Cboe Global Markets, Inc. (CBOE) Q3 2021 Earnings Report, Transcript and Summary

Hello and welcome to the Cboe Global Markets Third Quarter 2021 Financial Results. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the call over to your host today, Ken Hill. Mr. Hill, please go ahead.

Good morning and thank you for joining us for our third quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO, will discuss our performance for the quarter and provide an update on our strategic initiatives. Then Brian Schell, our Executive Vice President and CFO and Treasurer, will provide an overview of the financial results for the quarter as well as an update on our 2021 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer and John Deters, our Chief Strategy Officer. I would 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 each slide is available on our 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 call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now, I would like to turn the call over to Ed.

Thank you, Ken. We are happy to have you on board as Debbie Koopman prepares for retirement next month. Good morning and thank you for joining us today. As we head into year end, I hope that you are doing well and remaining safe and healthy. I am pleased to report on solid financial results for the third quarter of 2021 at Cboe Global Markets. For the quarter, we reported revenue growth across each of our business segments, reflecting strong year-over-year increases in both transaction and recurring non-transaction revenues, with net revenue up 27% and adjusted EPS, up 31%. Our solid third quarter results were driven by higher volumes in our index options and volatility products, increased demand for our suite of data and access solutions, and growth in trading volumes across nearly all our segments. In our proprietary products, ADV increased 29% in VIX futures, 32% in VIX options, and 39% in SPX options. We also continue to see strong growth in multi-listed options trading with ADV, up 20% year-over-year in the third quarter. During the quarter, we also delivered on several strategic milestones to expand our global network, including the successful launch of our European derivatives platform as well as the closing of our acquisition of Chi-X Asia-Pacific. I will touch on both in a moment. But first, I want to discuss our plans to enter the digital asset market through the planned acquisition of ErisX, which we announced last week. ErisX will provide Cboe with spot trading data, derivatives and clearing capabilities for digital assets through its regulated futures exchange and clearinghouse. The past 2 weeks have been a watershed moment for the digital asset industry, with the launch of trading in the first Bitcoin ETF in the U.S. equities market. As the appetite for ownership and digital assets continues to grow, we believe Cboe can play a guiding role in shaping the trajectory of this revolutionary market. Today, we are at a critical inflection point. We are seeing strong retail demand, institutional interest, market growth, streaming of digital assets even with traditional financial firms. As a leading provider of global market infrastructure and tradable products, we can bring the knowledge, structure and transparency of our trusted markets to the digital asset space. The demand and excitement for digital assets is driven by the unique market structure and freedom it affords and we want to maintain that innovative spirit, while providing the regulatory framework and structure that many market participants desire. We have secured support from a tremendous group of industry leaders who are aligned with our vision and want to shape and define this asset class now and for the future. These industry leaders bring different perspectives and expertise from retail brokers, crypto leading firms, global liquidity providers and sell-side banks. They are expected to form a digital advisory committee tasked with advising us on the ongoing development of our digital asset business, CBOE Digital. These industry leaders include DRW, Fidelity Digital Assets, Galaxy Digital, Interactive Brokers, NYDIG, Paxos, Robinhood, Virtu Financial and Webull. Additionally certain members of the digital advisory committee intend to acquire minority ownership interest in CBOE Digital. I am confident that together with ErisX CEO, Tom Chippas and his team and our incredible partner group, we can not only meet the growing demand for institutional and retail trading solutions, but also push the boundaries of digital asset innovation and unlock its next phase of growth. I am extremely pleased with the progress we made during the third quarter, executing on the four key incremental growth drivers I outlined at the beginning of this year: the opportunity to grow recurring non-transaction revenue; the launch of Cboe Europe derivatives; our expansion plans for BIDS Trading and extending access to our products and services across geographies and market participants. We saw positive momentum in our data and access solutions again this quarter, fueling a 21% increase in our recurring non-transaction revenue. This growth was driven by continued demand for access to our exchanges, proprietary market data and new subscribers to Cboe’s front-end platforms, including Silexx and Trade Alert. We continue to optimize the efficiency and delivery of our data and access solutions to market participants and are excited to launch CBOE Global Cloud, a new