a slightly different take, but I'll answer it more broadly around capital allocation and this. I don't really want to -- we don't really have any additional comments or color around any specific transaction that may or may not occur that was stated other than in the prepared remarks. But in the context of capital allocation, let me address that and I think John will maybe cover some of the other kind of our thoughts around strategic investment and considerations and our overall approach broadly. But at the end of…

Thank you. And the next question comes from Ken Worthington with JPMorgan. Q – Ken Worthington: Hi, good morning. Thanks for taking my question. On the VIX side we can see the ETP vega exposure increasing, thank you for that information. And it's definitely helping the future side as we can see. The VIX options side has fared maybe less well more recently. Can you flesh out maybe why the more -- or maybe the less robust results on the options side relative to the future side? Thanks. A – Ed Tilly: Sure. I think it -- it's Ed Tilly. Thank you, Ken. I think it really -- if we take a half a step back and we look at the psychology going on now in hedging and traders as we know and investors as we know are most influenced by the most recent past. And you're coming out of a fourth quarter last year with very, very high volatility, a huge market sell-off; you entered the first quarter of this year either in a market or in a long position that has been hedged. And you're faced with a couple of options and we kind of set that stage at the last time we spoke where we saw hedging opportunity and remaining in a long position in the market you're forced with basically two choices to hedge that position; out-of-the-money puts in the S&P 500 out-of-the-money calls in VIX. And we referenced the really, really low VVIX making out-of-the-money calls in VIX relatively inexpensive compared to other money puts in the S&P 500. Now, while that scenario continues and VVIX is at a relatively historic lows all of the influences in the first quarter that very volatile fourth quarter is in the rearview mirror. What we've had now is…

Okay. Thank you very much.

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

Hey, good morning everyone. I don't usually like to ask about expenses, but I guess it would be great if you can just run through some of this and the expense -- and the expectations for the rest of the year a little bit more Brian. If I heard you correctly the equities side of the comp line was $3 million better than I think $6 million from something else. I don't know if you said what it exactly was. But -- so I guess its $9 million so the real core expenses if I'm looking at this correctly are more like $103 million so at a 4, 12 run rate. So, the question I guess is do you expect expenses -- where do you expect expenses to ramp in an environment where you're still taking those costs because of the integration? And then secondly, can you give us a little bit more color around the kind of like incentive fees -- or incentive compensation? How that's working? In terms of what are you accruing right now? What is the environment you're kind of budgeting for? How could this look going forward if we're staying in this kind of volume environment going forward? Hopefully that made sense. Thank you.

Sure. So, let me take the first part of that as far as the ramp and why do we expect the slightly higher run rate in Q2, Q3, and Q4. As we look out I mentioned -- we mentioned a couple of times about our continuing investment that we need to do. And that will primarily show up in people and different things that we're doing as far as how do we continue to invest in that client-facing approach. So, that's one of the areas of investment. We'll continue to see that it could show up in the comp line end for example. We also see -- with respect to various initiatives that are going on, we see some increases coming on potentially in professional fees. We know that we have some of our software tech that's rolling on so we're starting to see a little bit slightly higher increase in some of the depreciation and amortization. Again offsetting -- some of that offset is the synergies that are coming in. But again there is not going to be a material change from synergies showing up until the very end of the year. So, there's not really that offset as we try to kind of profile a little bit in the last call of like hey, we're still on track and we still think this is a big number on a run rate basis. But unfortunately the realization of that -- those kind of direct-offsetting expenses during the year are just not going to happen in these early quarters. So, we expect to see a slight ramp-up in comp and I'll come back to incentive in a second. Slight increase in professional fees, slight increase a little bit of a D&A depreciation, and amortization that I mentioned. And along with…

Excellent. Thanks for the color.

Yes.

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

Hi. Thanks and good morning. Maybe just given some of the investments that you mentioned given some of the expense guidance, what has been your traction with the new clients and international users? And maybe any stat that you can provide over the past few years and what you see as the opportunity ahead given some of these investments?

