Good morning, everyone, and welcome to the 24th Annual Credit Suisse Financial Services Forum. This is Gautam Sawant, Credit Suisse's equity analyst covering U.S. exchanges, and it is my pleasure to introduce Ed Tilly, Cboe CEO and Chairman, and Brian Schell, Cboe CFO. Cboe is a global securities and derivatives exchange operator and is expanding its services into new geographies and asset classes. Ed and Brian, thanks for joining us today.
Great to be here. Thank you.
Let's begin with your macroeconomic outlooks. Can you begin by highlighting any changes in client behavior developing across your global platform?
I think what we've saw the engagement across the entire globe was the change over the last couple years in higher volatility. Every asset class, we saw engagement, certainly in the U.S., in Europe, FX led by rates, the Japan market and Australia as well. There's just been more engagement. I think of late, the trend has certainly been into derivatives in the U.S. In particular, looking at the macro environment, the engagement of really, really short-dated options. We have focused over the last year or so on the growth of short-dated options.
Since May of last year, now that we have the S&P 500 expiring every day, the engagement really is in outcome-based investing based on the news of the day or the move of the day. That, I think, is the greatest trend.
Macroeconomic uncertainty could be an ongoing contributor to trading activity in 2023. This year, the VIX has declined to a 20 level from a 25 level in 2022. Can you speak to how Cboe can achieve its 7%-9% total organic growth outlook for 2023 and 5%-7% medium-term organic growth outlook if markets enter a sustained period of lower volatility?
Volatility, we've seen over the years, ebb and flow. We had incredible growth in sustained low volatility, so low teens pre-pandemic, was one of incredible growth in Cboe's proprietary products. You know, having a derivatives complex, there is a strategy of really for any market environment or every perceived market uncertainty. The ebb and flow of volatility is normal.
Volatility is mean reverting, so not surprising to us that volatility over time goes back to the mean. That is not to say that there is certainty out in the global market. The knowns happen to be knowns. The unknowns happen to be knowns. We are watching monthly, the change in unemployment. We're looking at Fed announcements here.
There's really the events in the compression on vol is just being prepared for and expecting changes to those known unknowns. The growth from us comes from greater adoption, and that is the move that we've seen since the pandemic from Delta one into Greeks. As I said, in the U.S., that's been an incredible movement for us and our growth, our other business lines and Brian will speak to the DNA business in particular, what that means as the core businesses around the globe continue to grow with adoption and activity. Brian, maybe a little bit on what that means for DNA in particular.
Yeah. I mean, the broader story there is, you know, you have the macro backdrop, but it's really... You heard Ed talk about, you know, some of the things we've done is about growing that access and distribution part of that, right? Whether it was on the transaction side, we had 24/5, Tuesday, Thursday additions to the weekly complex, to the cross, the proprietary complex.
You have further distribution in different geographies, incremental products, incremental data feeds, incremental analytics, work around the index complex, and leveraging the cloud per se. It's been a really nice, you know, kind of ecosystem around the overall growth, complementing it, kind of across the board.
It really does feel like the market is digesting, responding to economic developments, interest rate expectations, and investor sentiment at an accelerated pace. Which of the Cboe products do you see benefiting from this environment?
Well, I think it's again, looking at the trend and listening to customers. For us, again, the fastest growth we saw last year continues and then continued through January, was the zero days to expiry engagement, and that happens to be in our proprietary complex, the S&P 500.
The ability to have a new strategy each and every day that can play out either as anticipated or in defining the outcome, if you are wrong, limiting the downside and being able to take full advantage of a cash-settled nature of the S&P 500 means that at the beginning of the day, your opinion can be limited in risk, and by the end of the day, the settlement, the position goes away, and it's reconciled by cash either coming your way or limiting the risk, the amount that you paid in premium, for example. The trend, we watching that continue, and we've only been at this since May on having expiries every day.
We see the adoption in days where the S&P 500 has a big range, 50-point spoo range, in days like yesterday, where it's much more compressed. The engagement has not really changed given the daily move. We think there's much more adoption. That's in the S&P 500. The large institutional size SPX. We've also seen the steady growth in XSP. XSP is 1/10 the size of SPX, much more retail-friendly. We're hopeful that as zero-day strategies catch on, we have a contract that is bite-sized and appropriate for retail. We'll look for that trend and build from the base that we find ourselves today.
You know, the SPX complex has been a key area of focus for investors. The recent market structure innovations you've put through have led to pretty solid growth. Can you help us understand the segmentation between institutional and retail investors in that channel? Maybe what is the market missing in terms of this growth outlook over the next few months?