real-time cloud-based market data streaming service in collaboration with Amazon Web Services, November 1. CBOE Global Cloud is expected to help further extend Cboe’s data to new users and geographies, an important step towards broadening investor access to our proprietary content and market data globally. Turning now to Europe where we successfully launched European derivatives market on September 6, we are very pleased with the initial progress with trading and clearing running smoothly as we slowly build volume. Over the coming months, we plan to introduce additional products and onboard new participants. Bringing the first truly pan-European transparent and lit derivatives market to Europe is a remarkable achievement and we are enthusiastic about the opportunities ahead. Additionally, our European Equities business delivered strong results in the third quarter, with average daily notional value traded up 29%. Cboe LIS, powered by BIDS, continue to see positive momentum, and for the first time in its history, became the largest block trading platform in Europe for the month of August. BIDS has established itself as the premier block trading destination in the U.S. and Europe and we are excited about our plans to expand the BIDS network to Canada early next year and then to Asia-Pacific region to serve an even broader base of customers. Turning to Asia-Pacific, we made good progress integrating the Chi-X team since we closed the acquisition at the beginning of July. We plan to migrate Chi-X to Cboe technology and are busy working through the integration plan and timeline. With our expanded footprint in the Asia-Pacific region, we see significant opportunity to further develop our ecosystem of market infrastructure and tradable products into one of the world’s largest derivatives and securities networks. Beginning November 21, we plan to take an important step towards broadening our network and access to our proprietary products through the launch of extended global trading hours for VIX and SPX options as part of our 24x5 initiative. The length in global trading hours complement our entry into Asia-Pacific and are designed to help meet growing investor demand for the ability to manage risk more efficiently and adjust SPX and VIX options positions around the clock. We are also pleased to announce that Webull, a leading retail broker platform, with a growing global presence, began offering our proprietary products, fixed and SPX options, on their platform this month. We have continued to see strong demand for SPX options for both institutional and retail broker platforms and are eager to expand access to this product suite. Similar to last quarter, we saw solid growth in SPX options trading on retail broker platforms, with ADV on those platforms, up 24% from the second quarter, hitting a new all-time high. Key to our global network expansion are strong partnerships. And to that end, we were thrilled to expand our relationship with MSCI and extend the licensing agreement that allows Cboe to offer options trading on MSCI global indices through 2031. We have valued our strong relationship with MSCI for many years and look forward to further collaboration in the years ahead, particularly in the important area of ESG investing. As the retail market continues to grow, we remain committed to investing in education and product development to meet their unique needs. To that end, earlier this week, we announced plans to launch Nanos, a first-of-its-kind options contract designed to make trading more accessible for the retail trader. Increased retail participation has fueled record trading across the industry. Between the top 4 retail broker platforms, there are now more than 150 million retail brokerage accounts and many of these accounts are too small to take advantage of the potential benefits, certain options contracts can offer. We plan to launch our first Nanos product on the S&P 500 Index first quarter 2022. At a fraction of the size of the standard options contract, the one multiplier cash-settled Nanos S&P 500 answers the growing demand for a simpler, more cost effective way to gain broad exposure to the U.S. equity market. The S&P 500 option market is one of the most highly traded and liquid option markets across the globe. Through our Nanos S&P 500 product, we are broadening access to a greater universe of traders who can enjoy the potential benefits options provide, including hedging, asset allocation and income generation strategies. To complement the launch of Nanos, the CBOE Options Institute plans to offer a new options introductory curriculum tailored to retail traders. Through our longstanding commitment to education, we are continuously evolving our programs to offer more retail-centric content through the Options Institute and we look forward to welcoming a new generation of traders to options trading with the launch of Nanos. As we broaden our global footprint by entering new markets and launching new products and services, we further our goal of expanding access to a broader base of customers, both institutional and retail. By leveraging our technological expertise, customer relationships and capital markets capabilities, we plan to continue to unlock additional revenue opportunities across our businesses. We head into the final months of the year on a stronger footing than ever and we look forward to continuing to execute on our growth opportunities ahead. With that, I will turn it over to Brian.

