We can go ahead and get started. I'm Patrick O'Shaughnessy, Capital Markets Technology Analyst at Raymond James. Thank you, everybody, for joining us today. Kicking off the day for me, we have Cboe. On Cboe's behalf, we have CEO Ed Tilly, and we have Dave Howson, President. Guys, thanks for showing up.
Great to be here.
Thank you.
For those in the room who are maybe a little bit less familiar with Cboe, can you maybe just give a one or two-minute overview of how you think of the company?
Sure. At the highest level, we are a global exchange operator. We operate 26 exchanges around the globe. We are in very competitive environments. Any geography that is open for competition is interesting to Cboe. We primarily and usually start in Delta One or equities, and we move up in sophistication into derivatives in clearing and most recently, digital. We do all this with a common technology platform that runs all of our exchanges, and we are in various stages of technology migration in our newest acquisitions.
Our goal is to operate trusted, regulated markets around the globe. As a result, we're able to take advantage of those presence with data and access and analytics. Looking at a unique product set that the world is interested in, we are trading the S&P 500 SPX contract here in the U.S. as well as the VIX franchise globally. That is primarily at the highest level, what Cboe is all about.
Terrific. Thank you. What do you think Cboe does better than any other company?
Well, let me start, Dave, and then you jump in. I think the uniqueness of what we bring to the marketplace is running a common technology platform. Our acquisitions and the presence that we have around the globe, the advantage for us and our customers is knowing how Cboe operates. That is a huge advantage in a market that has operators that are not always the same, don't always hold regulation in the highest regard. Our trusted operations really the core to that is a common technology platform with many other ideas.
Absolutely, what differentiates us from our peer group is that global securities and derivatives network. We're in every equities market open to competition now. That common technology platform, the data generated from those 26 markets really opens up a myriad of opportunity from data packaging and bundling and delivery via the cloud, and also data and analytics capabilities that we can then deploy back to our customers to provide pre, at, and post-trade capabilities. As we look at the blueprints from around the world, as we've grown on top of that global stack, we can think about how we take that from one region into other regions as we grow out the capability. Really it's an unrivaled growth trajectory that we've got spanning from that baseline foundation.
I think the other difference is challenging incumbents around the globe, we have become very, very good listeners. We take advantage of the gaps, that investors see, around the globe by product and by operation. Listening is one of the keys to our success. It allows us to develop new technologies and new solutions, both product and technology.
Building off of that point, how does that competitive advantage manifest itself in your strategy, and in particular, some of your new product initiatives and acquisitions?
Well, certainly when you think about, I mentioned the blueprint there for growth, so, with that global footprint that we have, a little bit of a look back in terms of Europe. We talk to our investors significantly about the flywheel effect of our businesses that Ed previewed just there going from the cash through the data businesses into derivatives in each region.
So in Europe, we started with a single venue matching buyers and sellers in a central limit order book. We combined a variety of organic and M&A initiatives together to grow our footprint there. We acquired and gained scale in Europe with a second acquisition in Europe. From there, we listened to our customers and worked with them to add new functionalities and products and services.
We added the BIDS network. We added Periodic Auctions in response to regulatory change, all in conjunction with our customers, and added data capabilities, taking us to be the largest pan-European stock exchange in Europe through the combination of those initiatives. From there, we were able to acquire EuroCCP, now Cboe Clear Europe, and that allowed us to then step into derivatives in terms of futures and options based off our own indices, based off our own data from our, the largest pan-European equity exchange operated by Cboe. That allowed us to step up through that value ladder. As we think about that playbook, if you like, that blueprint, we're then able to think about that in other regions around the world where we've now gained scale through organic and M&A initiatives combined.
You've mentioned a handful of different growth initiatives underway right now. Of those, what are you most excited about, both in terms of the long-term revenue potential as well as your ability to be disruptive?