Both institutional and retail have always had interest in the 500. You don't need to be a stock-picking expert to participate in the more broad market, and the 500 is the country's benchmark. From institutions, the S&P 500, with its large notional size, the SPX contract, has been the contract of choice. For retail tends to move toward the ETF SPY.
Interest in the 500 has been sustained for years and years. What the case we make is that the European settlement preferred tax treatment of cash-settled derivatives are really built and more appealing for all users. Our job is to educate retail into the awareness that the cash settle European XSP is an incredible contract compared looking at side by side next to SPY.
as you think about the growth channel for SPX, how does that compare to the VIX complex? How has VIX products trended this year?
VIX products, throughout the year, steady growth in options on VIX. As a matter of fact, yesterday, can't plan this, but we had a, you know, a 1 million contract day in VIX. The utility of, and the optionality embedded in, the VIX option complex is starting to show signs of adoption again in this market. Think really simply, we've had a pretty nice run up in the more broad U.S. market.
Rather than give up those positions, the leverage and the hedging power of having a VIX options strategy in alongside the 500 strategy is really starting to show up again. That is not at the expense of or instead of having S&P 500 or SPX exposure. The complex actually working together quite nicely right now and in a market environment where both the SPX and VIX options are really finding great use.
Growth within the U.S. derivatives market has been very positive. Can you remind us where the pan-European equity and index option build-out stands? What are some of the potential revenue and margin impacts over the next three years?
Do you wanna start, Brian? I think, really this is a story that starts with Cboe Clear, Europe Clear now, and it really is because of the EuroCCP purchase years ago where we find ourselves today.
Yeah. That was enabled by. Remember that was started as a consortium to continue to provide alternatives for pan-European clearing as well and with respect to that structure. We had the opportunity to take the entire franchise with respect to the clearing and help shape and help preserve and help continue to promote competition and clearing in Europe.
That enabled us to be able to launch the European derivatives effort. Again, listening to customer feedback of, "This is what we would like to see from a market structure standpoint, looks a lot like what you see in the U.S. market structure as far as being able to have some on-screen liquidity," and what that looked like.
That started with us being able to have the infrastructure behind that from a clearing perspective to be able to offer that through the exchange. We haven't wavered from our expectation of where this is going. We're actually starting to see increasing volumes, albeit the volumes have come slower than we would like. We knew it was gonna be a longer-term build.
We knew it was going to be a multi-year exercise. I think the last several quarters, even last month, we've continued to see increase in volume. We've seen increase in open interest, look and continue to add options to that platform and continue to build out that complex. We put a target of roughly EUR 25 million in a revenue standpoint, three years out. We.
About a year ago, we extended that just given what we had seen, what was going on with some of the conflict in Europe with respect to Ukraine and Russia and some of the other items that were going on there. We saw some of our market participants said, "Hey, we need to address these things for a priority. We still wanna do this," we saw them shift, and we were like, "We've got it. We're ready."
We've seen that. We started to see that volume starting to come on. We started to see more and more participants come on board to that to the exchange. So we're excited. Our confidence in that effort hasn't wavered. It's just a little bit slower. To Ed's point, the underlying ability to do that was the Cboe Clear ability to offer that, and to, as I said, provide that infrastructure not only the existing equities business, but again, the derivatives that people were looking for.
You know, sticking with the cash equities business, can you speak to the recent success of Cboe European Equities? sorry. Is central clearing across different regional markets impacting order routing decisions?
Two different, great question. I'll take the first aspect, and I think, Brian Schell, you can hit clearing. For us and the success we've had, pan-European on the equity business really is in execution quality and sharing the data with our customer base that the experience on the Cboe network across Europe is second to none.
We are showing, by engaging with us and trading on our platforms, the incredible execution quality that customers are enjoying. That's driven a great amount of our success. Then I think, Brian Schell, back to the clearing aspect, is for us bringing that all together and been an enabler. But really for us, it's execution quality and really at the heart of the experience is what's best for the customer.
Right. They are clearly separate from a regulatory standpoint and everything else. The ability to have that pan-European ability is that any product innovation that does occur on the equities platform, in addition to what kind of Ed talked about the success we're having around the execution quality, is it does enable an ability to facilitate and bring that to market to ensure if there is product innovation, having that underlying capability is a nice competitive advantage to be able to make sure that that occurs, and you're not waiting on someone else to be able to clear a nuance or something as far as what you're presenting from a client demand.
As far as the clearing operations, it's a fairly similar story, actually, as far as being very competitive, offering from a tiering of pricing structure, services, you know, continue to enhance our technology, has really been a really nice success story, that has allowed it to become, we believe, based on market statistics, the number one clearing entity as far as on a pan-European clearing basis for equity.