Thanks, Ed and good morning, everyone. Let me remind everyone that, unless specifically noted, my comments relate to 3Q ‘21 as compared to 3Q ‘20 and are based on our non-GAAP adjusted results. As Ed just indicated, the third quarter was incredibly strong for Cboe with robust results from both a transaction and non-transaction basis. Overall, adjusted earnings increased 31% versus the third quarter of 2020 and improved off solid second quarter 2021 metrics. As we move forward, we look for the cash, derivatives and data portions of our business to work in unison to enhance revenue opportunities and shareholder value. Now, a quick look at the third quarter. Our net revenue increased 27%, setting a new quarterly record. Net transaction fees were up 39% and recurring non-transaction revenue was up 21%. Adjusted operating expenses increased 29%. Adjusted EBITDA of $240 million was up 25%. And finally, our adjusted diluted earnings per share, was $1.45, up 31% compared to last year’s quarterly results. Turning to the key drivers by segment, our press release and the appendix of our slide deck includes information detailing the key metrics for each of our business segments. So I will just provide summary thoughts. While we saw year-over-year growth in all of our segments, our Options segment produced above average growth for the quarter of 30% driven by higher trading volumes and revenue per contract in both our proprietary and multi-listed options. Total options ADV was up 23% as we saw double-digit increases in both index and multi-listed options. Revenue per contract also moved higher by 16% given positive mix shift to index products and a strong increase in our multi-listed options RPC, up 23% and we continue to benefit from double-digit growth in recurring non-transaction revenue, particularly access and capacity fees. North American equities revenue increased 13% year-over-year as acquisition-related net transaction and clearing fees were further helped by strong proprietary market data fees and access capacity fees. This was offset somewhat by a 1% year-over-year decline in U.S. equity ADV and a 1% year-over-year decline in market share for the quarter. While market share trends have been impacted by aggressive pricing trends from some competitors, we remain focused on optimizing long-term profit in the business through the many initiatives we have introduced or plan to introduce to the market. For the quarter, MATCHNow and BIDS contributed $8.5 million in net revenue. Lastly, recurring non-transaction revenue increased by more than $5 million or 17%, with organic growth of 14%. Third quarter revenue increased in futures by 24% on the back of a 30% increase in ADV and a 6% increase in capture. Looking forward, we were pleased to see the SEC recently approved filings to list and trade shares of two new volatility shares products in inverse and long VIX futures ETF. These new listings are likely to increase the VIX trading ecosystem as the AUM builds on those products. The revenue increase in Europe and APAC primarily reflects the addition of Chi-X Asia-Pacific in July 2021, an $8.2 million contribution as well as growth in European equities and clearing. Underlying trends remained strong in the third quarter as industry average daily notional value traded, market share on Cboe European Equities and net capture, all moved higher on a year-over-year basis. And finally, revenues in the FX segment increased 8% as compared to the third quarter of 2020 as trading volumes and net capture moved higher. During the quarter, global FX market share hit an all-time high of 17%. Cboe’s recurring non-transaction revenue growth remained elevated in the third quarter, with year-over-year organic growth reaching 14%. Again, this strong growth was largely a product of additional subscriptions and units as opposed to price increases. More specifically, we saw both physical and logical port usage remained robust in our equities and options businesses driven by increased demand for trading capacity and on the market data side, the equities top of book and depth of book products continue to perform well. We are increasing our organic outlook by 1 to 2 percentage points to approximately 14%. Our total recurring non-transaction revenue growth is now expected to reach approximately 18% for 2021, up 2 to 3 percentage points versus our prior expectation. Overall, we are very pleased with the continued traction in this business as it’s an important element of Cboe’s ecosystem of products and services. Turning to expenses, total adjusted operating expenses were approximately $140 million for the quarter, up 29% compared to last year. Excluding the impact of acquisitions owned less than a year adjusted operating expenses were up 17% or $19 million for the quarter. Most of the expense variance related to the acquisitions was compensation and benefits. Moving to our expense guidance, we are tightening and raising our expense guidance range for the full year to $536 million to $541 million from $531 million to $539 million. The $4 million increase in the midpoint reflects higher incentive compensation costs, reflecting the strong year-to-date operating results we have posted as well as our plans for increased hiring during the fourth quarter and a slight uptick in our depreciation and amortization forecast. As a firm, we believe in a pay-for-performance culture and not only has our year-to-date financial performance has been strong, we have made significant progress against our longer term growth priorities, especially towards increasing access to Cboe products and services, as Ed noted previously. As you recall from our February earnings meeting, we laid out a path for revenue growth that would be preceded by higher-than-normal expense growth that would slightly compress margins in the short-term to enable longer term growth. We remain focused on investing in key initiatives with attractive returns and we look forward to meeting the current and future market demand by prudently investing organically and inorganically to meet those needs, even if it requires upfront spend. Now, turning to a summary of full year guidance on the next slide, we are raising our guidance for depreciation and amortization to $38 million to $42 million from $34 million to $38 million due to the earlier timing of various products. Our CapEx guidance range moves $8 million lower to $47 million to $52 million and we are reaffirming the higher end of our guided tax range of 27.5% to 29.5% for the full year under the current tax laws. Our interest expense for the third quarter of 2021 was $11.7 million. We expect our fourth quarter interest expense to hold steady in the $11.5 million to $12 million range. In addition to the investment priorities we outlined earlier in the call, we remain committed to returning excess cash to shareholders through dividends and share repurchases. From a capital return perspective, our strong cash flow generation enabled us to raise our quarterly dividend for the 11th straight year, growing 14% on a year-over-year basis. In total, we returned $52 million to shareholders through dividends in the third quarter. Our leverage ratio decreased slightly versus the prior quarter to 1.4x at September 30, as our debt levels remained steady on a sequential basis. Overall, our balance sheet remains unencumbered as we look to put incremental capital to use in value-enhancing ways for shareholders. Our adjusted cash and financial investments balance is elevated, reflecting the planned use of cash to fund a portion of the planned transactions we recently announced as well as a slightly higher requirement for regulatory capital purposes. In summary, Cboe delivered a very strong third quarter, and we’re even more enthusiastic about the number of high-quality growth initiatives we are bringing into our ecosystem, solutions that expand access to global markets for our customers, grow our geographic footprint and breadth of asset classes and diversify our revenue base. We look for these planned additions to fuel continued growth across the Cboe ecosystem. Now I’d like to turn it back over to Ed for some closing comments before we open it up to Q&A.

