Earnings Call: Q3 2018

Nov 2, 2018

Good morning, and welcome to the Cboe Global Markets 2018 Third Quarter Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I now would like to turn the conference over to Deborah Koopman. Please go ahead, ma'am. Thank you. Good morning and thank you for joining us for our Q3 earnings conference call. On the call today, Ed Tilly, our Chairman and CEO will discuss the quarter and provide an update on our strategic initiatives then Brian Schell, our Executive Vice President and CFO will provide an overview of our Q3 2018 financial results. Following their comments, we will open the call to Q and A. Also joining us for Q and A will be our President and COO, Chris Concannon and our Chief Strategy Officer, John Deters. In addition, I'd like to point out that this presentation will include the use of several slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward looking statements. We undertake no obligation to publicly update any forward looking statements whether as a result of new information, future events or otherwise after this conference call. Also note that references made to the planned migration of Cboe Options Exchange is subject to regulatory review. During the course of the call this morning, we will be referencing 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 a strong Q3 of 2018 at Cboe Global Markets, where we increased our adjusted earnings per share by 19% year over year to 1.06 dollars with net revenue of $271,000,000 Our solid financial results enable us to continue to invest in our long term growth while returning nearly $84,000,000 of capital to our shareholders through dividends and share repurchases. Trading in SPX options continue to grow at a double digit pace, increasing 12% for the quarter over Q3 2017. We saw trading volume in VIX options and futures slowly build month over month throughout the quarter, then surge in October as volatility increased and investors around the world turned to Cboe to manage their risk. Other volume highlights for the quarter included ongoing success in our FX market where average daily notional value for the 3rd quarter rose 19% from the prior year. We also saw continued growth our European equities business with increase in market share and volume. I'll look now at the volatility landscape throughout the quarter and beyond. As major stock market averages hit all time highs and we are now in the longest running bull market in history, we saw the VIX futures term structure return to its normal upward sloping shape along with steady volume increases in our VIX product complex. As we expected, the lingering effect of the February market shock that led to a flat VIX term structure in the Q2 was unsustainable, and we began to see growth in trading strategies used to capture volatility risk premium, volatility hedges and a return of large trades in VIX options. The return of higher volatility in October that led to record volumes in SPX options and VIX futures was fueled by an 11% decline in the S and P 500 comparable to the move we saw in February. Yet the VIX index and VIX futures suggest that the current volatility environment is substantially different than what we experienced earlier this year. We expect to see changes in the VIX Index when markets move and risk expectations change. We believe the difference this time is that the correction was not compressed over just a few days as it was in February. Rather, we saw an orderly repricing of risk that has occurred over a period of weeks, allowing traders to monetize hedges in both SBX and VIX options and reposition their exposures tactically. Regardless of market conditions, we remain focused on our commitments to product innovation, seamless trading solutions and leading edge technology. Product innovation remains the cornerstone of our growth strategy. I'm pleased to report on our entry into the growing corporate bond marketplace With the successful launch of futures on Cboe, iBox iShares High Yield Corporate Bond Index, IBHY, on September 10 and investment grade corporate bond index IBIG on October 8. Siebel Corporate Bond Index Futures were designed in collaboration with Market and BlackRock to enable market participants worldwide to hedge positions and gain exposure to key segments of the roughly $8,800,000,000,000 corporate bond market. Encouraged by the strong market quality we saw right out of the gate, which we see as a testament to the design and utility of the products and to our close collaboration with our liquidity providing community. Volume and open interest continue to build in line with our expectations for these early days of trading. We're enthusiastic about our prospects to steadily increase use of these products and look forward to further expanding our presence in this space with additional products going forward. Turning now to Cboe Europe, where we are 10 months into MiFID II and the solutions we put in place for this new regulatory regime continue to see strong adoption. Our periodic auctions book has established itself as a leading non continuous platform, while our relationship with BIDS Trading continues to blossom. Our block trading platform Cboe LIS powered by BIDS Technology logged another record quarter with €200,000,000 in daily volume. We continue to diligently prepare for a post Brexit world. We are in the process of establishing an EU venue in Amsterdam, which will allow us to effectively serve our customers in the absence of an agreed exit deal between the UK and the EU. We are currently working with the Dutch regulators in preparing to onboard customers to our new venue. We are also monitoring Brexit negotiations and we'll be prepared to respond as quickly as possible to any developments that could cause us to alter our strategy. Turning now to the final migration of Cboe Exchanges onto DAT's proprietary technology. We are now fully engaged in the multi phase migration of Cboe Options Exchange and are on track to reach our migration target date of October 7, 2019. We are pleased that we are now less than 1 year away from our ultimate goal of providing our customers with a single world class trading experience across all our equities, options and futures markets. Given the recent attention on equity market data fees, I'll take a moment to provide our views on an important matter before closing. First, I would like to reiterate that Cboe's growth strategy as it relates to market data revenue has been and remains focused on expanding our user base. We are confident in the value proposition offered by our suite of competitively priced market data products across asset classes. These offerings are tailored to meet the needs of our customers and we will continue