Cboe Global Markets, Inc. (CBOE) Q4 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Cboe Global Markets 2019 Fourth Quarter Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I now would like to turn the call over to your host today, Debbie Koopman. Please go ahead.

Thanks, Keith. Good morning, and thank you for joining us for our fourth quarter earnings conference call. On the call today, Ed Tilly, Chairman, President and CEO, will discuss the quarter and provide an update on our strategic initiatives; and Brian Schell, our Executive Vice President and CFO, will provide an overview of our fourth quarter 2019 financial results and 2020 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 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. 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. Good morning, and thank you for joining us today. I'm pleased to report on financial results for the fourth quarter 2019 at Cboe Global Markets. Lower volatility throughout the quarter was reflected in year-over-year declines in trading industry-wide. The comparisons were especially challenging in our proprietary products due to exceptionally strong trading in the fourth quarter of 2018. Despite the unfavorable trading conditions, I'm pleased to note that in the fourth quarter and throughout 2019, we significantly strengthened our foundation for growth in 2020 and beyond. We completed our technology migration while delivering on our synergy targets, expanded our offering of unique trading and educational resources and launched new initiatives, such as our plan to acquire EuroCCP and build out pan-European derivatives trading and clearing. And just this week, we acquired Hanweck, a real-time risk analytics company, and the business of FT Options, a portfolio management platform provider. As a result, we believe we are better positioned to grow our business and to define markets globally to deliver value to our customers and shareholders. Collectively, our team is excited to execute from this enhanced competitive position in 2020. I will highlight our upcoming initiatives today. First, touching on recent market conditions. The fourth quarter capped another year of tremendous market growth. The market continued to grind higher, ending up roughly 10% for the quarter and more than 30% year-over-year, marking one of the best performances in the past 2 decades and sparking debate over how much upside remains. Thus far, in 2020, geopolitical tensions with China and Iran, an aging global expansion, the March primaries and November presidential election, and a potentially global pandemic loom over the economy. As market unknowns increase, we see a greater focus on hedging and risk management. The need for more precision in positioning for potentially significant market events has been a consistent theme from our customers. In response, we provided them with added granularity by accelerating the listing of new terms in both SPX Options and VIX futures and options and have already begun to see growing trading in the new contracts. In fact, we saw stronger trading across the board in January, with increases in ADV month-over-month and year-over-year for SPX options and VIX futures. We had a record month for ADV and access fee options and saw our third highest monthly ADV of all-time and multi-listed options. Turning now to our 2020 strategic initiatives. Our goal is to define markets by being the global leader in innovative tradable products and services. We are focused on the following initiatives aimed at reaching that goal: strengthen our proprietary products and services, pursue leverageable derivatives methodologies, engage customers via Information Solutions, relentlessly focus on technology leadership, expand our global access and distribution and create capital efficiencies for customers. These initiatives reflect the considerable opportunity we see for organic growth, particularly in our proprietary products. Our recent acquisitions enable organic growth and reflect our M&A philosophy, which includes targeting acquisitions that have the potential to accelerate geographic and asset class presence while deepening buy side connectivity and channel distribution. We believe our planned acquisition of EuroCCP, a leading pan-European equities clearinghouse, significantly advances our strategic approach in Europe. We expect EuroCCP to enable us to grow our current European business to further diversify our revenue stream and to launch a European derivatives business that leverages our expertise to better serve our global customer base. Additionally, as an EU located clearinghouse, we believe EuroCCP provides us with strategic flexibility in light of the political and regulatory uncertainty surrounding Brexit and the future framework of European capital markets. We see considerable headroom to grow the European derivatives market, which currently lacks many efficiencies seen in the U.S. market. Customers are looking for a vibrant on-exchange alternative, which we intend to provide through the creation of unique derivatives products in a more liquid, transparent and competitive marketplace. On the product front, we expect to offer exposure that represents multiple European markets through European index futures and options and to explore potential single-name futures and options, ETP futures and options, OTC instruments and volatility derivatives. We expect the deal to close in the first half of this year, pending regulatory approval, and we look forward to efficiently welcoming the EuroCCP team to Cboe Global Markets. This week's announced acquisitions of Hanweck and the business of FT Options represent a significant step forward in our ability to drive trading in our markets. Hanweck and FT Options are profitable best-in-class companies in the fast-growing financial market data sector. Both companies will integrate with Cboe Information Solutions, which offers a broad suite of data solutions, analytics and indices to help market participants better understand and navigate our products and markets. I'll note here that Cboe Information Solutions is separate and distinct from the planned research and data platform we discussed in previous calls. Our research and data platform will be built in-house and is intended to be internally focused, providing us with data, trends and insights into trading across our markets. Information Solutions is external in nature, providing real-time tools for customers throughout the trading process. Officially just over 3 years old, the seeds were planted for Information Solutions with our 2015 acquisition of LiveVol, which was our first step in building out client serving derived data and analytics products. In 2017, we acquired Silexx, which, along with LiveVol and Cboe Global Indices, formed Information Solutions. Our two new acquisitions bring complementary drive data products and services to Information Solutions, making it a truly comprehensive offering designed to optimize the customer experience throughout the life cycle of a transaction from free trade to at-trade and post-trade by providing insights, alpha opportunities, portfolio optimizations, risk management clarity and execution services. With the added capability to help clients evaluate portfolio risks throughout all phases of trading, we expect Information Solutions to drive increased participation in our proprietary products and to attract new users to our marketplace. This week, we welcomed the Hanweck and FT Options teams to Cboe and look forward to working with them going forward. Turning now to capital efficiency, which represents an opportunity for increased training on our products and, because of its considerable importance to our customers, is an area in which we are deeply committed to customer advocacy. In 2019, we, along with the support of our colleagues at OCC, began the necessary work to advocate for the expansion of customer portfolio margining to include more of our proprietary products. This is a considerable undertaking, which would permit the inclusion of a VIX futures contract within a securities account for the purpose of portfolio margining. The inclusion of futures is expected to benefit customers that use VIX and SPX options by increasing margin efficiencies. We are in the initial stages of a long process requiring coordination among OCC, Cboe and numerous regulatory bodies and are committed to seeking to expand the availability of our products through this important initiative. We continually evaluate execution costs, depth of liquidity and capital requirements, improving them where we are able in order to maximize the efficiency of the hedging tools we provide to investors. We believe that our proposed customer portfolio margin program will increase capital efficiencies and thereby expand trading opportunities. Further, we think that allowing customers to more effectively deploy capital will benefit the entire market by increasing liquidity within the larger financial system. Another advocacy initiative of note was our recent publication of Cboe's vision for equity market structure reform, which codifies our key recommendations for equity market reform, including that SIPs be implemented in multiple locations in order to reduce geographic latency. We think the recommendations we put forth are achievable and will generate consensus. We will remain both proactive and open-minded in responding to the ongoing process resulting from the SEC's proposal on SIPs and any other market structure matter. In addition to our advocacy work, we are committed to enhancing the customer experience in the U.S. equities market through innovative products and services. We were gratified to receive final approval last month from the SEC to introduce Cboe Market Close. As you know, we work closely with our customers to develop CMC in order to provide opportunities for cost benefits amidst one of the most critical liquidity events of the trading day. We and our customers have long looked forward to our ability to provide opportunities for cost efficiencies at market close. We are working closely with customers and, subject to their readiness, plan to launch CMC on our BZX Exchange on March 6. In closing, I would like to thank Mark Hemsley, who retires as Head of Cboe Europe this month. Our entire organization is grateful for Mark's vision, leadership and dedication, which created a cultural success at Cboe Europe. Cboe and industry veteran, Dave Howson, succeeds Mark in what has been a seamless transition, leaving Cboe Europe well positioned for continued success. We thank Mark for his service and wish him well in his retirement. I would also like to thank the entire Cboe team for their successful execution of key growth initiatives in 2019, which enhanced our competitive position and better enabled us to serve and grow our global customer base. Furthermore, our team came out of the gate in 2020 with strong forward momentum already leveraging the success of newly integrated trading technology, closing 2 pivotal acquisitions, working closely with customers to quickly implement CMC and embarking on an ambitious and well-orchestrated 2020 global marketing and educational effort. As a result of their collective efforts, we are very bullish on all we can accomplish in 2020. With that, I'll turn it over to Brian.