Thanks, Brian. Before we move to Q&A, I want to provide a further update on our ESG initiatives during the quarter. Earlier this month, Cboe was proud to be named a founding member of the derivatives partner exchanges network of the United Nations Sustainable Stock Exchanges initiative. We look forward to sharing ideas and engaging this network on an important dialogue on how derivative exchanges can support greater sustainability in addition to advancing partnerships with index leaders in this important space. As you can see, we have been extremely busy, and I thank the entire Cboe team for their hard work delivering outstanding results. We look forward to hosting our Investor Day on November 16, where we will dive further into our business, providing more color on these initiatives and how they are helping drive our strategy. We hope you can join us, details for accessing the event or on our IR website. Finally, I’d once again like to thank Debbie Koopman for her service and wish her all the best as she heads into retirement next month. She’d be with us through Investor Day, so it’s not quite farewell yet. But this is her finale for quarterly earnings. She will be dearly missed by me and the entire Cboe team. I’ll now pass it back to Ken for instructions on the Q&A portion of the call.

Thanks, Ed. At this point, we would be happy to take questions. [Operator Instructions]

Yes. Thank you. [Operator Instructions] And first question comes from Rich Repetto with Piper Sandler.

Good morning, Ed. Good morning, Brian and team. I guess, Ed, we take your acquisition seriously – very seriously now, so the ErisX positions and you talked about it in the prepared remarks. But I guess I wanted to get what does Eris – I know they are trading right now. I know they trade some over-the-counter products. And when do you actually expect them to trade any digital assets? And do you need regulatory sort of clarity to do that? And did it prevent you from buying back shares in the quarter?

So let’s take the first part first on shares, Brian, and the view of just the buyback on shares.

Yes. Rich, just as a pipeline as we look at things, we are being more conservative than not as we look at kind of overall leverage, deployment of cash. So it was – like I said, it’s always a balance quarter-over-quarter of do you sit on a little bit more cash in anticipation of a transaction closing in the pipeline. So that was more of a reflection of that than anything else.

Thanks, Brian.

Alright. So let me – Rich, let me take a half a step back on ErisX because I think it’s important to recognize that we didn’t just wake up a couple of months ago and think, gosh, crypto, look what’s happening, it might we need to get into this space. When we launched, if you recall, the first futures contract in 2017 and even before that, we had applications at the SEC for ETNs and ETPs. So at this space, we’ve had our eye on. We thought the ecosystem in this space would have evolved a bit quicker. So we’ve always had an eye on getting back into the space the last couple of calls, I’ve been mentioning that. Importantly, also, we were early investors in ErisX in 2018 when Don Wilson and Tom Chippas saw the opportunity to build out a regulated fair market in spot, derivatives clearing and margining. So long answer to your question, framed that way, we’ve constantly and since the launch of those future, consciously been looking for an opportunity that gets us back into the market. But John, I think importantly, the rollout, what ErisX is trading today and what we have in front of us between now and close.

Yes. Thanks, Ed. Good morning, Rich. This is John. So the mention that you just gave of OTC products, Rich, I think that relates to a separate business. It’s a little confusing. It’s also called Eris but that business offers swap futures. They are traded on a competing exchange. We’re talking about here, ErisX, which is purely a crypto platform. The businesses are completely separate. And what ErisX offers, as Ed mentioned, is a – really a start-to-finish integrated platform for crypto trading, spot clearing and derivatives. And the platform is live today. So there are significant users on the platform depending on the day. Some days, it can be really one of the top three, four in the market. The partners that we’re bringing to the table here, and you see us mentioned in the press release, these partners is forming our digital advisory committee, many of those partners are live today on the platform. So we believe, as we kind of look at the evolution of the space, the partners we’re bringing to the table and the readiness of the platform, that our timing really is pretty much spot on here because the technology platform is built. The regulatory approvals are in place. One thing that we’re really looking forward to, as we move towards close and towards evolving the business is the expansion of the derivatives franchise. So again, the regulatory approvals for that platform were all in place. The technology is in place. But what we intend to do is work with the CFTC in gaining approval for margin futures and then other derivatives products, which we think are – can be game-changing for the industry. There really is nothing like it’s settling into the physical coin in an integrated spot clearing and futures and derivatives platform. So we look forward to that build. But really, that’s the only piece that is yet to come. The rest is live and poised for growth today.

Got. Very, very helpful and we will see at the Analyst Day, Deb.

Thanks, Rich.

Thank you. And the next question comes from Dan Fannon with Jefferies.

Thanks. Good morning. I wanted to ask about the European derivative opportunity. You talked about some of the product launches and more in the pipeline. Are you incenting volume with pricing or how – what is the pricing strategy? And what – how should we think about kind of growth or some of the milestones for success in the kind of coming months and quarters for that business?

Yes. Before I turn it over to Brian for the incentive program, I think, very, very important, the way we look at success starts with operations. And Chris, your observations in the days and since September 6, actually, we could not be happier with not only the execution on our platform, but clearing. So EuroCCP, keeping up with the demands to offer clearing and that’s flowing seamlessly through a couple of words there, Chris, and then Brian on incentives and the stipends for market makers.