Yes. I don't -- as far as statistics that's very, very difficult. But I will tell you coming out of our Risk Management Conference in March and the hunger for updated and the continued exposure to white papers and neutral papers so for example, we updated the Wilshire report on option-based benchmarks performance and risks and updated that through December of 2018. Those types of engagements because they're demand-driven is why we're focusing and continue to focus in the pension and insurance space where that exposure is non-stop. Those customers need the information. They need third-party validation before they can go and convert funds that don't use our basic strategies to employ those strategies. So it's really now we're in the knowledge and gathering phase after a year like last year. And the sophistication level and the engagement, I would say that this Risk Management Conference was at an all-time high. I saw all of our client-facing folks engaged in conversations that years ago I could only have imagined from a sophistication level. We need to invest and keep up not only on the client-facing customer interaction from our team, but going out and commissioning papers and having things written by third-parties. That's what we're doing now. And again it's fueled by a year like last year. And run-ups like this where gosh, I haven't seen an all-time high before. Well I did. I've seen them over the cycles in the past. What do I do this time? And why is it different? And these basic strategies these basic -- these white papers that are educating our users that's how we start.

Michael, this is John. I'd add one more thing. So Ed spoke to the sophisticated end of the user base spectrum. And we see -- because it's a little more visible, we see some pretty interesting momentum in the more entry level of the user base spectrum. And you see that around things like some of the packaged products that incorporate our strategies. So for example Global X has recently announced they'd be launching a Russell 2000 covered call ETF -- that joins a family of ETFs from a variety of distributors including Invesco and WisdomTree and others. So we -- those are visible launches. The asset accumulation there has been really robust. We talk about VIX ETPs, but I think the story around ETPs that incorporate all of our product strategies is a really compelling story for us.

Okay. That’s helpful. Thanks a lot.

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

Hey, good morning, guys. I wanted to ask you about dynamic in equity market share trends. So obviously, it looks like you've been losing pretty meaningful share. And I know you highlighted EDGX and that's the one we tend to focus on more. But it looks like there have been some losses on the Bats side as well. So maybe expand a little bit on why you're seeing incremental share losses now? What sort of pricing changes you have made? I think you alluded to something on EDGX side, but curious any plans for the rest of the cash equity franchise. And ultimately how is that going to shake out and the blended capture rate we should be thinking about on U.S. cash equity side from here?

Yes, Alex. Good morning. This is Chris Isaacson. I'll take that one. Yes, as you can see we have had higher-than-expected capture in U.S. Equities. And we made a decision in May we're going to reinvest some of that higher capture into the EDGX book where we've seen most of the market share attrition. So we made quite a change there and we've seen some early results that are positive, but it's just a couple of days in. We intend to be very, very competitive in this space and we're going to reinvest that capture. We think this change on EDGX will work very nicely with the retail priority that we have before the commission and hope to get approval this summer on that will -- we think put retail orders earlier in a market queue position for them and hopefully improve fulfillment rates. For the rest of the exchanges, it's month-by-month we're looking at market share and capture. And so I think as we reinvest some of that capture you can expect the capture to come down as the market share goes up. We've -- we made a choice here that we think it's better for us and for our shareholders and customers if our market share is higher than where it's at now so we're going to reinvest to capture.

So just net-net between the SIP and the trading revenues there, should we be thinking about kind of that whole bucket being flattish? You lose in trading you gain on market data and that's kind of the framework?

Yes. The framework is I think at least net revenue neutral for the entire complex for U.S. Equities, but we want higher market share.

Great. Thanks very much.

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

Hi. Thanks very much. So, just to follow-up on two prior questions. Just on that last one the market share we're tracking. It looks like the improvements starting on May 1, I know it's just a couple of days in May, but it looks like it's coming in the Bats area mostly rather than EDGX. So maybe just talk about that. And then a follow-up to the question on the expenses earlier, I guess, if volumes in general broadly for the whole firm remain at sort of 1Q levels not that we think it would, but if they were to do that would you have more flexibility on that incentive comp side to come in closer to that $100 million quarterly run rate on expenses this year?

Yes. I'll take the -- this is Chris, again. I'll take the question on the market share. For BZX equities market share there were no material changes made in May for BZX equities. So that's probably just movement, natural movement that comes and goes each and every month. The major changes were made on EDGX and that's what we're watching very closely, but no more color there. And then Brian, if you want to cover the expenses?