Thanks, Ed, and good morning, everyone. Before I begin, let me remind everyone that unless specifically noted, my comments relate to 4Q '19 as compared to 4Q '18 and are based on our non-GAAP adjusted results. As Ed noted, we had difficult comparisons given the record financial results we achieved in the fourth quarter of 2018 versus weaker trading volumes in 4Q '19. Overall, our net revenue was down 16%, with net transaction fees down 30% and nontransaction revenue up 10%. Adjusted EBITDA declined 18%, but achieved a healthy margin of over 70% compared to the record margin of nearly 72% in last year's fourth quarter. And finally, our adjusted diluted earnings per share decreased 21% to $1.21. Throughout 2019, a consistent theme for Cboe was the growth of our recurring revenue stream, a proprietary market data and access to capacity. Combined, they increased 7% for both the fourth quarter and the full year compared to the same period in 2018, in line with our expectations for mid- to high single digit growth. As it relates to proprietary market data, about 70% of the growth this quarter was a result of incremental subscriptions, and nearly 85% of the growth of our access capacity fees was attributable to incremental units. We continue to see opportunity across all of our asset classes and believe we can grow this revenue stream at low to mid-single digits in 2020 on an organic basis. Note that this revenue growth rate reflects the shift of approximately $4.5 million or 150 basis points previously reported in access to capacity fees in 2019 and transaction fees in 2020. The primary revenue contribution from our acquisitions of Hanweck and FT Options is expected to result in additional market data revenue. Thus, on a reported basis, the growth rate is expected to be in the high single digits. Now I'd like to turn to our segments. In our Options segment, the 20% or $35 million decrease in net revenue was due to lower net transaction fees, particularly in our index options, offset somewhat by lower royalty fees and higher market data fees. Index Options average daily volume, or ADV, was down 31% for the quarter, while revenue per capture, or RPC, was up 2%. The RPC lift reflects a mix shift with SPX options representing a higher percentage of the overall index volume. In multi-listed options, ADV was down 8%, and RPC fell by 34%, with the latter primarily due to a shift in volume mix by order type and higher volume rebates versus the fourth quarter of 2018. Turning to Futures. The 24% or $9 million decrease in net revenue primarily reflects a 33% decrease in ADV, offset somewhat by a 6% increase in RPC and lower royalty fees. The higher RPC year-over-year was primarily due to lower volume-based rebates. In U.S. equities, net revenue was down 7% or $6 million, primarily due to lower transaction fees, a result of a 27% decline in matched ADV and a 15% decline in capture. This decrease was offset somewhat by higher market data revenue and regulatory fees, the latter driven by fines. In third quarter of 2019, we reinvested a portion of our higher-than-expected net capture to attract additional market share, which has shown mixed results as measured by total market share through the fourth quarter of 2019. However, Cboe share of continuous trading has actually increased during the course of 2019, reflecting the impact of the pricing changes. The lower total market share reflects the increasing portion of volumes trading off exchange and during the closing auction, where Cboe has not competed. With the upcoming launch of Cboe Market Close, we'll be able to tap into a part of the closing auction market volume, benefiting the industry with an on-exchange price competitive alternatives. Net revenue for European equities decreased 11% on a U.S. dollar and a local currency basis, reflecting lower market volumes. The net revenue decline reflects a 28% decrease in transaction fees, offset somewhat by a 20% increase in nontransaction revenue. The growth in non-transaction revenue reflects increases in access capacity fees and other revenue, which includes licensing and trade reporting revenue. The decline in net transaction fees was due to lower market volumes and market share, offset somewhat by favorable net capture. The higher capture resulted from continued strong periodic auction and LIS volume. We attribute a portion of the lower volumes and market share to the ongoing uncertainty around the timing and final outcome of Brexit and loss of ability to offer Swiss securities for trading due to Swiss equivalency issues. In addition, we continue to see growing portion of volume trading off-exchange and in closing auctions, driven in part by the low market volume and muted volatility. Net revenue for Global FX decreased 6% this quarter, reflecting a 14% decline in market volumes, offset somewhat by a 6% increase in net capture, with the latter reflecting the impact of lower volumes on our tiered pricing. In addition, market share reached a new high of 16%, up 70 basis points year-over-year, primarily driven by positive customer response to our new full amount offering. Turning to expenses. Total adjusted operating expenses were about $96 million for the quarter, down 14% versus last year's fourth quarter. The key expense variance was in compensation and benefits, primarily resulting from a decrease in incentive-based compensation. The decline in incentive-based compensation is aligned with our full year financial performance versus our targeted performance. Additionally, I'd like to point out two expense items included in our non-GAAP adjustments in the fourth quarter. One, a $23 million provision for notes receivable associated with the funding for the development of the Consolidated Audit Trail, or CAT; and two, a $4.5 million charge for the write-off of Cboe Command following the completion of the C1 technology migration. With respect to our 2020 expense guidance, and I want to be very clear here, absent the recently announced acquisitions of Hanweck and FT Options, our expense guidance for 2020 would be exactly the same as it was when we announced more than a year ago. But with the inclusion of these new operations, we are updating our prior expense guidance of $420 million to $428 million to a range of $435 million to $443 million. Take note that this