to innovate in this arena to meet customer demand. With regard to the recent SEC opinion, which did not involve Cboe directly and the SEC order, which implicates some Cboe filings, we believe the SEC exceeded its authority in issuing the order and last week filed a motion requesting the SEC vacate its order. We stand by our products and our fees and are hopeful the SEC roundtables clarified some of the misunderstanding concerning exchange market data fees and that our motion requesting the SEC to vacate the order will prevail. While litigation could likely take years to resolve, we remain focused on building upon the product development and growth initiatives that drove our strong Q3 and our continued strong volume through October. In closing, I would like to thank our team for continuing to lay the groundwork for future growth with the successful rollout of Cboe Corporate Bond Futures by continuing to provide seamless trading solutions for our customers and by advancing our technology integration. I look forward to all that we can accomplish to power the potential of our customers and shareholders in the months and the quarters to come. With that, I will turn it over to Brian. Thanks, Ed, and good morning, everyone. Before I begin, I want to remind everyone that unless specifically noted, my comments relate to Q3 2018 as compared to Q3 2017 and are based on our non GAAP adjusted results. We reported another quarter of solid financial results. In summary, our net revenue was up nominally with net transaction fees down 3% and non transaction revenue up 5%. Adjusted operating expenses declined 3%. Adjusted operating income of $171,000,000 grew 2%. And finally, our adjusted diluted earnings per share grew 19% to 1.06 dollars It's worth noting that these results were achieved despite a decline in volume in our proprietary products, reflecting our more diversified mix of revenue. The press release we issued this morning and our slide deck provide the key operating metrics on volume and revenue capture for each of our segments as well as an overview of key revenue variances. I'd like to briefly highlight some of the key drivers influencing our performance in each segment. In our Options segment, 2% or $2,500,000 increase in net revenue was primarily driven by increases of $3,400,000 in net transaction fees from our multi listed options and $2,400,000 in access fees, offset somewhat by a $4,900,000 decline in net transaction fees from index options. Index options average daily volume decreased 14% for the quarter, reflecting a 47% decline in VIX options, offset somewhat by a 12% increase in SPX options. However, as Ed mentioned, index option volume improved month over month throughout the quarter in both VIX and SPX. The impact of decline in index options ADV was offset somewhat by a 10% increase in RPC, resulting from a shift in the mix with SPX options accounting for a higher percentage of volume as well as pricing changes implemented at the beginning of the year. The 6% ADV increase in our multi listed options business was primarily driven by higher industry volumes. Our market share was down from last year's Q3 as we continue to focus on optimizing our overall net transaction fees, reflected in an 11% increase in RPC for multi listed options for the quarter. Turning to futures. The decline in net revenue resulted from a 28% decrease in ADV and a 3% decline in RPC, offset somewhat by growth in non transaction revenue. RPC was lower year over year due to a shift in the volume mix with fewer block trades, which have a higher revenue capture. However, 3rd quarter RPC was up 4% compared to the 2nd quarter, reflecting the impact of fee changes implemented on August 1, as well as a more favorable overall mix. Mixed futures volume picked up in the second half of the third quarter and surged in October as volatility heightened, setting a monthly volume record for October. VIX futures had ADV of 420,000 contracts in October, up 79% versus the Q3 and 58% above October of last year. Turning to U. S. Equities. Net revenue grew 2%, primarily driven by increases in net transaction fees and exchange services and other fees. As we expected, SIP market data revenue fell 12% and proprietary market data increased 27%. As an industry low cost provider, we plan to continue our focus on efforts on growing our proprietary market data by attracting new customers and innovating to meet client needs. We continue to expect downward pressure on SIP market data revenue absent audit recoveries due to industry consolidation and historical trends. Net revenue for European equities increased 21% on a U. S. Dollar basis and up 22% on a local currency basis, reflecting growth in both net transaction and non transaction revenues. Net transaction fees were the key growth driver, reflecting favorable net capture and higher market share on relatively flat market volumes. The higher capture resulted from strong periodic auction volume and LIS volume, which have higher relative net captures as well as price changes implemented January 1 this year. Net revenue for Global FX grew 20% this quarter as we maintain our strong market share at 14.8%, up nearly 2 percentage points year over year. The growth reflects favorable market volumes, stronger market share and a disciplined pricing schedule. Turning to expenses. Total adjusted operating expenses were $99,000,000 for the quarter, down 3% compared with last year's Q3. The key expense variances were 1, lower depreciation and amortization, primarily a result of the accelerated pace recognized in 2017 and the retirement of certain assets in 2018 and 2, lower travel and promotional expenses due to a target reduction in advertising related expenses. We are reconfirming our full year expense guidance to be in the range of $420,000,000 to $428,000,000 While we expect to be at the lower end of that range, it will depend on 4th quarter volume levels as about a third of our compensation and benefits expense is variable and will self adjust based on our financial performance and other metrics. For the Q3, we realized $5,000,000 in pre tax expense synergies, primarily from compensation and benefits, bringing year to date expense synergies to $12,200,000 Turning to income taxes. Our effective tax rate on adjusted earnings for the quarter was approximately 26%, slightly below the low end of our annual guidance range of 26.5% to 28.5%. The effective tax rate on adjusted earnings in the Q3 of 2017 was about 36%. The decline primarily reflects the favorable impact of corporate tax reform. We are reaffirming that we expect the annual effective tax rate on adjusted earnings to be within our guidance range of 26.5% to 28.5% for the year, with the tax rate for