Yes. Good morning. Thanks, Dan, for the question. So we’re very pleased with launching this on time on September 6 on the leadership of Dave Howson and Ed, and Cecil in Europe. Our exchange work just as designed, so to the clearing system, we bought EuroCCP about a year ago, and they have added Clarington to their portfolio as we built the derivatives exchange. So operationally, things are going just as we planned. We’ve communicated that our – we had modest expectations this year as we build the base. And Brian can talk about incentives we have in place for market making and liquidity.

Yes. Thanks, Chris. I think it’s a – to frame that is you have to look at the entire ecosystem of who is involved in what makes a product successful. Relative to the clearing members, obviously, we’re bringing the infrastructure soft-copy the exchange and clearing, which was mentioned. But if you think about the clearing members, the market makers, the customers that are going to be trading and putting the right incentives in place, so what we’ve done is we’ve obviously tried to remove those frictional elements to facilitate liquidity and facilitate volume. So there are stipends in place. There are – there is tiering in place with respect to those elements, to – again, to incent those participants. And we will see that continue to build as we add more and more clearing members, as we add more market makers to both the futures and the options side. So stay tuned for that progress. We will put out some targets at our Investor Day as far as where we think this business can go, call it, in a more of a 3 to 5-year time frame. But I would say right now, as the team has already mentioned, the key success here was the operational element of getting people on the platform, getting it traded. The products are successful from that standpoint. We’re achieving the on-screen transparency and liquidity of what we set out to do and then with the expectation of growing that over time.

Thank you.

Thank you. And the next question comes from Ken Worthington with JPMorgan.

Hi, thanks for taking my question. I wanted to follow-up on Rich’s comments on ErisX. So how big – you indicated that ErisX might be like a top platform periodically. How big have they been over the last 6 months? Like what sort of volume have they done? And what tokens are offered? And Cboe was, I’d say, first or at the very least, early in building crypto futures in December 2017. You guys had the right call. You were taking a chance. But it seems like CME, I don’t know, somehow were overdue. They were second, but they somehow one. So give us a little context of what happened there. And then maybe lastly, Cboe launched Bitcoin futures at a peak price and then seem to change its mind 15 months later at sort of a Bitcoin price trough. Is this flip-flopping going to make it harder for you to be successful in building a futures platform at Eris given that venue commitment is so important in sort of longer-dated products?

There is a lot there. You’re right. We were first to the market. As I said, we really anticipated a little quicker action on approval in the ETN and ETF space. We do appreciate incenting market makers to post quotes and to trade. But with no end in sight to the regulatory uncertainty, we decided to step back. So I wish we were smart enough to know that the price of Bitcoin was at its top. I probably would have made a trade there instead of pivoting in a way and waiting for regulation and design to be more obvious for us with the ecosystem as we find it today, primed and ready for an exchange like ErisX. And significantly, you didn’t mention the partners that we are entering this with super important. They do see the opportunity to offer their customers access and an experience that they are used to in other asset classes. This is very important. This is not a disintermediated market where we think we should be offering direct to customer customers are used to the platform that they trade on. Those partners that we list, we are not getting in between them and their experience. So if they like to pivot from their exposure in options, Cboe’s proprietary products and on the same platform, be able to trade crypto in a safe, regulated fairway, that’s the experience we’re looking for. So I don’t think we’re chasing any won’t here, Ken. It’s an interesting observation. But John, back to the coins that are on the platform today.

Yes, Ken. So there are five coins in the platform today and the platform is highly extensible. So currently under review additional coins and altcoins. And it’s worth noting that in terms of today’s bond platform is one of the newest out there, given the time frame since launch is relatively short. And we believe that it has all the underpinnings to recognize pretty substantial growth. It’s important to recognize that – this – our involvement in the space is – and the entire space itself is an evolution. And so Ed really kind of described nicely our initial foray into it. We call that product version 1.0, cash settled pretty simple kind of construct. We quickly learned and evolved from those learnings that the industry was demanding something different. They were demanding physical settlement. They were demanding a robust clearing platform that dealt with the underlying spot in conjunction with the derivatives product. And so when we decided to take our original B 1.0 product down, it was really with a mind towards doing something much more comprehensive to meet the demands of the digital asset space as market participants were telling us they wanted. So that process of kind of getting back into it with the right platform, it took some time. We were waiting for the perfect opportunity. I would say that we were attracted to ErisX really because of the comprehensive sort of from spot through clearing and data to derivatives. It conforms very nicely with our strategy across asset classes and geographies. But as we – kind of to the evolution theme, as we started down the path of evaluating a deal with Eris and we sampled the market to ensure that we were thinking about things in a way that really resonate with market participants, this is where another step the evolution came into play, where there was really this obvious demand for participation from market participants to be part of this initiative to be on the cap table to be aligned with value creation. And so we met that demand with the structure that you saw us announce last week. So really evolution and it’s a rapid evolution because the market – the digital asset space is evolving so rapidly. I don’t think we could have really nearly come close to meeting the demand that the market is telling us to have for a particular type of products and services with our prior product in any sense, and this platform does it for us.