guidance does not include our planned acquisition of EuroCCP and the buildout of pan-European derivatives in trading and clearing. We plan to update our full year 2020 guidance after the acquisition closes, which is expected to occur in the first half of this year, subject to regulatory approvals and other closing conditions. This slide provides a bridge from our 2019 adjusted operating expense to our 2020 guidance detailing the key expense drivers, which I'd like to review now. Our core expense growth of 4% to 5%, in line with prior years, which reflects continuation of investing to support our organic growth initiatives, which Ed referenced previously; an offset from expense synergies of about $18 million expected to be realized in 2020, primarily from the C1 migration completed last year; a full year of incremental cost for our Brexit readiness of about $3 million; the absence in 2020 of approximately $6 million in favorable expense adjustments in 2019. The transitioning to our new corporate headquarters in 2020 and moving our trading floor in 2021 is expected to result in $7 million to $8 million in duplicate occupancy expense in 2020. We expect these incremental costs to decline to about $3 million in 2021, with cost benefits starting to accrue in 2022. The impact of software development expense versus capitalized of $7 million to $8 million, reflecting the faster cadence at which we implement technology updates and a shift in the scale of our technology projects; the assumption that we will achieve our targeted incentive compensation in 2020, accounting for $10 million to $12 million; and incremental operating expenses of approximately $15 million related to our acquisitions of Hanweck and FT Options, in total, arriving at our guidance for 2020 adjusted operating expense of $435 million to $443 million. Additionally, as we disclosed previously, our pending acquisition of EuroCCP and the build-out of pan-European derivatives trading and clearing are expected to reduce earnings per share by about $0.08 to $0.10 in both 2020 and 2021. About half of the estimated EPS impact in 2020 reflects potential acquisition of EuroCCP, including incremental costs associated with a new EUR 1.5 billion backup line of credit. The remainder relates to our investment in building out the derivatives business. We expect EuroCCP to be neutral to slightly positive to earnings per share in 2021 as it build on growth initiatives. As you can see from this table, EuroCCP generated about EUR 23.8 million in revenue in 2019 based on unaudited and preliminary results, up 12% versus 2018 and generated positive net earnings. We're excited about the opportunity to see -- to grow the market for derivatives trading, particularly in options. While the U.S. and Europe have similar GDPs and wealth levels, the notional value of equity and index options traded in the U.S. is 7 to 8x greater than the notional value traded in Europe. With the final technology migration completed, we exited 2019 with $80 million of run rate synergies and still expect to exit 2020 with $85 million. As noted on our prior earnings call, we expect most of the remaining $5 million of run rate synergies in 2020 to result in reduction in cost of revenues versus expenses reflected in royalty fees. Turning to income taxes. Our effective tax rate on adjusted earnings for the quarter was 24.7%, below our prior guidance, but above last year's fourth quarter rate of 22.1%. The tax rate increase was primarily due to tax benefits associated with remeasuring our net deferred tax liabilities recognized in the fourth quarter of 2018. Our 2020 full year tax rate on adjusted earnings is expected to be in the range of 26.5% to 28.5% versus 25.5% in 2019. The projected increase reflects a reduction in discrete tax adjustments in 2020 versus 2019. Capital spending in 2020 is expected to be $65 million to $70 million, up from $38 million in 2019, primarily due to leasehold improvements and other costs associated with our Chicago headquarters relocation in 2020 and a trading floor move slated for 2021. Furthermore, we expect depreciation and amortization to be $34 million to $38 million for 2020 compared to $38 million in 2019. This excludes amortization of intangibles of approximately $120 million in 2020 versus $139 million in 2019. Turning to capital allocation. We remain committed to a disciplined and consistent capital allocation strategy that includes reinvesting in our business, complementing our organic growth with acquisitions and providing steady distributions to our shareholders through increased dividends and opportunistic share repurchase in order to maximize shareholder value. During the fourth quarter, we returned over $40 million to shareholders through dividends and $70 million through share repurchases. For the full year, we returned over $300 million to shareholders through dividends and share repurchases. And through the first month of this year, we used nearly $27 million to repurchase our shares, leaving approximately $273 million of share repurchase authorization available at January 31, 2020. Our debt remains at $875 million, and we have $250 million in availability under our revolver and if short-term funding need arises. Our leverage ratio is 1.2x at year-end, up from 1.1x at the year-end -- at the end of the third quarter, reflecting a slightly lower trailing 12 months of earnings. And we ended the year with adjusted cash of about $208 million. The $500 million cash balance reflects the anticipated funding of share repurchase activity in January and the recently announced acquisitions. In summary, Cboe is executing on strategic initiatives and setting the stage for both short-term and long-term performance with our continued focus on defining markets globally, growing our proprietary index products, executing on our initiatives of getting closer to our customers pre trade, at trade and post-trade to drive volume; growing and diversifying our recurring revenue streams; leveraging our freed up technology resources to focus on organic growth initiatives; disciplined expense management to leverage the scale of our business and a disciplined capital allocation plan focused on long-term shareholder growth. With that, I will turn it over to Debbie for instructions on the Q&A portion of the call.