the Q4 expected to be at the higher end of that range. In addition, we are reaffirming our guidance for CapEx of $35,000,000 to $40,000,000 and for depreciation and amortization of 43 dollars to $48,000,000 Moving to capital allocation. Our strong financial results, cash flow generation and financial position enabled us to continue to invest in the growth of our business, while also returning capital to the shareholders. We returned nearly $84,000,000 to shareholders this quarter through nearly $49,000,000 of share repurchases of our common stock and $35,000,000 of dividends. Year to date through September, we have repurchased approximately 1,300,000 shares of Cboe common stock under our share repurchase program for nearly $141,000,000 representing 1% of shares outstanding. We ended the quarter with adjusted cash and investments of $138,000,000 and our leverage ratio was unchanged from last quarter at 1.6 times. In summary, Cboe delivered solid quarterly results and continued to demonstrate our focus on growing proprietary index products, expanding into a new asset class by launching the 1st broad based U. S. Corporate bond index futures, growth in a diverse set of revenue streams, disciplined expense management, leveraging the scale of our business producing higher profit margins, an integration plan that continues to be on track and ongoing focus on capital allocation by continuing to return capital to shareholders through quarterly dividends and share repurchases. We look forward to sharing our 4th quarter results and our outlook for 2019 on our Q4 earnings call in February. With that, I will turn the call to Debbie over to Debbie for instructions on the Q and A portion of the call. Thanks, Brian. At this point, we'd be happy to take questions. We ask that you please limit your questions to 1 per person to allow time to get to everyone. Feel free to get back in the queue and if time permits, we'll take a second question. Operator? Yes. Thank you. And the first question comes from Rich Repetto with Sandler O'Neill. Yes. Good morning, Ed. Good morning, Chris and Brian and Red Sox. Ed, did you mention did you mention the Red Sox? Rich, I was about to. Outstanding, what a season, man. Okay. Can we take the next question, please? I want to start off positively. And I guess the first question, I know you're going to get a lot on market data questions, but I guess I'll start off on volume and the sustainability of volume. Is that what you're pointing to on Slide 67 that the increased volume that the VIX spike was much different than February? And can you point us to any other anecdotal or factors that would say that, hey, that the stuff we saw in October might be a little more sustainable than the drop off we've seen after February? Difference is you look at that spike and in the prepared remarks really happened in a short period of time and did not give the market time to adjust in an orderly way as risk was being repriced. So yes, those two charts, one just the VIX spike and the difference and then the term structure difference as a result. What's different this time aside from a 30 or 40 day repricing of risk going forward is the shift in the term structure in the back months. That indicates to us the market is saying that the events that caused the correction on October that 11% correction or so we're not through that information. We haven't digested all that information yet. So Fed language around rates going forward haven't fully absorbed what that means. Elections and the outcome and the uncertainty around a shift perhaps in partisan power. Trade talks and the President's continuing making comments in the marketplace around trade. We don't know. The market is saying, I haven't seen past these events. I'm shifting the cost of risk over time. That is a more sustainable and orderly adjustment to the market. What we then look for and what we hear from our customers are a shift from, hey, I'm going to capture roll down premium as a normal market environment to I need strategies and we'll employ strategies at an elevated VIX level between 17/22. What am I going to do differently this time than I would have done in a spike scenario in February? So we think that this is a much more healthy move in the market, more sustainable. And in the months to come, as certainly returns to the marketplace, perhaps we'll see another shift in the VIX term structure. But for now, I think that this uncertainty in elevated follows here to stay. Let me go one more step into the weeds. And if we look at single stock volatility, single stock volatility is at really a high we haven't seen since August of 2015. What does that imply? Correlations are low and individual stocks, the worry about EPS has raised vol. So the entire marketplace is in a higher volatility environment than it has been in the past. Hope that helps, Rich. Yes. Very helpful, Ed. Thank you. Thank you. And the next question comes from Dan Fannon with Jefferies. Thanks. Good morning. I guess to start with market data, you mentioned the SIP revenue being down in the quarter and kind of continue to be down going forward. I mean, just thinking about volumes in the Q4 and shouldn't that be somewhat of an offset to that trend? And then I guess just looking at the rest of your market data, could you give us a sense of kind of how you're thinking about growth in those businesses beyond some of the headwinds, I guess, as we think about the traditional kind of equity side? Sure. It's Chris. I'll take that. So with regard to the SIP, I think we've always mentioned that the SIP is relatively flat to down over the last 10 years actually. So we don't look at the SIP as a growth engine of market data revenue. Obviously, fluctuations of market share does determine our share of the SIP based on the SIP formula. So as market share moves, the sharing of the revenue in the SIP will move with it. Now in higher vol, we tend to see a higher market share for the exchanges versus the over the counter market and that can lead to higher revenue as a result of the formula and sharing of the SIP revenue. Looking at our market data across the entire complex and I'm including our FX strategy, our European strategy, our future strategy, our proprietary product strategy and equities, we are looking at a very competitively priced market data offering with multiple types of offering from top of book to depth of book products, all of which are in large demand by our clients and priced, we think, highly competitive in the market. So it's really a growth strategy by adding users, not a pricing strategy unlike some other competitors that we see in this space. So we continue to use the competitively priced offering that we have both in equities