Yes. Brian, on the expenses -- and there would be nobody in this room nor probably anybody on the phone rooting for the scenario you just mentioned. But that would show up in incentive comp. I mean, as far as there would be a lower number, it would reflect a lower-volume environment if the first quarter volumes were to repeat itself.

Yes. Thank you.

I've made a follow-up on the last question about BZX equities. I haven't looked at the statistics yet. But I will note that we are listing VXXB and now actually VXXB migrated to VXX as of I believe it was two days ago seamlessly. So we're watching that closely. That's the listing venue for VXX. And remind you all, we talked about VXXB last time there was a transition from VXX to VXXB and now there's a -- there was name change back to VXX where its full transition is finally complete.

Okay. Yes. Maybe that's the driver. Okay. Thank you.

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

Thanks. With respect to VIX, it seems like the shape of the VIX curve has more anomalies in the recent quarters in recent years than it used to which I think has perhaps led to some of the uneven volume outcomes, we're seeing. Would you guys agree with that? And if so why do you think that's the case?

Anomalies, I think that's right. If you look at statistically, the current shape, while there are -- making of the steepness of the front month versus second while that bounces a bit, the amount of flat days that we've seen in January and February is very unusual. And why would I think that is? I think that it's just a reflection as my original comments it's just the perception of risk over that very short period of time. And that curve is most influenced as I've said by the most recent events. I think when you have the volatility and the spikes involved like you saw last year that front month is weighed more volatile than it has been historically, which obviously changes the shape of that curve. The roll-down trade it's difficult when that front month is as volatile as it is. If we're going from 16 to 15, 13 back to 15 you're not as likely to engage in what has been a pretty consistent shape of the curve as you had like in 2017. So my reasons for the shape of that curve were not my own. It is basically just watching the customers' perception of that 30-day versus 60-day and all of those drivers of uncertainty. Where is the timing and the spectrum? And as I said, we've seen the steepness today because all of those four big drivers on the end of the fourth quarter are kicked out into the June through October timeframe. But that's -- there will be something new. There will be more uncertainty. I guarantee it. We've seen it every cycle, but we just don't know what it is yet.

Okay. Thank you.

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

Hi. Good morning. Just on the slide regarding the proprietary non-transaction revenue in the mid to high single-digit growth guidance, you note that 70% of the market data growth is being driven by additional subscriptions. I guess, focusing on the access and capacity fees, can you give more color as to what's driving the growth there? I'm just trying to get a sense of how much of that is being driven by pricing changes. And then moving forward, are there any meaningful pricing adjustments that are planned for the remainder of the year maybe as that tech migration occurs in October?

Yes. So that one is a little bit harder to break out, because, for example, as you think about pricing versus kind of new ports, you'll see movement a lot as far as people, as they test different strategies increasing say, folks maybe on ports because -- maybe I'll use the example of increasing capacity that are not to increase or decrease depending on the things they do. But one of the reasons it's hard to segregate price versus, I'll call it subscription is for example the CFE tech that was just rolled out. With that platform migration, there was significantly more amount of capacity that was rolled out as part of that platform. And so, as kind of the entire environment changed, and so the pricing changed. And so there was hard way to say well, this number changes because the throughput was different. And so that's an example of why it's hard to necessarily measure that. And we expect that some changes -- sometimes when you do have a price change, of what happens to capacity do we see the numbers fall? With any of the price changes we have seen we really haven't seen any material reduction in it. So it's really across the board. As I look across the segments, of the proprietary market data it's pretty solid across the board up. The biggest one is -- I guess we mentioned the -- some of the futures. We mentioned some of the options. So, it's kind of across the board of what we're seeing. So it's not any one thing. So again, long-winded way of saying that it's hard to tease out. But again we continue to monitor and take a look at it. And Chris, I think you – A – Chris Isaacson: Yeah. Q…

Thank you. And the next question comes from Chris Allen with Compass Point. Q – Chris Allen: Morning guys, most of my questions have been asked and answered. I guess just a quick one. On the regulatory fees jumped up a bit this quarter. I wonder if there's any one timers there. Or is this a good run rate going forward? A – Brian Schell: Yeah. The only thing I think that we have is, it would be the -- if there was a -- in the futures where there was I think the fine that we reported. But otherwise noise sometimes you get rate adjustments from checks they're on. So there's just going to be some noise. There is nothing there that I would say that we see a continuing trend or anything to model. Q – Chris Allen: Got you.