Thanks, Brian. At this point, we'd be happy to take questions. [Operator Instructions]. Keith?

[Operator Instructions]. And the first question comes from Rich Repetto with Piper Sandler.

Ed, Brian and Chris, I guess the first is a little bit off-the-wall question. With the higher volatility, we've seen volumes up nearly across the board. I know this makes up a small amount of your revenue, but the multi-listed option volume has been -- I thought you said third month or something like that, we have it as being -- the industry being at record levels. So I'm just trying to see what's driving that. Could it be retail? And could it be affecting your proprietary products, which drive the majority? And then lastly, is there any truth to the rumor that you're going to extend the take or you extended a takeover offer to Match.com?

Wow, Rich. I mean, I've found my match with Beth. So we're done with that. So let's take these in order. Sure. I think the retail investors love a rally. And history says that in a rally, we get -- stock pickers are rewarded more than they are in a selloff, where correlations tend to be higher in sell-offs. So coming out of a year of a 30% rise, the retail investors tend to get paid by being really smart stock pickers. And I think if we look at the most recent past, if you look at volumes, Tesla is an incredible driver of volumes in multi-list option classes just over last, I don't know, gosh, 1.5 months or so. 1 million, 2 million Tesla contracts trading in a day. That's incredible. So there is a great deal of interest when there's a breakaway from the norm and rallies to illustrate that. As for its effect on our proprietary products, if you think of correlations then, and we have liquidity providers dedicating liquidity across hundreds of thousands of strikes, the roll-up into macro hedging for our pros is even more important. So we do see the roll-up in more macro hedging from professionals than in our proprietary products. So I think it's always been complementary. We've always talked about the power of the ecosystem. So individual stocks roll up into sectors, roll up into macro hedging. And ultimately, for Cboe, that shows up in SPX options in particular. And then depending on small or large-cap, we can see that across the proprietary suite of products here in Russell and Q. So it's not a bad story for us any way to look at it. That's kind of the view from us from the individual multi-listed names.

Rich, let me just add. From a retail perspective and with the 0 commission, that's really more of an uplift, I'd say, in equities than it is in options. But it certainly has at least a neutral to a positive effect on volumes. We think in the long term, we don't see that receding as zero commissions are here likely to say.

And the next question comes from Ken Worthington with JPMorgan.

Ed, I wanted to dig more into the buildout of the pan-European Option business. You gave us a slide or 2 on it. So maybe what exists now for index options and futures? You kind of highlighted it's small, but what is it? Maybe why you're seeing demand for Cboe to build this product out, maybe you have like an anchor client or something that might help you with launch. And I assume this heavily leverages Chi-X and cash equities. And then maybe give us a rough outline of major milestones of your buildout. And I guess maybe conclude when do you think you might be breakeven? Is it like 3 years away, 5 years away, longer or less? So again, all around this pan-European equity opportunity.

Breaking the rules again on the question.

No, I like it. That is a great lead-up. It's a great question, and I'm going to have John start to kind of give you the landscape. I'll take over on how we see offering Cboe's unique perspective. Chris can lay out the schedule for you and milestones and Brian will wrap it up with when we see this really taking the benefit of our efforts.

Yes, Ken, this is John. Thanks for those questions. It's an exciting initiative for us. In terms of the current landscape in Europe, I mean, we showed you just the look in terms of notional value traded. There are index options, as everybody who covers our company is aware, in the European landscape. There are index options. There are single-name options. There are single stock futures. So those products do exist. And they're provided by very competent, we think, competitors in the space that we have a lot of respect for. The structure of those markets just serves a different, a more limited universe than our market structure serves. And we're not making judgment about that, there's just -- it's just based on where you grew up as a company. So Cboe for 4 years has been built around the primacy of the quote, the primacy of the quote from a diffused number of market makers. And that's embedded in our technology, so the capacity of our technology. It's embedded in our fees and our rule structure. It's embedded in our relationships, the diversity of our relationships, and it's embedded in our product design, our easily hedgeable product designs, so that you can really encourage this diffused community of market makers to provide robust quoting. You can see this, I mean, there are in dish off it, and we study this stuff all the time, and dish off it in the markets -- market stats. So for example, if you just look at quoting, U.S. versus Europe, the typical quoting amount is less than half in Europe as it is in the U.S. The spreads tend to be about 100 basis points wider. They update less frequently. And yet, at the same time, if you look at the kind of average trade size of what's actually executed, the average trade size is larger. But what does that all mean? It means that people are looking at the quotes. The quotes are really meant to be indications, guidelines of where the market is. And when they go to act on those indicative quotes, they tend to call the relationship banks. You call a handful of them. The best bank wins. And then you post it sort of in block fashion. Our market operates very, very differently where the quote on the top of the book as well as the depth behind that quote makes a large-sized transaction completely actionable through the depth of quoting in the book. And so, ultimately, that filters down to create an environment where a broader number of participants. Retail gets brought in because the quotes are actionable and reliable. Institutions that don't necessarily have those deep bank relationships get brought in because those quotes are deep and reliable. And that builds a virtuous liquidity cycle. One more thing to note about this before I turn it over, because it's going to be a team effort on this question, is just that I think people underappreciate the importance of quotes for the options market, whereas equities are really about last trade. The options market, you've got thousands of actionable points, strikes and maturities. And they don't always trade with frequency. The quotes are really what people use to understand the market. In fact, the 2 deals we just announced this week, those sets of analyses couldn't happen without quotes. And a lot of people -- we've got a really, I think, a world-class options-based strategy benchmark index business. Those indexes are built on quotes. So people need to understand, in order for you to find your way in the options market, you need good quotes because these tools wouldn't exist without it. So that's a little bit of perspective in terms of what we see. We're not just saying we're better. We've done a lot of time, spent a lot of time deeply evaluating differences between these markets. And we think we've got something unique that we can deliver together with our key relationship customers.