and options and we see hopefully adding users as a result of those competitive prices. Great. Thank you. Thank you. And the next question comes from Brian Bedell with Deutsche Bank. Great. Thanks. Good morning folks. Maybe just to go back on to the October trends on the volatility, maybe just a different way of looking at it. Can you talk about the customer usage dynamics as opposed to sort of the market conditions, but more of to what extent you've seen a shift in the types of customers and types of strategies that are being used? And are you seeing more people come back to it that were previously dormant during the summer? And then, it looks like we're seeing a mix shift toward SP X options from VIX options in October compared with what we saw in the Q1. So maybe sort of weaving that in as well? Sure. So really, I think you laid it out right. If you look at the different products and what are the users doing, I think in VIX options, we saw a great monetization of long haul positions that have been put on in the months prior to October. Again, hedging using the increase in large VIX trades that we saw basically after the last earnings call, what a great time to monetize those positions. So we saw a lot of that in the VIX option complex. We also see just the outright buying of VIX puts. This is a mean reverting contract and a term structure that is in backwardation, which is really not a normal state. So we see a lot of the outright buying inputs and saying, look, I am going to take a position and just selling this asset that seems to be elevated well beyond its mean. So that's a difference that we had not seen over the last quarter. SPX options to your point are this is the easiest market to monetize a hedge in SPX options. Not surprisingly, you've seen the open and close in the range and even the overnight range that makes it really, really an efficient a market that's easy to monetize hedging positions in SPX. And then in the VIX futures, again, if you look at VIX options, just look at the asset class vol, when we're in this backwardation, selling that front month is a strategy. VIX is beyond VIX futures are above its mean, taking the position we see our customers doing just that. And then also rolling out of that front month into back month when back month is cheaper. So there's a lot of strategies that we have not seen over the last quarter that our customers are employing now. As for the mix shift, SVX has continued to grow all year and VIX options have really picked up what we've done, we've got about 800,000 but we but we will see that rotation in and out of SPX and VIX as market conditions and expectations of risk change. So even if the curve inverts a little bit here, like it has done in late October just a little bit, you don't see that as impacting a flat curve or inverted curve sort of as a headwind on the futures? Haven't got there yet. Still, you're right, these last 3 or 4 days of an upward move in the market has lessened the backwardation. We'll go to flat. Flat, if you recall, from the last earnings call, is the most uncertain market from a trader's perspective, really no long lasting opinion on Vault. The difference this time again back to Rich's question is the shift in the backlog. We think that the market is saying the uncertainty is sustainable. So again, strategies around 17 to 22 will become really interesting and we think we'll hear a lot about that in our risk management conferences in the next few months as opposed to roll down premium strategies from front month 2013midmonth up in 2015 2016. In terms of VIX, this is John. In terms of VIX options, a lot of the strategies Ed was just describing are incremental in this market environment. So the strategies that we've been seeing, people employing long fixed calls, it's still alive. Out of the money fixed calls are still reasonably priced because of the orderly move we've seen. So that's still an impactful strategy people are using for hedging their exposures to equity baskets. Yes. And this is Chris. I'll just add that not only did we see a record VIX futures month in October, but we are also seeing growth in the ETP complex during the month of October. So we are growing AUM in that complex as well as seeing added futures volume in the complex. And really comparing October and the higher vol that we have seen versus February, February was like a bird strike. It was a real spike in the VIX complex that is much harder for traders to handle versus a much more orderly increase in VIX throughout the month of October. Okay. That's great color. Thanks. I'll get back in queue for a different question. Thanks. Thank you. And the next question comes from Michael Carrier with Bank of America. All right. Thanks a lot. Maybe just a question on the European equities. So you guys have seen good strength both on the revenue side, the market share. Just wanted to get your sense, when you look at the outlook, like is it do you view it as sustainable? Is some of the competition coming back in or some of the changes with MiFID you're just making it like the haves and have nots and you think that you can continue to opportunistically gain in this environment? It's a great question. We're very excited about our opportunity in Europe. It took us several years and hundreds of thousands of man hours to build out our MiFID solutions and our partnership with BIDS was built out, took at least a year to build that strategy out. So it would take substantial investment by the competition in Europe to build out all of the various offerings that we have that provide literally MiFID solutions for our members. And that's part of the growth that we're seeing in Europe. But also the continued growth is in our lit exchange book. We are seeing higher market share at higher capture rates as well. So in terms of MiFID's overall goal of moving flow from the over the counter market to the exchange market, that has been successful and we're seeing and feeling the benefits of that. I don't see many of our competitor, I'll call it our exchange competitors with offerings, any new offerings that will come into the market, many of them have offerings that compete with our products, while we continue to grow market share against those offerings. So our large and scale offering, our periodic auction, there are alternatives in the market and we continue to grow against those alternatives. So we're excited about Europe. We do have, as Ed mentioned on his prepared remarks, we do have a Brexit strategy laying in wait. We can execute when we get clarity around Brexit. But we MiFID strategy to go forward. Okay. And then just we'll be prepared with our MiFID strategy to go forward. All right. Thanks a lot. Thank you. And