That kind of underlying infrastructure and what it's enabled to happen, again, it's not an accident. Again, it's. We see that combination in what we're doing there to be very compelling to the European community and a very competitive to not only the clients, but it's been a net revenue growth for us, for Cboe. We're not giving it away. We're pricing it competitively, and we're seeing our revenues grow.
Cboe has a similar opportunity in Australia. Given BIDS is expected to launch at the end of the quarter to help modernize regional execution, have Australian regulators considered giving Cboe an opportunity to modernize clearing and settlement?
Thank you for acknowledging the rollout, and part of the global expansion for us is a technology migration. What you reference is not only is BIDS expanding into Australia, but Cboe technology to the end of the quarter as well. We'll be running the Australia operation over the same technology, core technology platform as the U.S. and Europe and Canada. Following that, at the end of the year, we'll do the same thing in Japan. Cboe tech will be running our PTS in Tokyo, and BIDS will expand then into Japan. That is part of the power of building networks.
It is easy, once the core has been established, and for BIDS, it's been the US, Europe, Canada, that adding geographies onto the same technology platforms allows for that block trading mechanism to be expanded as well. Brian, maybe a follow-up.
I mean, with respect to the clearing, while it's not off the table, I think to Ed's point, the other opportunities are just immediate, right? There's a much higher ROI, and the clearing is it would take a longer time. Certainly not off the table, but I think the focus on the technology migration, BIDS, continue to grow market share, and frankly, continue to expand our global listings. We already have a very, very strong ETP listings presence already there in Australia. I think we're number two as far as listing goes there, similar to where we are in the U.S.
Being able to potentially with respect to dual listings on the corporate side, there's a lot of really good opportunities that are shorter term as far as being able to bring those results of that investment to the bottom line, and leveraging that existing, you know, kind of core, you know, kind of market share size and what we've been able to do, are just really interesting opportunities. Again, really strong relationship with the regulatory body there with ASIC. Again, clearing, great, but those other opportunities I think are more at the forefront.
I think Brian brings up a good point. When we, when we view our regulators, it truly is in a partnership and being sensitive to what's right for each jurisdiction. While expanding the execution facilities around the globe, we are collecting regulators as well and building those relationships and really going into markets with a pretty known case that we're a trusted market operator.
Any expansion beyond the core equity platform will be in consultation and cooperation with our regulators in each of the home markets. It's really important for us to point that out. All the markets we operate start with transparency and trust and highly regulated and high a degree of oversight.
I wanted to go back to listings. Within Canada, the acquisition of NEO has expanded listings capabilities beyond ETPs to corporate listings. Can you share your outlook for launching corporate listings in new markets like Australia?
Maybe the cross-border opportunity.
Again, we did talk about this, and we're very excited about what that looks like, right? Just from a global listings perspective. You know, you've mentioned all of the various, I'll call it franchises across the globe right now with respect to our presence, right? We have this terrific buildup of our ETP presence here in the U.S. with being the number two, and continuing to capture our more than fair share of listings that come out every year. We are the second-largest in Australia as far as capturing those.
We're continuing to have success with Neo, with bringing that into the Cboe fold as far as those ETPs. That has been the traditional focus. With Neo, now we have this corporate opportunity, right? They have 56 listings already in Canada.
Again, more of the emerging market and finding that sweet spot there. We know that a lot of issuers looking for increase in global access to capital and liquidity, which again, the two facilitate each other. Being able to have this ready-made global network, again, there's some work behind that. It doesn't just turn on.
But Cboe becomes a very attractive alternative to entities who want to list to get access to multiple markets because we can bring a, you know, I'll call it a common framework for technology, a common framework for a, I'll call it a legal framework, albeit obviously every country is gonna have different regulatory requirements and listings requirements. A global liquidity provider set that again, that consistency is very important, both to the providers as well as to the investors across the globe.
That rollout, that consistency, that underlying brand name, of being able to build that brand awareness about what Cboe does is very important. We're really excited over that build for the next couple of years of building that capability in each of those, I'll call it big exchange markets of where we are as far as, you know, the U.S., Canada, Australia, and, you know, and seeing that happen, like I said, we think have a really solid start to that.
Could you expand a bit further on how globally listed ETPs could encourage continuous asset price discovery, and if that could attract more ETPs to the platform?
We think that it does because, like I said, if you look at the global nature of the investment community, of the liquidity providers, the market makers, they, like I said, they're in the multiple jurisdictions. The extent that we can continue to connect that together and make it easier, not just for them, but then their customers, those investors to be able to hook in and understand, we think, like I said, you know, it's an overused phrase, but it's very true, is liquidity begets liquidity or that common framework is very important to that entire community.