So as for an anchor tenant, I think it's tenants. So the inbound to me, after we announced the deal of that years ago was when are you bringing the U.S. model of transparent, deep liquid markets to the European derivatives market? And with Mark Hemsley, it was a dream of his to realize this, and we lacked the solution for clearing. So with EuroCCP, we're able to enact a plan that we've really had on the back burner for many, many years. And it is in response to inbound. And if you think of the global liquidity provider community, there's nothing unique in the U.S. Our liquidity is really formed globally. But to John's point, what we reward is the dedicated liquidity provider. That has always been the model for derivatives. To John's point, there are hundreds of thousands of strikes. And in order to light those strikes up, liquidity providers need to participate in transactions. That's fundamentally the difference. And so I would say there are many of the global liquidity providers asking us and willing to be those tenants, early movers in our derivatives in Europe. Chris, on milestones and timing.

Yes. As far as the milestones go, we hope to launch our derivatives market in Europe in the first half of 2021. If you look at that, there's going to be some intermediary milestones. In the second quarter of this year, we plan to have technical specifications for all the customers. And in the fourth quarter, we'll allow them to start testing in a certification environment as well. Obviously, this is all subject to regulatory approvals, both of the acquisition of EuroCCP and the adding of derivatives and clearing of derivatives for both the market and for the EuroCCP. In addition, there's an integration effort, of course, to be done with EuroCCP and the adding of derivatives for clearing and settlement. We look forward to working with our partners there at EuroCCP having them under the tent here at Cboe. And as we've mentioned, this is a customer-driven effort. And therefore, we're going to develop this system, this platform, as we do all of our platforms, to serve the customers. So you could think it's going to be the common platform of use across all of our equities, options and futures markets and, as John mentioned, quote-driven. So for instance, we processed, on C1, 10 billion quotes and orders last Friday. And in order to have an active, vibrant, highly quoted market, you need to have a high capacity system, which we'll bring to Europe.

So let me just add one more on operations. I think what we should probably mention, and this effort is going to be led by Dave Howson. Dave is ready. Dave has been in charge of the technology for Cboe Europe for quite some time. So he will join with Cecile Nagel,who currently leads EuroCCP. The team is ready to deliver. And those milestones that Chris outlined, we are ready to achieve those. So Brian, probability?

Yes. So I would say that -- and Ken, you would expect nothing but to be -- us to have, say, a conservative point of view of this. But from a profitability standpoint, we're looking at a 3- to 4-year time frame, roughly. And we'll continuously keep you and everyone in as far as our updates go. And those will be tied to the milestones that we achieve, the regulatory approvals along the way. And just part of that is informed by our experience in launching new products. This is a little bit bigger effort as far as a quote market goes. So again, we've tried to be radically transparent as far as what we believe the costs it will take upfront to invest in the long-term growth of what we think is just an amazing opportunity for us. But we're starting from -- somewhat from ground 0 on, call it, the derivatives end of this. So there is some heavier investment upfront. And so we're looking for that call that 3- to 4-year time frame for profitability. And then after that, as it takes to build scale, then we hope that we'll have meaningful contribution after that.

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

I wanted to dig a little bit on the 2020 expense outlook. The 4% to 5% core expense growth, I'm assuming the main factors there are the continued data buildout, the sales buildout. I'm just wondering, what's the flexibility? If we have a challenging revenue environment, could you separate out an incentive comp of $10 million to $12 million? And also just on the incentive comp, maybe you could give us some color, what was the incentive comp for 2019? And how is that impacted by the outlook for revenue growth moving forward?

So if I can -- so the -- if you look at -- if you think about the overall pool, the incentive comp, we'll call it, as far as for 2019 was roughly $35-ish million at the total base. Relative to the prior year, I think it was closer to $50-ish million in 2018. So you can see the big delta that swung from '18 to '19. And the fact that we did not have positive revenue growth and earnings growth, that was the big change. As far as we talked about expense discipline, that's as much about alignment and structure as it is. Don't take that extra trip or don't buy that extra rim of paper. It's about how do you align the organization so that there's a little bit of a profit-sharing element within the overall incentive plan. And that's certainly -- and with our comp committee and the board, certainly focused at the higher end as far as the senior leadership team, as far as that's where the most dollars are at risk, is this, the people sitting around this table right now. So the big flux is always going to be in that incentive comp as far as where that goes. And you can see that's a direct result of when we laid out the bridge of the $10 million to $12 million. That's the biggest flex point. As you know, in the long term, all expenses are variable. In the shorter term, the key triggers that we have is that incentive compensation. And that's really kind of the biggest thing that we have. Now as we have these growth plans and everything that's going on in the way, we believe they're going to start yielding results. They're going to start generating the positive revenue that we've targeted, which we're not providing guidance on in the aggregate. But that's really the main flex point. And if there are decisions along the way, whether it be within that core growth rate, about -- in that 4% to 5% growth rate assumes some marketing spend around some of the products launched, some different efforts we have around growing those products organically. If some of those things that we factored into our budget and in our plans aren't quite working the way that we thought that they would or in the same time frame, we'll pull that back. So there's a little bit of flex in that as well. But as far as single category, order of magnitude, it's going to be an incentive comp.

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

This is actually Sameer Murukutla on for Michael. So sorry if I missed this, but did you provide any of the revenue contribution from Hanweck and FT Options? And I guess, just maybe a higher level. I know you told us about your strategic rationale, but, Brian, can you just update us on your typical financial rationale that you look for in a deal? And given the growing recurring revenue stream, how much are you willing to raise the leverage in a potential deal? I still think that counts as one question.