the next question comes from Ben Herbert with Citigroup. Hi. Good morning. Thanks for taking the question. Just wanted to touch on non U. S. Customer growth and particularly volatility products, just if you're seeing any pickup in interest there or the pace of the education cycle? I think the first look we get at it's really in the European trading hours and the direction from where that flow originates difficult. Some of our European customers through come through New York Trading Desk. But I think what is most useful for us, most telling for us when there's market uncertainty, perhaps it's in the European hours or even the Asian trading hours, our extended trading hours, VIX futures really spike. We've had some amazing days in October in excess of 4,050,000 contracts before the U. S. Market opens. Difficult to track origination other than the conversations we have with our customers because as I say, some of the European desks, some of the Asian desks come through a New York route. But key to us is the utility of this product being open near 24 hours a day. And I think from our perspective that just shows the reach, the liquidity and the usefulness of being open near 24 hours a day. What I will tell you is we'll get some firsthand feedback. We're having our 1st risk management conference in Tel Aviv next week. So hearing directly from those that are making their trading decisions primarily outside of the U. S. Trading day will be very telling. We have a very, very big turnout in excess of 130 people signed up for our first ever risk management conference in Tel Aviv. Chris, anything to add? Yes. I would just add, when we look at Europe and our growth opportunity, we're fairly excited about our current user base in the VIX complex. We just had a risk management conference in September in Dublin where we got to have intimate conversations with those users and some of our new users in the complex and they were unfazed by the February events and really looking at the end of a put on hedges on their portfolio and lock in some put on hedges on their portfolio and lock in some of the long years of return. So very encouraged by our growth opportunity throughout Europe and some of the current users in Europe. Thank you. Thank you. And the next question comes from Ken Worthington with JPMorgan. Hi, good morning. Thank you for taking my question. I wanted to kind of dig into pricing power, a topic we talked about in the past. You called out again some areas where you've changed prices. Behind the scenes, we've seen a bunch of others as well. Maybe talk about how you're approaching the leveraging of pricing power? And what I'm really curious to hear is how much revenue growth we might expect in a typical year, all else being equal, from price increases? Hey, Ken, it's Chris. I'll take that question. Appreciate the question. Little bit sensitive about the word pricing power. We certainly don't exercise pricing power in the market data world. We offer very competitively priced product. I think you're referring to some of the pricing moves that we've made this year across our complex. We have made some pricing moves in equities where we certainly don't have any pricing power and our market share declines that you've seen in 2018 are a result of us not moving price, not moving on capture, but we have had the benefit of higher volumes and higher revenue across our equities complex. If you look at our recent pricing in VIX futures and our recently announced pricing in VIX futures for customers, the customer range, we did make some adjustments in our VIX futures complex. Those adjustments have been optimal for us in terms of repricing a number of our clients that were on an old pricing schedule and putting in tiers so people have incentives and we have seen the benefit of those incentives certainly in October. And the recent pricing for customers was really trying to match our customer fee schedule to our member fee schedule, introducing a frequent trader. So some of our larger clients, our larger customers will have incentives, volume incentives built in similar to our member fees. And then I think specifically to the second part of the question, we always anticipate that the greatest increase in revenue will come from new customers and the expansion and adoption of our products going forward. Rarely and I can't even historically I look back that we don't count on our growth coming from a pricing power certainly, but even from the movement upward in price, it really is further adoption. And if you look at our VIX option strategy where we compete aggressively with the over the counter market, the swap market in particular, we have repriced to capture large box. We did that in 2017. We continue to look at that opportunity. We've had the benefit of that pricing here in both October and now November. So we are using price as a leverage to increase volume and not a leverage to increase our capture. Okay, great. Thank you very much. Thank you. And the next question comes from Chris Harris with Wells Fargo. Thanks. Hi, guys. Can you give us an update on the improvements you've made to the VIX settlement process? And in particular, wondering whether there's still more work to be done there? And then related to that, have you noticed any volume leakage from certain customers as a result of the new settlement process? So great question, because we put a lot of work into this area, really focused on increasing the liquidity of the auction. When we looked at the liquidity in the auction earlier in the year, we wanted to increase not only the participation of our members, but also the levels of liquidity that they were providing into the auction. Most of our work was around transparency in the auction, where the imbalance information was being disseminated, how it was being disseminated and then putting in place certain rules that we worked closely with the SEC on to ensure that clarity around our market makers' participation in providing liquidity into the auction, providing offsets to published imbalances was a key. And so not only did we work on the transparency of the imbalance, but also rules that assisted our market makers to come in and offset those imbalances. We've seen, what I'll call healthy settlement auctions over the last several months as a result of some of these moves. And as a result, really the most material change was moving SP X to hybrid and providing for an electronic market maker offering where we saw more market makers moving in with streaming prices during the auction. So that was a huge assist to the liquidity that we needed in the auction. And with respect to what's coming, the largest change to our auction will come with the migration to the