Us being able to provide that standard and the market data of understanding that and what that looks like I said, we're very excited because just listening to that customer feedback, we wish we could, or we wish you would, right? Fill in the blank. That is how a lot of times we have chosen the investments that we have made, and this international expansion is to help facilitate that incremental volume. We do think it adds incrementally to the platform, and we do think it's gonna bring incrementally issuers to the platform.
Given all these exciting developments on the transactional side, how do these initiatives complement the data and access segment? Can you also touch upon tailwinds propelling 7% to 10% medium-term organic growth?
Yeah. This is something that we've continued to be very excited about, to highlight, and I think you've seen it in the overall results overall with the double-digit teens organic growth that we've had historically, and then with the strong guidance leading into 2023, is if you look at those initiatives. Again, it's not independent of a transaction side because we think they actually feed off of each other with the growth.
If you look at the market data, the real-time market data and access, you've seen a tremendous growth rate rise from the quality of the data, the quality of the market share continue to arise. You've seen increasing access, right, as you've seen incremental volumes, but you've also seen incremental, let's say, market presence in a lot of international jurisdictions.
Some of that tailwind that you're seeing is, again, we'll go back to access and distribution is again, leaning into that theme, right, is introduction of cloud, which is an investment we started making a couple of years ago, which we've highlighted, is we've seen a tremendous amount of that growth independent of local markets, is a lot of international demand for U.S. data, both from the analytics and then the access. The cloud has really enabled more and more people to take that in the framework of what they're accustomed to taking that market data in. We've seen that as a huge tailwind and continuing to grow, right?
We're also leaning that with incremental cloud initiatives, incremental data being added to the cloud, most recently with our European market data, and you're seeing more and more participants take that offering.
As far as the other two parts of that DNA business you referred to is on the index business, you've seen us leaning also into providing, working with the largest AUM issuers, a lot of defined outcome as far as us creating that index and enabling them to grow their ETP or launch new complexes around the defined outcome space, which people have really seen the power of that, particularly after 2022, and what that looks like and what that affords them too.
The last piece of that is the risk management analytics piece, is that global offering of. How do we help people with margin compression? How do we people with a global analytics framework around derivatives that's just a best in class? It's not a spreadsheet somewhere behind the scenes that's looking at this.
These tools, again, across all of the platforms, expanding the access and expanding that distribution, expanding, you know, with new products, is really helping to support that growth rate that we've talked about, that target of that 7%-10% that we talked about in the medium term, and the success we've had over the last couple of years in that business.
Can you expand on the opportunity to bundle global data at lower cost than incumbents? What is like the demand from multinational financial institutions for that data, and how does that improve their ability to save money, you know, in the face of a recession or compressing costs?
Yeah, I think that depending on. Here's what we're seeing is they've given us feedback of some users may say, "I may not need the expanse of all this data. I may need reference data. I may need reference data from different markets." When you can able to bundle that and really save them money, and particularly on an enterprise basis, that's where you start seeing demand, right? Anytime you switch a market data vendor or add something new, there's some work on the back end that they must do. That's a real cost for them to be able to take a new feed depending on the protocols that they have.
Continuing to listen to them, and this is how it's going to help them business, that's why we've continued to modify the products to be able to pull that bundling and unbundling of data that is most applicable to them. Odds are, it's not just them. There's gonna be multiple people in their situation that they're gonna see the Canadian, or call it, a more complete North American perspective of equity market data, or they really need more around what they're looking at in Japan as far as where a data feed is coming from.
We'll see more and more of the European and the U.S. Just listening to that feedback and that bundling has really kind of given us a nice roadmap to be able to continue to provide new products. Again, looking at how does it save them money, and it becomes a new revenue stream for Cboe that may not have existed before because somebody who's gonna be trading is gonna need that depth of book data in all of those markets. They're gonna need that no matter what. They may not be switching per se, but like I said, other people may have different needs. That is just we're in a unique position to be able to provide that others just can't right now.
Brian, Cboe has pretty robust growth prospects in 2023. How are you able to balance near-term margins versus investing in the future?
Yeah. So we've been very transparent about what our investment, objectives are and what we think that's going to take. I think you've seen really strong revenue growth on the last couple of years. You've seen us also then lay out, here are our investment plans that we're going to invest today dollars. We are willing to sacrifice some margin compression in today dollars for that longer term revenue growth, and we've been very clear about where we're driving those expectations.