Not exactly because I'm not even sure I wrote them all down, so you have to remind me if I didn't get them all. So one, we did not provide revenue guidance on the transactions. We did indicate at the announcement that we believe that they are going -- that they are accretive for certainly in the immediate year of 2020. So we did not give explicit revenue guidance for those transactions. I believe that one of the questions was, what is the calculus we use on looking at transactions? And I will say that we look at all the traditional corporate finance metrics that one would think of as far as a pure analytic framework of looking at discounted cash flows and the net present value. What do we believe that return is going to be relative to other opportunities that we have? So we use a lot of the traditional metrics that one would look at as far as, what do we believe the long-term additive benefit is to our -- basically, shareholder value? The accretion dilution, we always, always strive for accretion, but it is not the -- it's not a binary decision based purely on that. It's really about what we think the long-term value is going to create called traditional DCF in those projections. Now obviously within that is our strategic rationale has always got to be part of why we're doing the transaction, which we've talked about, and we spent a lot of time talking about. And I'll reemphasize again, this was done to help supplement our core proprietary product and help leverage that growth. Again, these businesses in and of themselves are profitable and is a wonderful revenue stream that is terrific. It fits very strategically with what we do, continues to add scale to that overall market data business that we have already. But again, we believe that the big strategic focus is, how do we help continue to drive the opportunity to grow that trading in our proprietary products? I believe the last question was, how far, Brian, is Cboe willing to lever up to do a deal? And I think that's what your question was. But these transactions, obviously, are small, and we're just essentially using cash on the balance sheet. I think it's going to depend on the opportunity. The only thing I can point to you, because I can't speak for our Board, but we can look to that. The exchange industry has been given, I would say, the capital markets has given them a fair bit of flexibility to flex up to 3 to 4 -- or 3.5 to 4x within a kind of a typical leverage ratio, given a history of the ability to pay down rapidly, making commitment to maintain an investment-grade rating, and obviously if there's a strategic fit with what we're doing in that overall mix. So that's not an absolute commitment from -- that's what Cboe would do or will be able to do because that's obviously a large Board decision as far as the opportunity comes in front of us. I would just say I would point to what we've seen in the markets of what others have done. We have similar cash flow profiles.

And just to -- this is John. Just a follow-up on the second part. I mean, I think Brian really laid it out well. It's worth repeating, we've said this before and this will not change. We lead with organic growth. And when we look at transactions, those transactions are designed to accelerate our organic growth aspirations. So while we focus on the intrinsic financial benefits of an opportunity, there are also, I'll call it, unseen benefits that occur throughout the business that you'll just see recognized in our continued outsized performance.

And the next question comes from Alex Kramm with UBS.

I think this has been asked a few times over the last few months, but it would be great to have an update on what you've seen since the final, I guess, platform migration was finished. I think there was an expectation that we would hopefully see some customer behavior shifts, maybe some uptick in turnover velocity. So any color there would be great. And any other asset that your customers are giving you now that this is done in terms of new products that you may launch in terms of access to these market data opportunities? Anything else that's new that's come out of that migration now that it's done?

Yes. Alex, I'll take that. So we've seen some really positive trends since the migration. Obviously, volumes came right back or market share was right back within a week or two. But since then, I just mentioned earlier in an answer to a question, we've seen great -- good volatility here in January, and the platforms handled 10 billion messages or orders or quotes last Friday. We've seen the mix between electronic and floor trading has stayed largely the same. I'd say it's upticked a bit, especially in SPXW. Slightly more electronic, but we're still seeing very vibrant for trading. FLEX and XSP continue to grow. We've invested quite a bit in the FLEX product and we'll continue to do that. We have planned enhancements for FLEX for the remainder of 2020 based on demand we're seeing from customers. And then I'd also say the volatility settlement enhancements that we made, we've seen 4 very successful settlements since migration. Participation -- number of participants has increased. The number of replicating orders has increased, and the quoted spreads at the time of the settlement are down about 40%. So we're really quite encouraged by what we're seeing from a settlement perspective, is that monthly settlement especially is so vital for our customers to achieve convergence for our proprietary products.

And next question comes from Ari Ghosh with Crédit Suisse.

Just a quick one on the market close initiative. I think the volume that you'll potentially interact with, I think you mentioned a 7% number, but what you could potentially touch is closer to 4 to 5-ish. So just would love to get your thoughts on expectations around either volume share capture or what the updated economics might look like on this initiative. If there's anything that you could provide, that would be great. And then just in addition to that, like based on your conversations with your customers, is the value proposition here around pricing or added functionality that you think could get you to win some of this share?

Yes, thanks for the question. We're quite excited about Cboe Maket Close given the multiyear effort we've had with the SEC and customers and comment period. So very excited to launch on March 6. As we've laid out here, the overall closing volume or market share is about 7% in the U.S. It's about 20% in Europe, actually. So it's been trending up year-over-year. So we're very excited to compete in this area of the market. The addressable market for a market on close is roughly half of that. We don't have exact visibility into every single trade that occurs at the close. But roughly half of it, we think, is addressable. We won't be announcing pricing quite yet. That will be closer to the March 6 launch. But I can just tell you, it would be very aggressive, and we look forward to competing very aggressively in this space. This is something our customers -- they've asked for us to bring this to market for many years. In fact, there are many dark pools or ATSs that offer similar off-exchange facilities. And they're excited for us to bring this to the exchange space. So more to come on pricing. The functionality, we think, is well designed, and the demand from our customers is quite exciting. We expect to have people there March 6.

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

Great. With respect to Hanweck and FT Options, just by the way, of your guidance on the market data and access fees, with and without the deal, I'm getting to around $25 million of revenue for Hanweck and FT, give or take a few million, depending on the range. So I just wanted to see if that's a reasonable calculation. And then, also, if you could talk about the growth of Hanweck and FT given what overlap there is with Cboe users now and new users coming on. And then just if you can just comment on the revenue capture across most of the areas, where it was pretty strong sequentially and year-over-year, whether you think that's sort of sustainable into 2020.