C1 platform where we will be using that technology to run the auction. We'll be publishing the specs and discussing those recent changes in the coming future. But we think the enhancements that we've made to our liquidity and our liquidity providers has helped a great deal in the most recent auctions. Thank you. Thank you. And the next question comes from Alex Blostein with Goldman Sachs. Hey, good morning guys. I was hoping to zone in a little bit on what's going on in the non transactional side of the options business. I think legacy Bats talked about opportunity to grow market data in that part of the market, that part of the business and it's been kind of flattish over the last couple of quarters, I guess. So what's going on there? And do you guys still expect to see some growth there? And on the flip side, the access season multi listed option has actually been growing pretty nicely. So maybe kind of dissect the trends in both buckets and what should we expect going forward? Alex, can you repeat the second part of the question? Sorry, yes. So the access fees in the multi listed options was kind of the opposite of what we're seeing in market data. That's actually been growing. So what's kind of been driving the growth there? Great. It's a great question. So as you know, it's a healthy balance of growing share and charging for people to show up to put share on your platform. So we've had, I think, a very healthy balance of as as far as they compare to some of the other platforms in the space. And you have to appreciate that we are doing migrations at the same time. So when it comes to charging for non transaction revenue, we are very sensitive when we are trying to have our clients migrate platforms. So we've been hesitant to be very aggressive in the non transaction space and options while we go through these very large migrations. With regard to the transaction fees, we made a decision to hold price and not be as competitive on price. And we've seen some market share decline in the multi list option space, but that's obviously offset by higher volumes and higher capture. So we were happy with our strategy in our multi list options business as we did reap the benefits of the higher volumes that we're seeing in 2018 as compared to 2017. But again, you have to appreciate we're in a migration strategy here in 2018 going into 2019, and we've been very cautious on how we are charging for not only market data, but also access to those platforms. Alex, one more point, this is John. I think when you look at options, market data, really Opera is the big driver there and thus Chris' perspective on market share. But let's say Opera has been a data stream that hasn't been growing in value as robustly as the SIP data on the equity side. It's another reason I think why we're very encouraged by the trends thus far 2018 year to date in terms of multi list and overall options volumes. When you have OCC clearing over 550,000,000 options contracts in a month in October, the whole market is appreciating the value of options a lot more. And while it's a lagging metric, I think we'll see options market data becoming more valuable to the market. That's helpful. Thanks. Thank you. And the next question comes from Kyle Voigt with KBW. Hi, good morning. Maybe just another question on VIX. When we're thinking about the ability for CBOE to drive adoption of volatility trading from here, I know you have your big risk management conferences, but outside of that, can you talk about selling more directly into end clients instead of more relying on your bank partners to drive client segment of the VIXESAR base do you see as having the longest runway for growth from here? I think it's a great question. And before I turn it over to Chris, just on the business development plan going forward, I think if you look at the easiest conversion for us are those that already employ a basic overwrite strategy. When I say those, these are not small individual customers, but rather they're funds that already are engaged in the SBX complex. That is really the lowest hanging fruit for conversion into and recognizing the benefits of having a multi approach and strategy to hedging, one that does involve direct ball complex and not just the SP X. We've talked about that rotation, but that's the easiest. So we're really talking about advisors and really the insurance industry that has S and P 500 exposure embedded in many of the contracts. Those are the easiest to convert because they get the power and the utility of derivatives to begin with. I mean, it's we are dependent on our relationship with our bank partners. They are a wonderful sales force in the VIX complex, in the VAR complex. So we will continue to rely on our bank partners in the distribution of the product. But we have taken a direct distribution. We do think it's critical to our long term strategy to have direct distribution. So whether it's here in the U. S. Talking to pension funds, insurance companies or even the consultants that are employed by those pension funds, we are now actively engaged in conversations with those users. When you go and look at Europe, we are having direct dialogue with the end users throughout Europe. It's a wonderful opportunity for us because we are talking to those same institutional clients with our large and scale VIX complex and our SPX complex in Europe. And so it is a direct sale. We do that sale with our bank partners. They ultimately are bringing the products to our exchanges, but we are now engaged in the direct sale of our products to the end user. Thank you. Thank you. And the next question comes from Vincent Hung with Autonomous. Hey. So I don't want to bring back the angry Chris from last week, but any sense for what issues you think resonated with the commission at the roundtable based on the way you saw things play out? Because one of the issues is that these debates aren't really new to the commission. They probably heard this all behind closed doors over the years. So it's hard to get a sense for what is incremental to this debate? Chris, I think maybe you can start with the willy nilly approach that SIFMA has taken in their attack on the industry. Great. Thanks. Great question. I was expecting a market data question, so I might be prepared. So yes, as you point out, this is a long running debate. This debate goes back over a decade and it has been obviously engaged at the commission level and with our clients. It likely won't be resolved in the near term because of the litigation that's involved. NASDAQ and NYC litigation is underway already. So it could take several years to resolve the specific market data debate. So we have a long road ahead. As you think about it, SIFMA was