Great. Thanks, you gave me a lot to consider there. Appreciate it.

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

Great. Thanks. Good morning, folks. Maybe just continuing on ErisX, just I mean, maybe just to sort of – I know you covered this much more on Investor Day but maybe just to sort of characterize it broadly, if I’m thinking of it right, is the longer term aim here – and I appreciate it’s probably still under development, but to become, say, like a competitor to Coinbase? And – or is it more to really stay in the sort of regulated exchange space with more listed types of contracts, either spot or futures? And I don’t know if you can talk about the investment required in the 2022 outlook, and again, maybe that’s Investor Day coming up. But should we consider this as – I think you said 2 to 3 years for EBITDA profitability? Should we consider this as sort of a drag on earnings initially before it really gets going? Maybe just comment around that?

Yes, I’ll kick off, Brian. It’s a great question. So yes, the ambition of the vision here is that we really do offer a regulatorily compliant product set from spot through clearing and derivatives. And that’s a little bit clear what that means when you talk about derivatives, the CFTC-regulated platform, both clearinghouse and futures market. On the spot side of things, the industry is really hungering for this part of the demand. We’re talking about, hungering for a framework. And so with these partners that we have on board with us, as part of our digital asset advisory committee, we are – we intend to go to the regulators, work together collaboratively with the regulators in an industry to help define what that means product by product, token by token, coin by coin. And we think that initiative and the clarity that, that will potentially bring can unleash the next wave of growth in this space. So that’s the opportunity. It’s very much regulated together with our market participants. And then the liquidity out in the market today is really – it’s – despite the some of the regulatory overhang here, the liquidity is impressive but the growth in the space is so rapid that soon enough, the platforms and the OTC trading that’s occurring out there is going to potentially exceed its capacity. We’re creating really a regulated liquidity catch basin for the entire industry, bringing the right partners to the table to be able to establish that kind of platform. Brian Schell, on the financial implications?

Yes, I will go. And I think, Chris, I think will maybe kind of end it all. But as far as the financial elements, the – as we look at that and – the platform is built. So, it’s not so much a CapEx as far as that investment goes. It’s going to be a little more around on OpEx. So yes, and we will give this further guidance as we get closer to close and where we are in the platform. We have already seen increasing activity and things of that. So, it would be premature to give us kind of a run rate versus historical versus where we are. And when we get close to the close date, particularly with – as we mentioned in our announcement that we are going to have our digital advisory committee, those various partners likely taking the various equity positions in that. So, those numbers could move a little bit. So, would only be premature in that overall number. But yes, it’s a slight drag on OpEx as we continue to build and as we continue to get scale. So again, more details on that as we get closer. And then Chris Isaacson, I think is going to wrap it up.

Yes. Thanks, Brian. So I mean, these are a lot of great questions about ErisX, and it just speaks to how excited we are about it and how much interest there is in the space, and we think the timing is right. As John has mentioned, this – in one step, we get spot, data, derivatives and clearing in a single step, and that’s so consistent with our strategy and what we have done in other asset classes. I would also say, as we looked at this asset, we see that there has a lot been a ton of innovation in the digital asset space, but there still remains a trust, transparency and data gap. And we think with ErisX, we can fill that gap with Tom Chippas and team and the platform they have built and expand on the vision that ErisX started with because of the partners we are bringing to the table. And regarding competition, we won’t just have a spot market. We are having a derivatives market that will allow for physically settled futures, margin futures, as John talked about. There is a big and broad vision here that we think we can fulfill with these partners, not dis-intermediating, but embracing them, so they can access all the customers, both traditional and nontraditional customers, that want to trade digital assets. We will be able to get to them through these intermediaries and this platform that’s going to embrace transparency and regulation as it gets formed and clarified. And I think that Tom and team have built this right. They have got the regulatory approvals that are needed. They have got the money transfer licenses in 50-plus states, CFTC approval for a futures exchange and a designated clearing organization. So, they have got a great chassis, great foundation to build upon.

That’s great color and I really appreciate all the detail.

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

Hi guys, good morning. Thanks for taking the question. I was hoping you could expand a little bit around your plans for Cboe Global Cloud in early November here. What’s the vision ultimately? How do you think it expands the addressable market and sort of consumption of your data across different participants? And maybe I can sneak in one more just since we are talking about recurring data streams. The guidance for the fourth quarter seems to imply a little bit of a decline versus third quarter run rate. So, maybe you can expand on that a little bit as well.