So on the revenue guide, I don't want to provide the specific guidance, but I think your calculus is a little high as far as the contribution goes. And because I know that's -- when you're backing into it, you've got ranges that you're working with. So I think it feels like you've chosen maybe the higher points of some of those ranges. And I know they can move back and forth. So I just want to give you that. That feels heavy when you look at it overall, as I think it was the first question.

And then the second one, Brian, was -- this is John. The second one was on the customer question. I think there are 2 ways to look at the opportunity set. One is just in terms of the value add of the product set. And two, the other is the customer question. The first one, so I think you can go back to the slide we showed where we've got pre-trade, at trade and pos-trade. The transaction revenues we earn from our Options business are that single moment in time. It's people are compensating us for the value we provide at that moment in time. People are putting on positions that could last a day, a week, a month, a year. And for the duration of that holding, and even leading up to in the pre-trade period, people are going to want to risk analyze. People are going to want to mark using theoretical prices. People are going to want a portfolio evaluate. So you think about those things as sort of being buckets of value you provide, the transaction being at that moment in time and these other services for the lifetime of the holding. I think what we're really trying to describe is significant opportunity to grow that non-transaction revenue stream because people find similar value in those non-transaction services. And then secondly, in terms of the customers, so you can think about these 2 businesses as having -- I mean, customer numbers really in the low -- very low 100 range. Very, very marquee customers, great customers. But if you're smaller businesses like this, you face some challenges. One, you don't have the sort of the diversity of distribution channels that we have at Cboe already in place. Two, you're facing a client base that wants fuel rather than more vendors. And three, you're just facing questions about who you are. It's -- you're a new name. And so even before you really start in earnest the sales cycle, you're describing that. And out of the gate, we sort of overcome that. So you -- now you match up these, call it, 100-plus customers that these 2 businesses come to us with, with our thousand plus customers, who all, because they trade our products, will find some utility in this suite of offerings. We think that there is obviously significant upside there to grow the businesses.

And the last thing I'd mention here is that with Hanweck and FT, it really -- we mentioned on the call the capital efficiency during the script. And these 2 have the potential to help us really unlock greater capital efficiencies for our customers. So in addition to the non-transactional revenue that they do produce in our profitable companies today, we think we can dramatically help customers unlock that capital, which would improve liquidity and ultimately increase trading, as we've mentioned earlier. But this is -- we feel like this is a double win, both of these. It's not just about the revenue and the contribution themselves, it's how they can help our customers better use our products.

And your revenue guide does not include that growth potential, I assume. It's really the run rate of the business currently in terms of the debt revenue guide of...

Right.

Correct. And then I think your last question was just kind of on a net capture kind of broadly across the -- as far as the trending goes. And it's also an asset-by-asset class dialogue. But as you look at why were some of those captures stronger than where they were previously, I'm hoping that a lot of that doesn't necessarily repeat. Because some of that was either volume-related or a slightly lower market share than what we were achieving. Particularly if you look around U.S. equity, some of the futures and the FX volumes were generally lower. So without hitting the certain thresholds, you're going to see a slightly higher capture. I think, obviously, the Index business, you're always going to see where is that mix shift within that proprietary mix. And as you know, we view that as a suite of products and utilization with whatever the environment calls for. And the customers are going to find mass utilization versus us kind of "managing that RPC" in and of itself. So again, the outcome of where we saw those -- that captures are more in line with what we expected, and, again, are going to continue to be driven by market share as well as somewhat by volumes.

And the next question comes from Kyle Voigt with KBW.

Maybe just another -- just a follow-up question related to the Hanweck acquisition, FT acquisition. I was wondering, with respect to the strategic fit, you went over a lot of strategic benefits, but one thing that does come to mind is they do have relationships with a lot of these buy side firms. I think there's been some frustration in the past at Cboe and within your Options business that you're kind of intermediated between you and the end client by the dealer community. Does -- do these acquisitions in any way help you get better insight into what your clients are doing? Or to be closer to your clients, could it help your Options business in terms of new product development or just better understanding what the end clients are doing and how they're positioned, et cetera? Is that a part of the strategic rationale? Or am I off base?

No. Look, you're not off base in general. I mean, any tool we can provide to our end users to make more efficient pre, at, or post-trade is really what we're after. So this is really designed for at-trade, if you think of the combination of Hanweck and FT, real-time risk analytics adding to a portfolio solution in theoretical pricing, that's a huge add for us. It really isn't a disintermediation counterstrategy. Our customers tend to share with us their strategies. And whether or not there's an obstacle for them, ultimately trading on exchange, looking for another solution, this really isn't the -- so this really isn't trying to fix or supplement their access to Cboe. It really is to arm them with the moment of trade, with all of the tools they need to know exactly what the impact of the next trade would mean for them and/or their portfolio. And then when we talked about the capital efficiencies, and John said it, any dollar that we can become more efficient in the overall marketplace in a portfolio at the point of trade, we would assume that there's going to be the deployment of that extra dollar back into the market. Cboe will get its share or outsized share because of the unique product set, but it's really arming our customers with more tools to be more efficient at the moment of trade. So yes, I wouldn't look at this as a solution for this remediation at all. I'd really -- this is just arming our customers at trade with much more at their fingertips.

And Kyle, yes, we hope the intermediaries continue to make -- have quite profitable business with us, bringing their customers to our marketplace. We -- if you look at the -- back to that customer profile of these businesses, about half of them are current direct customers of ours, and about half are not. So to Ed's point, we are half of those. And that will probably -- that ratio may continue as we grow the number of customers. So half of those will be customers that we're providing services to, so they can better understand our products and then go through the intermediaries to reach our market. So everybody continues to grow the ecosystem together.

Yes. I think just to punch it a little bit. The effort we have in customer portfolio margining, that's actually our argument. And if we can put futures and securities accounts, that's a big deal. And it takes away the argument where I will just go and trade upstairs. Counterparty would be my bank. We continue to pitch, if you can bring somebody to OCC, the offset is immediate. And the hedging around that initial position is ongoing with the appropriate margin offset. That's incredibly powerful. So that's why we continue to stress in all of these calls our efforts to be an advocate for margin and capital efficiencies.