hired by large investment banks, by HFTs, by dark pool operators, internalizers, people that compete directly with us to challenge all of our filings or a handful of our filings. Those challenges were quite random. While half of the filings were market data related, the other half were largely related to access services and products that we offer connectivity on. Some of those filings included filings that actually lowered fees and some of them include filings that we had no fees associated with it. In fact, some of our filings were renaming products specifically. So as we look at it, we sit in a fairly unique industry. I've spent most of my career in the exchange space. It's quite laughable when I hear someone say it's not a competitive space. It's a space where you have your own competitors, can see what you're doing through SEC filings. You have your regulator that can influence what your strategic direction is. You have your largest clients competing against you by offering dark pool and internalization strategies. And you have your largest clients every 5 to 8 years introducing a new consortium, an exchange or a new consortium to directly compete against you. So when you think about brewed ECN back in 2002 and BATS itself was a consortium, Direct Edge was a consortium, Philadelphia Stock Exchange was a consortium, NSX was a consortium. So you can see there's random new entry into the space and the Justice Department ironically finds the level of competition to be fierce and approves the consolidation of exchanges on a regular basis. So if you would really have to be an with your head in the sand to conclude that there was no competition in this space. As I think about the roundtable, the roundtable was actually quite helpful because it was the first time really in the debate where the exchanges were able to provide unique information and data that really laid out the competitive offerings of these products and really the optionality of many of the products that the clients have. So I thought the roundtables were helpful for the exchanges given the unique information that was provided. Ironically, much of the data that we are able to provide will assist NASDAQ and New York in laying out the groundwork for their litigation that there is in fact competitive pressures on price and on the offering. And now if you take a step back and look at the economic rents involved here, you have some of the largest investment banks having record revenues. You have some of the largest brokers enjoying record earnings and margins as a result of consolidation. And you have with higher volatility, HFT is enjoying unique margin growth as a result. So when you look at our fees, really what the analogy that comes to mind is a bunch of golfers sitting around drinking gin and tonics, complaining about the tips they have to pay the caddies at the Country Club. So it's a unique debate that we're having given the economic rents that our clients are enjoying in this quarter. So when I take a step back and look at this, this is a debate will go on and on and my answer has gone on longer than necessary. Ed is starting to look like Rip Van Winkle at this point falling asleep. So I'll end it right there. And just shy of angry Chris, which was really good. Thanks. Thank you. And the next question comes from Patrick O'Shaughnessy with Raymond James. Hey, maybe a follow-up to that last one. When you think about the market data debate, is there a risk that you could win the battle but lose the war in terms of alienating the broker dealer community that you depend on for distribution and order flow and not just in U. S. Equities, but all of your other contracts and you were just talking about how you they are a partner of you kind of distributing and educating people on So is there that risk that you might come up against? It's a great question, one that we are careful about. When you think about the pricing that we have in our offering, we are the one of the most competitively priced exchanges in the space. Our prices are lower than the competition. Many of the filings that have been challenged were where we had no price and we were offering a small price increase for the first time. So when I think about our offering, when I think about the size of our markets, the efficiencies that we provide, I am confident that our clients aren't terribly offended by our taking a position that we have some rights to charge for these offerings. Recently, we were able to get a product offering through the SEC's process, a purge port that is a wonderful offering for our options clients and our options market makers. It is priced and it's priced competitively, but it allows for risk management by an options market maker, critical risk management for an options market maker. So many of our offerings were offerings that were provided by client demand, priced very reasonable. I think we were caught up in what was really a SIFMA challenge of all exchange filings across the board somewhat indiscriminately. So when I think about the battle, it's a battle of exchanges that are trying to defend their ability to price product. But it is, as you point out, a battle with some of our largest clients. But we are very confident in the competitively priced products that we offer on the transaction side and on the non transaction side. That's helpful. Thank you. Thank you. And the next question is a follow-up from Brian Bedell with Deutsche Bank. Great. Thanks very much. My follow-up is for happy Chris actually. Just on the market data, maybe if we just look past the litigation, let's say the litigation gets resolved favorably for the exchange industry, making that assumption, And everyone sort of comes back to the table and looks at the long term picture of the SIP versus proprietary data. I mean, what's your view of how the SIP could potentially be restructured? I guess, if you were to think about a way that could be restructured, how would you envision that happening? Or just more realistically, the interplay between SiP and proprietary market data for the industry in the long term? Sure. It's a great question and one that was obviously the roundtable spent a lot of time talking about. As I think about the SIP, you have a congressionally required offering through statute that the SEC has to wrestle with and will wrestle with for years to come. It would require major SEC rule writing to change the structure of the SIP. That's one option. The second option is the industry and the exchanges come to the table and achieve some compromise on a new structure, whether it's new offerings within the SIP or a structure of the governance of the SIP. That would require all the exchanges to file NMS filings under the