I'll stick with product. I think the product, either the continuation or identifying new products, again, it comes from listening to our customers and then observing the data. I think you'll probably get to questions on the greatest growth that we've seen in quite some time is an extension of the S&P 500 contract, and that is adding daily expiries, as well as extending the clock, meaning in trading 24- hours a day. I see the potential in the adoption of being able to control an investor's ability to define the outcome of their investments, not married to what has been the standard for years and years in the industry of a third Friday or a 30-day exposure, but now down to the day.
We're in the business of watching the customers adapt and embrace the flexibility that we have designed around our contracts. That includes then also being mindful of different wallet. Everybody in the room has a different wallet size. Our contracts have to take that into account. Dividing, you know, and looking and parsing this monster S&P 500 contract view as notional down into bite size contracts for every wallet. Every investor should have access to the U.S. market. We believe that that is a program and a view that we can expand and extend in other geographies.
I would take two more. We've got derivatives, and then we've got data and access solutions. The data generated by these 26 exchanges around the world is phenomenal in its own right of great interest to our customers. We're able to package and bundle that in different ways. We've got our Cboe One family of products, with Cboe One Canada, Cboe One U.S. Equities, and most recently Cboe One Options. We're able to take that data, package it in ways that customers want to receive it, and deliver it in a manner in which they want to receive it over the cloud. We've seen phenomenal growth last year with 72% of the uptake in cloud usage last year from brand-new users.
Also in data and access solutions, there's that the indices capability that we've got. We've seen and heard a lot about defined outcome investing in the last year, and we've really been the home of the defined outcome index benchmark calculation. When we think back to the flywheel, that many of those products have been listed on Cboe exchanges. You have the data generates the data for the data product, then for the tradable product all trading back on top of Cboe's platform.
I kinda kick this off by saying thanks for showing up and a little bit facetious, but I've been a little bit critical of you guys in some of my research of late. One of the themes of my research was, what if you guys had said, "Hey, we're just gonna be a cash cow. We're gonna milk our SPX franchise. We're gonna milk the VIX franchise.
We're not gonna invest in European derivatives. We're not gonna invest in global listings and some of these other things." Your EPS trajectory may have looked better, at least in the near term. How do you guys think about the trade-offs between, hey, you've got a great core franchise, there's great inherent leverage in that, versus investing in some of these initiatives to drive better long-term outcomes for investors?
Well, we obviously-- I think you're wrong, which is great. I mean, that's difference of opinion. I think you're not wrong in that the opportunity is pretty terrific, and we see that too. It really wasn't either/or for us. You don't see us, you know, going to sleep on what has been the most incredible growth that we've seen, is the continuation, the expansion of the core, the proprietary product set. It's not instead of, it's and. We see the opportunity to bring to the world a competitive and dynamic and highly regulated platform where our customers know us. When you see Cboe operating in a market, even before technology migration...
We've got two migrations happening this year, one in about a month in Australia and one at the end of the year, in Japan, and that is moving our technology into the region. Before that, market share in Japan doubled, and market share in Australia is up. The adoption, and when we see Cboe coming in the marketplace, we think the opportunity is just beginning. We're preparing for and putting our investors in a position so that the growth of the years to come doesn't rely just on the phenomenal growth that we've had over the last two, 10, 30, but rather that we're primed in every geography that allows for competition in the future.
Certainly growth initiatives do take time to seed. So it's not a short-term earnings call to earnings call process. It's a long-term, sustained, diverse set of opportunities that we have a high conviction for. We've looked at this, we've talked to our customers. Also, when we look back on the common technology stack, we can enter and execute on these initiatives with a lower incremental investment.
When you think about European derivatives, we already had the largest European equity stock exchange, all of the framework there. We had the technology capability, the functionality in the largest options market in the U.S., which we're able to easily bring into Europe. We're able to execute these things with a lower marginal incremental effort in order that when these platforms and these initiatives get to seed, the growth path and the margin is much more attractive to us.
think and that more.