Great. I will start with the Cboe Global Cloud, which we are very excited about going live here actually next week, next Monday. So, this just furthers the theme that we want to provide better access and more ubiquitous access to our data and our products all around the world. And so we will start with U.S. equities, futures and indices data. And the leadership of Cathy Clay on this new data and access solutions group that we formed earlier this year. This is just the first. We have data sets soon to be across 22 countries in equities plus futures, options data, indices data. We will just keep adding on to the data sets that we will offer. We are starting this with AWS, a great strategic global partner for us. And we want to access not just existing customers, but a lot of customers who may not have a cross-connect in the data center today, but would have an Internet connection to a global cloud provider like AWS. So, we view this as new customer acquisition and also getting them access to data sets that they don’t currently have today. Maybe I will let Brian answer the second question.

Yes. Thanks. And then just to put a fine point on that, Alex, is that, that broader, I would say, kind of story and strategy and are really our investment thesis on this whole area has been the increasing need for data analytics, therefore increasing the access, the increasing geography to leverage the global presence and then increasing the methods, which is that last point you just hit on that Chris helped fill in the gap for. And then the overall opportunity as we continue to pursue more and more and then we can talk about that later. As far as the growth rate, we continue to see growth. What you are seeing is you are still going to see growth over – that’s projecting growth into the fourth quarter. Over the third quarter, the rate itself may not be as great. And what we saw also – this is a little bit just kind of more of a math issue is that the fourth quarter in last year started to pick up where we started to see some of this momentum. So, you just have a slightly higher comparison base that it’s just going to move the numbers down. So, the rate is going to appear to be a little bit lower, but the trajectory is still – I would say, is still the same. It’s just – it’s going to look a little different just because we are starting off a slightly hard base last year.

Thanks.

Thank you. And the next question comes from Owen Lau with Oppenheimer.

Good morning and thank you for taking my question. Could you please talk about if there is any synergy between the extended trading hours of SPX and VIX options as well as Chi-X? And I am just wondering whether you would list some of your proprietary products to the exchanges in Asia to increase your distribution channel. And how should investors think about potential incremental opportunity for Cboe when it’s becoming more like a global company? Thank you.

So, let me start, because we are so excited to extend access to VIX and SPX options to global trading hours. Everything is always subject to regulatory approval. We think we are in a pretty good spot here, but that’s the plan. That’s an answering a demand issue. So, if you think about it, you have got a position on now as the world becomes smaller and information flow is free. The ability to adjust open positions or to open positions round the clock is very, very important. We trade the country’s benchmark here and need to be accessible 24 hours a day for sure. So, that’s answering the demand. We think there is great interest. Our presence in the APAC region, because of our acquisition of Chi-X, really allows us boots on the ground to tell the story and the access kind of completes the demand that we see more globally, but Chris, over to you on the current update on integration and migration of Chi-X APAC?

Yes. Thanks, Ed. So, great question, Owen. So, we are super excited about our entry into Asia with Chi-X Asia. Integration planning is going very well. We plan to bring bids to the region with in Australia in the second half of 2022. And then the first half of 2022, we would migrate the Cboe technology in Australia. And thereafter, we would do Japan also. So, as Ed mentioned, now we have a bona fide presence in that region and we are able to sell a full suite of our products, including SPX and VIX options and our growing set of data. So, let’s – maybe Brian, if you want to chime in at the end here as well.

Yes. So, I just – again, continue to hit that that the boots on the ground is a key element there as we continue to extend that global network. I think it’s important to remember and what that enables us to do across all our network and the proprietary products and everything that we have and then leveraging those learnings and basically, what does it mean to be an exchange operator and the consistency and the reliability of what that brings to the various market participants because our client base largely is a very global client base. The other is that, to mention explicitly, is BIDS, as far as bringing that to market in those geographies, which we talked about, so that’s on the timeline in conjunction with Chris mentioned, the platform migration. And then I will wrap it back up is the broader – going to keep coming back is the broader data opportunity here. We have talked about how we are not only continuing to go after more share of wallet to meet that increasing demand for data analytics. But a big part of that theme also is this international expansion, the incremental analytics, solving for customer capital/margin needs. And then again, in the crypto, which has been brought up a couple of times, is that entire ecosystem of that data need, and it just continues to feed off itself and expand from a data perspective, again, leveraging off the, call it, the cash/equity side of that spot as well as the derivatives and then completing it with the data opportunity.

Got it. Thank you very much.

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

Hi, good morning. Maybe just a question on retail, obviously, you have had some success with many VIX and XSP products, but it seems like uptake has been a bit more muted relative to some other retail-oriented index product launches we have seen over the past couple of years. So, maybe you can expand upon the Nanos a bit and whether you think this very small contract size will kind of enable you to unlock more growth in that net retail segment. And then also from a fee standpoint, is it fair to think about the fee rate being much higher than SPX or even the XSP relative to the notional contract size?