We have set longer, I'll call it higher than industry averages as far as revenue growth expectations. Again, you've seen some of that expense expectations being higher than maybe some of our peers. Again, it reflects our higher revenue earnings profile as well.
We take a look at it, as long as we believe we have that opportunity to grow that long-term revenue and long-term earnings, we're gonna continue to try and highlight those investment high conviction opportunities that we have. We're gonna be very, very mindful though of growing earnings. This is not about just spend, spend.
This is about being very calculated investment by investment, initiative by initiative. Frankly, if something's not working, we'll turn it off. As soon as we see it's not working, we're going to turn it off, and hopefully sooner than later. There are a few items that are gonna require that spend upfront, that we have a lot of conviction around that we're going to pursue. Like I said, it's gonna take a couple of years. It may take a 2022, 2023 spend for a 2024, 2025 revenue payoff, but we believe and we think we have a track record of those investments with that revenue growth in the longer term.
I just wanted to follow up. As we think about spend in 2024, 2025, do we think about a step down in terms of total expenses?
To be careful, I don't wanna provide guidance for 2024 and 2025. What I think as we look at that longer term growth way, as we look at our longer term modeling and investment opportunities, as we look at us continuing to start to scale up, we would expect a moderation certainly of that expense growth rate in 2024 and 2025.
As some of those, we see current initiatives rolling off in 2023. We have some duplication of our expense cost structure going on right now as we, for example, migrate platforms, as we build out, say, APAC and BIDS that may not need as much of that spend or will go away as those integration projects come to completion and build out come to completion.
That becomes to a little bit more of a steady state as far as that growth rate. We absolutely would expect to see some of that moderation in 2024, 2025 in conjunction with incremental revenue growth as we've talked about.
What are Cboe's capital deployment priorities for 2023, and how do you think about the mix of organic growth, deleveraging following, mergers and acquisitions, and repurchases versus growing the dividend?
Yeah. I think we've been very clear about our priority around organic, right? You've seen our expense guidance about that, continuing to be able to fund that future revenue growth, even if it's on the back of an M&A transaction that came a year or two years ago, and then being able to grow that organically once we have that infrastructure in place.
Adding infrastructure to enable that incremental organic growth. That's always gonna be the number one priority as far as that organic growth. Then from the M&A front, we've talked about that, you know, those transactions have always been about continuing to get us to scale and getting those opportunities, leveraging our core. You know, independent of that, I think our balance sheet is in a really good position as far as our leverage ratio.
I don't see the incremental benefit of continued delevering. You know, if there's some opportunity, we'll take a look at it. It's really, I would say it's been more about we see an opportunity around share repurchase that we've said. We've always said that we will repurchase shares opportunistically, and I think we're going to leaning into that.
As far as the dividend goes, I think we've always been competitive as far as taking a look at where we are, the dividend payout ratio, does it make sense? We wanna continue to grow it, and so we won't change that, and we won't sacrifice it.
As I said on our earnings call, you know, we would see that we expect there's greater opportunity for share repurchase independent of, while there's this M&A opportunity that had come up, we're always gonna wanna look at that should it arise. Again, I think the focus would be more on share repurchase say than dividend, outside dividend growth rate.
At this point, we can pause to take investor questions. Please raise your hand. We'll bring forward a microphone. While we're getting this squared away, how has the Cboe Digital opportunity evolved, and what is your outlook for the business?
As we set out to really bring transparency to the digital experience for customers, it was really with the customer in mind. The philosophy that a new asset class needs to or the expectation should be different than the established asset classes really didn't make much sense to us. In the digital vision was to continue to partner with in introducing brokers and intermediaries that add to the experience.
The Cboe Digital roadmap is to do just that. That is a syndication that we built with the customer in mind. Our market quality to date, for example, in Bitcoin, is second to none. With the onboarding of many of our syndication partners, that market quality is pretty terrific. The transparency in transaction are very, very clear.
We're still waiting for CFTC approval on margin futures, and then we're into the next phase of the rollout of Cboe Digital. We, like every other exchange and then some of the platforms that continue to operate in the space, are still looking for regulatory certainty around oversight. In the meantime, where we have certainty, in the two Bitcoins, we'll just be concentrating on the experience, the rollout, and the onboarding.
Just to add to that also is, we talked about some incremental products, back to your DNA and the growth and adding new products. We've just added the market data to our existing Cboe feeds as far as what's coming from the digital channel. That tightness of that spreads where they're seeing trading on those, call it those core coins that we have do listed on that platform. We've added that market data distribution again to continue to enhance the value that people are seeing coming from Cboe.
With that, I think this is a good place to pause. Ed and Brian, thanks again for joining us today.
Thank you.
Thank you.