Got it. We touched on SPX options a little bit. Volumes have been on a tremendous tear here. Much of the growth has come from zero days to expiration contracts, which are now roughly half of your SPX volumes. Obviously pretty notable trend. ZeroHedge is writing about it. Everybody's writing about it these days. CNBC is talking about it. What are you hearing as the primary use cases of zero days to expiration contracts, and how does that inform your view on whether volumes are sustainable or not?
I think they're sustainable in that we go back to defining the outcome of an investment. The sustainability comes around the multi-leg strategy and the ease and the liquidity that is found in our case, in SPX contracts that are zero-day. Zero-day's been around for 50 years in April. Since, you know, Cboe opened its doors in 73, the third Friday actually traded like a zero-day once a month.
From there in 2005, we added Weeklys. We've had zeros around for a bit, and the adoption we had been calling out over probably two years on our quarterly call was that the move has been into very short-dated, very low premium exposure. That is to take advantage of daily moves. All of us are more certain about what's going to happen tomorrow in any aspect of our lives than what's gonna happen in 30 days, 60 days, or 90 days.
That is not different in the U.S. market. Why not offer a contract that allows us all to take advantage of where we're most certain, and that is on the shorter end of the curve. Investors are finding great use case in having an opinion that can be different tomorrow than it was today. The cash-settled nature of that exposure in the S&P 500 for us and SPX means at the end of the day, there's no physical to deliver or to be taken from you. The position is over. It's settled in cash, and there's an absolute to it.
For example, in physically settled contracts, at the end of the day, you're either given more of the underlying or taken underlying from you. In cash settlement, it is simple over. You can have a new opinion tomorrow that doesn't have the tail of a physical settlement. That has resonated really, really well with investors. We think it's sustainable in that defining that outcome, limiting the exposure to the downside, but allowing a capped exposure to the upside is a strategy that is available, and we think ready to grow. Reminder, the dailies have been in the SPX since May. We haven't had a year cycle yet, so we love the adoption.
Started primarily on, two retail, broker platforms and has now grown to higher touch, bank desks that are finding the same use case, but in a little larger exposure now. We've loved the adoption so far. We think back to the wallet size we talked about a little earlier. XSP, which is one-tenth the size of SPX, we think there's a great, case, for the wallet that is maybe one-tenth the size of the users we've seen. We're gonna put a lot of effort, and invest in the exposure and marketing around XSP as an alternative for those that may not be ready for the large notional SPX.
Building off that commentary on retail, it's not just SPX options, it's or XSP, it's also multiple listed options. Volumes have been particularly strong. I think a lot of that coincided with the advent of no commission trading, emergence of retail trading platforms that were geared at a younger demographic. Where do you think retail volumes in general go from here?
When you make a conversion from Delta One and you are taught or you put the time in to learn about derivatives, changing the profit and loss from the 45-degree line and being able to define and limit risk, and therefore also eliminate the upside, there's great sustainability in that. Once you make the move from Delta One into derivatives, you tend not to lose.
That tends to be more sticky. You'll hear that if you cover retail platforms. That is the most informed customer. These are not people taking shots anymore and saying, "Gosh, I'm gonna buy a bunch of calls, and I hope something's gonna happen." This is really educated stuff. I've got a core position, I'm gonna overwrite calls. I've got a core position, I wanna protect that downside and stay long. I'm not in the position yet. I'm gonna enter it with a short put. These are the first level of adoptions that we see in derivatives, and you tend not to lose those customers. We like the trajectory, like the story, and think there's much more to education and growth.
Another trend that I've seen written about by people much smarter than me is that growth in options volumes can result in the tail wagging the dog in terms of options market maker hedging impact in the underlying cash markets. Do you think there's a risk of options volumes becoming too large for the underlying cash market to efficiently handle?