So, great question. It’s what I was hoping you would ask because we have been talking to you about the exchanges not keeping up with retail demand in our product creation, and this has been in the works for a while. We think simple, accessible and design for all is the theme behind Nano, and it’s really a simple concept. You take the retail size version of the S&P 500, SPDRs, for example, which is what retail is most familiar with, it’s still very expensive. It’s a $460 underlying. What we have done is we have done a one-tenth version and made it super simple if you are looking at a derivative screen. If you see the market at the money, it’s a one week out, it’s $2.50 for a call, you are a retail investor, you are like, “Well, that seems pretty reasonable,” except I have to multiply that by 100. And what we do on Nanos is, no, it’s actually $2.50. And what you see on the screen is what you would be paying for that exposure to the S&P 500. So, that’s really simple. And the other confusion we have noticed in retail and talking to retailer is, gosh, there is 30 different expiration cycles on SPX, which is awesome for institutional and more sophisticated retail. There is 10,000 different strikes or series that, in itself, is confusing. With Nanos, we are still finalizing what we are going to offer day one, but think four different expiration cycles, seven days or less to expiry and maybe 40 or 50 different series, again, really simple. That’s the goal with Nano. It is answering the demand from new retail and we can’t wait to launch this.

So yes, a couple of follow-ups then on the pricing and how we think about it. Again, it will be a little bit of a repeat story as we kind of framed up, and we talked about the European derivatives and pricing there, is that you think that it will be obviously notionally adjusted, obviously, from the pricing standpoint. But again, we look at it from the perspective of all the participants engaged again to facilitate with all the partners to be able to incent that trading, making it easier, reducing friction, making it affordable. And the next question is, well, okay, if you really want to put that in perspective, your entire SPX volume was completely replaced by Nano, would you be better off. And the answer is yes, would be even better off because, as you know, there is usually a slight premium as you continue to break contracts down by size. So, as it gets smaller and smaller, they tend to be a little bit more premium versus, call it, the larger size. So, it’s – on a notional value adjusted basis, it’s slightly higher, but again, it’s – the pricing is still TBD, look for progress as we move forward into that launch.

Most important part, I forgot and sorry for that. Importantly, this is a company an education program. So, you think of Cboe when you think of derivatives, we believe in recurring trading at an educated investor. And we have talked now the last few quarters about retooling our Options Institute, specifically for this new retail investor, and bring them along so that derivatives that are designed to reduce risk in a really measured way is for all investors. And our Options Institute is keen on making sure that our new partners were looking at us and our proprietary products with education in mind.

Yes, this is John. Just following up on that, I said that we are a partner. This is we are not creating these products in a vacuum. So and as a theme here, that crosses over to crypto, too. You saw some names there that are really kind of the retail. Vanguard right now, we are creating these products and the educational programs around them in partnership with these really important retail partners of ours.

It’s great. Thanks for all the color.

Thank you. And the next question comes from Michael Cyprys from Morgan Stanley.

Hi. Good morning. Thanks for taking the question. Maybe just continuing with the retail theme here, just on Webull, it looks like your proprietary products began trading on the Webull platform this month. Just curious what the early feedback has been. Maybe if you could talk a little bit about some of the initiatives in place to drive a broader engagement on the Webull platform. And then just more broadly, how penetrated do you think you are at this point in terms of getting your products on retail platforms? And if you could just maybe talk a little bit about the initiatives there to get on more platforms.

So again, I think we referred to in the past and Chris, I would ask you to jump in, in a second. But when we look at retail that’s been around for a bit more established broker-dealers the ones I would be trading on over the last years. We have – they have access to our proprietary products. And from those platforms, there has been incredible growth into our proprietary product set. We have got months over the past couple of quarters of record penetration in our proprietary complex. So, that has been pretty terrific and we have been watching that, as I say, over quarters. New retail, the one that – probably making headlines the most, Webull, in that group had not offered access to our proprietary products or cash settled indices in general. So Webull, as a first mover here, we are not going to trade at all. And other new retail does not offer access to our products either, so all greenfield for us. And then we look – another measure that’s super important to us is the penetration and the use case for one lot trading, and one lot trading for us makes us think that with the very high notional value of contracts in the S&P 500, even super short dated, really is a restriction for some retail accounts who are not capitalized similarly to maybe more traditional retail, there is the birth of Nano. So, I think we have got a pretty good runway over the next months and watching for the uptake in not only direct access into the products you know, like SPX, but in Nano as we launched Nano. So, Chris, over to you.

Yes. Just as Ed mentioned, we think we are just at the starting line for a lot of the new retail. Traditional retailer has had access to our products and offered great access for quite a while. But the new retail is just starting and we are excited with – that Webull’s offered access to SPX and VIX, but we still have a lot of room to grow there. I would also mention that they are adding new assets to their platforms and there is an intersection, we think here, over the long-term with digital assets as well. Customers, retail customers are going to want to trade multi-asset not just a single asset on a platform. And so many of them are offering that and we want to provide the ultimate retail investor access to all of our products, but through these great intermediaries, these great partners. We are trying to solve the problem with the intermediary. So, we are just – we are going with the trend here and wanting to provide the access and the products that customers really want.

Great. Thank you.

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

That completes our call for this morning. We appreciate your time and continued interest in the company. If you have any further questions, feel free to reach out. Thank you.

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