plan for the SIP. So each exchange would have to agree to that, those new structures and make filings. I think there is an opportunity to do something on the SIP. We had for a long time been expressing our willingness to be very flexible with regard to the SIP governance. Certainly, if you listen to the roundtable, there was, I think, an openness among the exchanges to think about adding additional information to the SIP or thinking of new ways to structure the SIP. So I do think I'm encouraged by exchanges coming to the table and making offerings of compromise in light of what I'd call a fairly public attack on exchanges that is coming from D. C. And so I do think there's an opportunity for compromise on SIP structure down the road. Unfortunately, the litigation puts us all in a position where it's difficult to negotiate when you're involved in litigation, which could take many years. Yes. So that's interesting. So it'll be really pushed down the road quite a bit until the litigation gets resolved effectively? I don't, not necessarily, but if you're involved in litigation, you're going to be very cautious where you compromise with the same parties that are filing briefs against you in litigation. So I do think it's a difficult time. And if there are continued public assaults on the exchanges, it's hard for us to come to the table feeling in the mood of compromise. And so I think we're in a difficult time. I think we're passing that difficult time when it comes to the public debate. And hopefully, we will go behind closed doors and have an open dialogue around SIP structure and things that we can do creatively on the SIP. Again, I don't think any of the exchanges, except maybe IEX, who is new to the SIP, looks at that revenue and thinks it's a long term growth driver for our businesses and the SIPs are moving at faster speeds than ever before. So when it comes to this notion that there is a 2 tiered market, there is really not. When you are talking about SIPs moving at 30 mics, again, that's faster than IEX moves. So the SIPs are faster than IEX. So I think when we think about the 2 tier market, it doesn't exist at that level. But again, I think the Exchange has expressed a willingness to compromise. I am encouraged by that. I just hope that the public assault gets turned down a notch. Yes. Okay. And just quickly on the Spikes contract by Miami Options Exchange. I know, Chris, you tried to launch a volatility look alike when you were at Bath. Just a quick comment on whether you think that has any potential to get going and challenge the VIX or not so much? So as I said, let me start with that. And SPIKES actually is the contract that you're referring to that BATS was going to bring to the marketplace. But really as the recognized leader in listed volatility trading with our futures contract, it's a bit puzzling this late in the game after an approval what exactly the VIX I'm sorry, the SPYX contract would be using for hedge. There is not a futures contract. So that's not the first time in the industry that there is a VIX lookalike introduced to the marketplace. We've got very successful ETP products. We commented on that earlier. Hedging in those ETP products really fuels our VIX futures complex today. So if there's any success in spikes, absent a futures contract, I would expect hedging to incur in our VIX futures complex similar to ETPs. I think they're going to be more VIX look alikes. That doesn't raise any concerns for us. We benefited by the adoption in any in a variety of ways to volatility exposure. We're all for our customers recognizing the utility of mixing in volatility into their hedging strategies, I think will benefit as a result. Great. Thanks very much. Thank you. And the next question also is a follow-up from Richard Patter with Sandler O'Neill. Yes. I know the call has gone on quite long and at the risk of letting angry Chris out of his cave again, I got a question. Does a certain SEC commissioner has made comments about exchanges and the number of licenses and medallions you hold. Could you just briefly go through the reasons why you have as many medallions as you do? Sure. There's a really good analyst that wrote a piece on this, Chris. I think I read it. So, Rich, it's a great question. Look, if you think about the way exchanges are regulated in the U. S, it's a fairly unique business model unlike most businesses. We have a standard pricing and a standard model that we have to deliver in a single exchange license. The SEC has really never allowed unique pricing by client and really never allowed unique structures within the same exchange model. So we are building exchanges for certain client demands, certain market models and certain pricing models by exchange. And that's really part of the development of exchanges. Obviously, the SEC chose to introduce RanganMS on its top of book protection, and that has certainly influenced the value of introducing another exchange on top of a single exchange model. So as exchanges consolidate, they don't migrate onto 1 platform in one exchange because each exchange has a unique business mix, each exchange has a unique client demand embedded in it and each exchange has a unique pricing model as you can see across all the different exchanges that we operate. Now in light of the transaction fee pilot, we have talked about introducing a 5th exchange. We obviously have 6 medallions that we can use. Again, it would be we view the transaction fee pilot as a price control pilot that would once again restrict pricing of exchanges requiring us to introduce an additional exchange book to have additional flexibility on how we price. And then last, I'll mention a commentary around exchanges. I've been in the space for a while and going back probably in 2,005, I don't this might come as a surprise to you, Rich, but sometimes I don't have a great filter on what comes out of my mouth. That doesn't surprise me. I'm kidding. In fierce competition, someone at the SEC called and said that it's important to compete, but it's important also to remember investor confidence and the integrity of the national exchanges is the most important piece of investor confidence. So when I think about the public debate and the dialogue, we have to take into account investor confidence in our national markets because it's just not appropriate to attack so aggressively that we damage that investor confidence. Understood. Thank you. Thank you. And as there are no more questions, I would like to return the floor to management for any closing comments. Thank you. That completes the call this morning. We appreciate your time and continued interest in our company. Thank you. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.