Not in the. I'd take the 100 multi-list and certainly not. I don't see that in the S&P 500. You can pick. We can give an example of probably liquidity-constrained, you know, the 1,000th liquid stack might be a different phenomenon. I don't. I can't model that right now. I can't give you an example of one that I would see constrained because of derivatives. Market makers kinda scale up and scale down based on their ability to hedge. Market makers also don't have concentration in their hedge. Not every liquidity provider will hedge the exact same way. Take zeros, for example. We see all of the zero-day, there's a dispersion among the strikes. There's not a concentration of risk. There's not a concentration issue.
A market maker who is hedging your daily today will be different than Brian's daily, and they will hedge either with a different strike of the same day or any number of days going out across the curve. Liquidity providers are very, very good at laying off risk, and rarely do we see that concentrated. The gamma hedging that we see as a result of either long or short, net long or short premium probably shows up a little bit more around the moment of expiry in physical when there's physical to deal with after expiry.
Got it. Interesting. What should investors make of your VIX franchise at this point? VIX futures ADV is still well off the 2018 highs and VIX options ADV peaked in 2017. Has the sector growth story run its course, or are there reasons to believe that trader adoption of these contracts is gonna re-accelerate at some point?
We have seen acceleration in VIX options are coming back in a pretty big way over the last year or so. Volatility is pretty low. The purpose of having VIX as a hedge, and that is really looking for large moves in the market that are not strike-specific hedging. What do we mean by that? The at the money VIX call trades the same if the level of the S&P 500 is 4,000, 3,000 or 5,000. Non-strike specific hedging of the broad market is really well served with VIX in any environment. We've seen a return to VIX options because they're relatively inexpensive for those moves that are a little larger than just the daily.
As for any moment in time, there is a normal rotation in and out of S&P 500 SPX and/or VIX based on your assumption of what the market's gonna do over the next day, 30, 60 or 90. We've seen right now realized volatility daily very, very high.
That means the ability to monetize an SPX, an S&P 500 hedge is easier than it is to monetize a VIX hedge. In this environment, that's very, very friendly for SPX. In an environment where that realized inverts or spreads, I would anticipate a normal rotation back into VIX. Users are very, very sophisticated. They find what makes the most sense based on their assumption of what's going to quote.
Gotcha. Dave, you brought up data and access revenues a handful of times. It's been a really nice growth story for Cboe, and not just in options. How does that growth break down between pricing versus usage? Is increased usage simply a function of higher market volumes or are there other drivers going on there?
Certainly. If you look back, last year, 80% of the growth came from new units and new subscriptions to our data. Predominantly the growth is really about taking more from us, and that is really spread across products. As I mentioned earlier, we've got those 26 markets generating a humongous amount of data, which we're able to package and stripe in different ways for our customers.
When we think about where we're going with Cboe on that global network journey, we're actually seeing a great opportunity to sell our data around the rest of the world. In numbers, that's 62% of incremental growth for our data and risk management and analytics side of the business has come from outside of the U.S., 38% in EMEA and 24% in the Asia Pacific region.
We see a great runway of data to sell all of our data and data products as we add new capabilities and new data to that stack. Really our point and the evolutionary curve right now is adoption, is gaining new users. As a lower price point data offering, that's really where we're looking to sit for some time because we think we've got a really tremendous runway for ourselves as we look to sell more of our data, our raw data as well as those data products we talked about earlier.
Are these adopters of your data products typically already trading customers, or are they getting the data first to develop their trading strategies, which then leads to more volume down the road?
It varies. I think that the same-day option is a great example actually, as people already in the SPX complex look to take new data stripes and data offerings that we've got within the franchise. Whether it be the intraday open and close position data that we've got available on a fifteen-minutely basis now. People become interested in using that data to then see actually how can I deploy my algorithms, how can I deploy my strategies.
Oftentimes the data and the analytics is the, is the lead point to assess a venue. Being, again, a lower cost option there has tremendous power. When you think about the analytics capability, we've added to our world-class options analytics suite European data this year. This allows us to upsell into the wallet of an existing customer as they begin to think about a European environment as well as the United States.
Got it. One of the nice things historically about the exchange business model is that the incremental margin profile is pretty attractive. Does that also apply to data and access fees? Are the incremental margins there, you know, roughly in the same ballpark as the transactional revenues?