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

Great. Pan-European derivatives, we've seen efforts by some of your peers over the years that try to take away market share from incumbents, and I think you guys probably know who we're talking about here. And those efforts never seem to work because of the protective moat around those volumes. So why is this initiative different? What gives you the confidence that you're going to be able to take a decent amount of market share away from the existing players?

It is plain and simple, not a share play. Cboe, we grow pies. And for us, there's unsatisfied demand for liquidity providers in Europe to have transparency into the marketplace. And the slide we had in the prepared remarks show the difference between the potential and the average daily notional turnover. This is adding access or giving access to those that are not satisfied today. So it really isn't a share play. We know there's global demand for the model that has been successful here in the U.S. And again, to the points we've made, this is not saying the European model is wrong or incorrect. It is just not answering the demand from global users today. And that's the play.

And Chris, there's -- I mean, there are a lot of examples. But one specific example, we have retail electronic brokers in Europe coming to us, asking us to help them establish connectivity with the U.S. options market because their customers want to trade options. But the structure in Europe isn't conducive to smaller granular retail electronic trading. So that's just one example of a customer segment whose needs are just -- are not being fully met by the services provided in Europe today. And that's the pie we're trying to go that I described. That's the pie we're trying to grow rather than head on trying to slice up an existing pie in an ever smaller piece.

And the next question comes from Owen Lau with Oppenheimer.

First of all, thank you for all the slides and explanation. We appreciate it. So a broader question related to your data and Information Solutions strategy. Is Hanweck and FT just a start of something big in data analytics for Cboe? Do you have all the pieces that you like, in particular, in real-time analytics? Given your strong balance sheet, how should we think about the data and analytics strategy for Cboe going forward?,

So to be clear, Hanweck and FT -- and thank you. Great question. The Hanweck and FT are really the addition to LiveVol, which is a 2015 initiative, and then the follow-up of Silexx in 2017. So it's a continued build on what we think are tools in information services. But John, let me turn over to you.

Yes. So I mean, we -- and I think we described this. We actually looked at our gaps in Information Solutions, in Cboe Information Solutions. And then we married opportunities with those gaps instead of the other way around. So we're still doing that. There are gaps. There are fewer and fewer of them as we build this business. So I wouldn't expect anything that's capital-intensive for us to go after. But you will see us fill in those gaps because our customers want us to be providing these real-time analytical services.

And the next question is a follow-up from Alex Kramm with UBS.

Just had a couple of housekeeping questions. One, I think, Brian, you talked about some shifts from recurring to transaction revenues. Maybe this was said before, but what exactly is going on there? What buckets? So that would be great. And then secondly, regulatory fees really spiked this quarter and this year, I mean, it's $10 million incremental almost on a run rate basis. So how should we be thinking about that line item? Because it obviously seems to be swinging around a lot more. So I guess, what should I think about there?

Yes. So the way -- and I'll tell you just I'll be very transparent about how we look at it. We don't -- it's impossible to predict and to forecast. So we -- generally, we go into our overall budgeting, forecasting process. We don't assume there's anything material. And so that's very -- as you might imagine, any of the work. And as an exchange, we don't have any visibility to what the regulatory team necessarily is working on or what the plan finds or anything that potentially is going on there. So that's going to happen, and that's -- I would not forecast that as a recurring revenue stream. So I would -- that's the way we think about it, and I would encourage you to think about it that way as well. As far as the shift goes, that is -- goes back to -- if you were looking at the volume release that we issued, I believe it was in December, about where we're looking and what that -- as far as kind of looking at where we thought the capture is going to be as we ended the year for that particular set of volumes, we wanted to highlight there was a previous fee, call it our trade processing fee, that was previously in access capacity fees, that after the migration and how we were looking at it, it's really mapping now to transaction fees. And that started in October, essentially mid-October, with the migration. And so the -- if you look at how much of that was built as access capacity fees in 2019, it was $4.5 million, which will now, going forward, be reported in transaction fees as part of that capture. So we highlighted that because it showed a slight uptick in the net capture. And we didn't want analysts and the investment community to overforecast revenues because it was going slightly take away from the existing nonrecurring revenue stream.

And next question is also a follow-up from Chris Allen with Compass Point.

Just wanted to ask a quick one on access capacity fees, just the kind of sequential uptick we saw in European equities. Apologies if I missed that. And then I think you talked about incremental units coming on board. Is there any color just in terms of how we think about that from maybe a client perspective, where it's coming from a regional perspective?

So that's, I guess, an ongoing effort. You're going to see -- when you saw the uptick in Europe, that's essentially the -- I'll call it our Brexit kind of continuity plan. So when the Amsterdam Exchange came online, you're seeing those fees coming online. There could be some rationalization going forward depending on where you're seeing the negotiation and that transition agreement come out. So there's a little bit of uncertainty of how much that will stick and how much of that will move. And as people continue to rationalize, the team in Europe was very, very thoughtful and worked very closely with the clients as far as understanding capacities, understanding the incremental costs of then also having to have an alternative, I'll call it, an EU -- a comprehensive EU solution versus just what they were dealing with the whole Brexit scenario. So you're seeing an uptick from that as part of it. I certainly don't think that's going to necessarily -- that rate of growth is not necessarily going to be continuing. As far as the units continue to come online, we've continued to see clients coming online, adding capacity. Chris talked about earlier like the Friday volumes that we're seeing. So as those firms continue to push those through, they need additional capacity, obviously, to make that happen. And so they hit a tipping point where, okay, it's a step-level function. They need that next level of access. So you're seeing that kind of across the board, but you did see the spike in Europe, again, distributed to the Amsterdam Exchange coming online.

And that does conclude the question-and-answer session. I would like to return the floor to management for any closing comments.

Thanks, Keith. That completes our call this morning. We appreciate your time and continued interest in Cboe. Have a good day.

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