Thank you. And the next question is a follow-up from Alex Kramm with UBS. Q – Alex Kramm: Oh! Hey! Hello again. Just on the VIX ETP side you had that slide in the growth and I think there was a question about this earlier. And I think you gave a lot of color around like VIX trading strategy. You don't know what people are doing. But I think that discussion was a little bit more about sophisticated people using your options and your futures directly. So, just trying to see what is driving the VIX ETP interest again. I know it's difficult to see. But what are you hearing in the marketplace? Is this retail coming back? Are there people asking -- I think people are asking for leverage products again. Like what's going on in the ETF space because historically that's been a big driver of growth I think? A – Ed Tilly: It has. And with the CFTC the largest position in short VIX futures as a result of, the long positions in ETPs. And you got to sit back and scratch your head well how does that happen? So retail yes engaging and taking long positions and whether it's VXX or levered TVIX the result is -- when you're taking the long positions in the ETP, someone's selling those long positions and looking to our VIX futures to hedge. And they're buying VIX futures. There is a liquidity provider that has to sell those VIX futures. And that record short interest in VIX futures is as a result of the retail and the small investor taking long positions in ETPs. Q – Alex Kramm: Okay. I guess the question is like are those all -- is this all retail? Are they semiprofessionals? I guess when you go to your Risk Management Conference are there a lot of people running around using the ETPs? Or is this is more a marketplace that you don't directly touch I guess is the question? Like because, it seems like, in the -- in previous periods when retail got hurt by something like this was similar it goes away for quite some time. So just wondering if you're hearing seeing more retail coming back is the question really?

Yeah. But if we look at that by contract size, because we don't -- obviously as you know – Alex, you know us well enough. We don't have transparency into clearing and where are the ETPs and the interest clears. If we look at contract size, it's pretty balanced. The more sophisticated trader tends to use the roll-down effect of an ETP to their advantage, and offset the ETP exposure with pure-play into VIX futures options. Retail, because it's so easy. It's easy to track parity with an ETP and options on those ETPs that tends to be more retail-friendly. But by size, it's pretty balanced on size. And the complex -- I think it's important to look at the entire complex. Our users look at the complex in its entirety. ETPs are just one extension to volatility exposure, but tends to be way more retail-friendly in general.

Okay. That’s helpful. Thank you.

Thank you. And the next question also is a follow-up from Richard Repetto with Sandler O'Neill.

Yeah. Hi, guys. Just a brief follow-up just on, I think an interesting area that you're looking at the retail, that's on slide 8. When you -- Chris you talked about. You're trying to give some execution priority to retail limit orders. And I guess the question is can you describe that? Or how are you doing that? Because, at least, I thought that you had to treat all classes of customers of the exchange level the same. I know, there's been some -- it's a fine line with the N.Y.C. has done things in the past to give. But could you explain how you've given retail a priority on EDGX?

Yeah. Sure, Rich. So, this has some precedent in the options market where you have, let's call it customer priority, and customers or "retailer" or given priorities. So we're using that as precedent. And as you mentioned, there's been retail programs in the U.S. Equities market kind of, on the aggressive or marketable side to give priority to them. But, yeah, this is just us giving retail priority for retail orders or orders that are clearly from retail. If they're at the same price level as other interests from market makers or non-retail customers, they would go to the front of the line and time priority for retail orders. So, it's very similar to what we see in multi-listed options. And that's just what we're planning to do. Of course, the SEC has to approve this, and it seemed that there may be a comment period. But, we've canvassed our customers, and by and large people are quite supportive of this retail and non-retail.

Is this the first of its kind priority in equities also straight equities?

This would be the first one on the non-marketable side for resting limit orders. This is an idea that we frankly, Bryan Harkins, who runs that business, and us -- internally we've talked about for many years, and we feel like this is the right time to bring it to market.

Thank you.

Thank you. And as there are no more questions, I would like to return the floor to management for any closing comments.

Thank you. That completes our call this morning. We appreciate your time and continued interest in our company.

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