Think of it as an ecosystem. When you look at a venue and everything that goes into building an exchange, the core matching engine, the connectivity and the data itself, it's very hard to tease apart kind of a margin calculation for trading versus data. What I will say, of course, is that once you've got that ecosystem established and going, the kicker for us is the ability, as I mentioned, to package those data products, deliver it the way consumers want to receive it over the cloud, and then add value-add data solutions to it, whether it be the analytics of the pre and post-trade or whether it be data products like derivative index benchmarks there.
The kicker for us is once you've got the data established and the venue established is really in the data products themselves and the distribution of that data. Really back to the start again, the differentiate for us is having that global network from which to subscribe and actually extend our capability.
Gotcha. On the capital allocation front, you, the company indicated during its most recent earnings call that Cboe will likely pivot more towards share repurchases now that you're back to your target balance sheet leverage. Given the number of initiatives you currently have underway, should investors infer that you're not particularly inclined to pursue additional acquisitions at this time?
Just let me. One small clarifying point. We don't really have a target leverage. We have Brian has worked us down, and the board has liked having the flexibility in the balance sheet. Just as a point, we didn't really target a leverage ratio. The core of your question, there's nothing we need to do tomorrow or in the immediate future. Our eyes are always wide open for scale in the existing business lines or again, geographies that may open to competition, using the advantage of this technology stack. You know, you see us roll out and upgrade technology after M&A pretty quickly. That flexibility allows us to have eyes wide open, but, you know, nothing that we have to do.
Gotcha. With that, why don't we pivot and see if there's any questions in the room. Still early. I don't see any hands at this point. Maybe one more from me then. Digital, we haven't really touched on that a whole lot, but can you just explain what is your digital asset strategy? How is that maybe differentiated from the other initiatives that are out there, and what's the timeframe that you're kinda looking to reach some rewards in this?
Let me start. Dave, you can jump in. What we set out to do, and it was the direction that we were very, very transparent when we announced the purchase of ErisX and all the way through the building of the syndication of like-minded, go-along investors in Cboe Digital was that the customer's experience in a new asset class should not be different because the asset class is new, different, or has different characteristics. Rather, the exchanges and the operators of those markets should still be in the trusted operation business. That means regulation. There should be transparency and bid-ask, not hidden fees, like we see in some other digital platforms.
We were able to build a syndication of, and we think the most, you know, retail friendly and the most sophisticated liquidity providers that share that vision, that the customer's experience in the new asset class should be the same as they have in equities around the world, and certainly for Cboe's derivatives. With that, we set out to do just that. We are highly regulated. We are very transparent. Our fees will be reflective of that competitive nature and the view that our customers should have an experience that they're used to. With that, Dave, maybe where we are on rollout.
Yeah, absolutely. We're currently engaging onboarding those 13 equity participation members along with other new members. As we've seen the outcome of that onboard come through in the volumes and the spreads this year. When we closed, we were doing about $20 million a day, and earlier this year, we're doing over $100 million a day.
The spreads also in the two top line tokens, the BTC and ETH, were industry-leading spreads one or two basis points wide. You can see the impact as those customers come on board. With any ecosystem, any liquidity pool as that seeds and founds, there'll be ebbs and flows as new customers come on and the dynamic changes. We'll be helping in managing the environment as we go through that.
We're at the late stages of the margined futures application. The great thing, when and if that comes through is we're able to offer futures and spot on the same platform, which means that we'll be able to offer a collateral efficiencies, basis trading, all myriad, again, of new functionality, which we will look with our customers to enhance and continue to grow as we build out. Really from this year, expect from us, you know, that seeding of the platform and the beginning of that journey of a new, traditionally focused digital asset platform.
Final to Dave's point, CFTC needs to approve our margin future.
Got it. Terrific. I think that's a good spot to end.
Of course.
Thank you very much.
Awesome. Thank you.
Appreciate it.