CBOE Stock | Cboe Global Markets Inc Q1 2021 Earnings Call

Thank you, Debbie. Good morning and thank you for joining us today. I hope you are all doing well and staying healthy. We reported solid financial results for the first quarter of 2021 at Cboe Global Markets, while continuing to successfully execute on our strategic growth plan to expand our geographic and asset class blueprint, broaden our customer reach, diversify our business mix with recurring revenue, and leverage our superior technology. As expected, we have more difficult comparisons this quarter against last year's record first quarter earnings when we saw exceptionally strong trading as the COVID-19 pandemic began sweeping the globe. For the quarter, net revenue was up two percent and adjusted earnings per share was down seven percent year over year. However, we saw very strong sequential growth across business segments, with net revenue up 19 percent over the fourth quarter of 2020 and adjusted EPS up 26 percent. Our solid results were driven by record trading in multi-listed options and continued growth in our recurring non-transaction revenues, as well as the contribution from the acquisitions we completed in 2020. I want to update you on the progress we made this year on four key incremental growth drivers I highlighted last quarter: our plans to launch Cboe Europe Derivatives, the opportunity to grow recurring non-transaction revenue, our plans to expand BIDS Trading, and efforts to extend access to our products and services, including retail. First, I'd like to take a moment to highlight a few market dynamics we saw during the quarter. With increased certainty around the political landscape, progress around the vaccine rollout, and the reopening of various companies returning to work, we have seen institutional investors re-engage with our index options and volatility products this year. Quarter over quarter, volume increased by 63 percent in VIX futures, 29 percent in index options, and 15 percent in SPX options. In Europe, our successful Brexit transition and the reintroduction of Swiss trading on our UK market helped us achieve some notable records across our suite of European equity products during the first quarter. Cboe Europe Periodic Auctions had record value traded of 1.3 billion euros during the first quarter, up five percent year-over-year. Additionally, Cboe LIS, our European block trading platform powered by BIDS, had record market share of 24.1 percent, up from 22.7 percent market share one year ago. As clients have recalibrated their models and readjusted to the new trading landscape in Europe, we're pleased to see that our overall market share has increased to 17.9 percent month-to-date in April, our highest since July of 2020. We are maintaining our focus on investing in long-term growth, building on the strong foundation we laid last year, and are excited about the momentum we are seeing across our business. Last month, we announced plans to acquire Chi-X Asia Pacific, which will provide Cboe with a single point of entry into two of the world's largest securities markets, Australia and Japan. I'll touch on this exciting deal in a moment, but first let me update you on key incremental growth drivers I noted earlier and how this planned acquisition complements several of these growth initiatives. I'll begin with the progress we've made growing non-transaction revenues. During the first quarter, we achieved 17 percent growth in recurring non-transaction revenues, exceeding our expectations. This increase includes organic growth of 14 percent. Brian will share additional details later in the call, but we are increasing our 2021 growth target for organic recurring non-transaction revenues to a range of 10 to 11 percent from a range of six to seven percent. One of our top priorities remains the continued global expansion of our data analytics offering. And last month, we announced the creation of Cboe Data and Access Solutions, a new division that will lead our charge to become a global leader in data and analytics. Led by Catherine Clay, this new division combines our Information Solutions and Market Data and Access Services teams into one group that will create an optimized offering for our global client base. This holistic solution is expected to enable customers around the world to seamlessly access all of Cboe's expanded capabilities, including global equity interface solutions as well as data, market and risk analytics through a unified offering. Additionally, in connection with the planned Chi-X acquisition, Kathy will lead our effort to build the first truly global equities market data platform that is expected to offer data for most major markets around the world. We recognize that as the trading environment becomes more globalized, customers want greater efficiency in the market infrastructure services they require, and our goal is to align our business to address these client needs for global data and analytics. We are excited about the continued evolution of this business and believe the new Data and Access Solutions group will create opportunity to further grow our base of recurring non-transaction revenue. Kathy is a tremendous leader with a track record of delivering results, and we're excited for her to lead this team as we look to expand the business and our market data offering globally. Turning to Cboe Europe Derivatives, yesterday we announced plans to go live with this new market on Monday, September 6, subject to regulatory approval. We had originally hoped to launch this new venue in June, and while we expect to be operationally ready, the regulatory approval process has taken longer than expected given this initiative expands our existing clearing capabilities into a new asset class. We are working closely with regulators and continue to have a very constructive engagement with them. Most importantly, we have a critical mass of key market participants ready to support the exchange from day one, including banks, clearing firms, market makers, and proprietary trading firms who will help contribute to the provision of liquidity and client order flow on the new market. The team has worked incredibly hard to achieve our mission of creating a modern, vibrant pan-European derivatives market designed to grow the overall derivatives trading landscape while creating new opportunities for customers to express their investment views and manage their equity exposure. Our pan-European model will help provide market participants with the ability to access a modern, on-screen derivatives market through one single access point, creating efficiencies in trading and clearing. As previously noted, while our 2021 revenue expectations for European Derivatives are modest, we are investing for long-term growth and looking for a gradual revenue build as we gain traction, expand our product offering, and unlock the potential we see for considerable growth in this market. Moving to BIDS Trading, we see significant opportunity to leverage the planned Chi-X Asia Pacific acquisition to bring BIDS' industry-leading block trading capabilities to this new geography. With BIDS' current network covering major North American and European equities markets, the planned addition of Asia Pacific equities is expected to create a global block trading platform to serve a broader base of customers. The expansion of BIDS into Canada is well underway alongside Cboe's technology integration of MATCH Now, the Canadian ATS we acquired last year. With BIDS' extensive global network of more than 460 buy-side investment managers and sell-side constituents, this innovative platform will play a critical role in achieving Cboe's mission of building one of the world's largest global derivatives and securities trading networks. We also remain committed to extending access to our products and services through product innovation, enhancements of our markets, as well as expansion of our customer base, both institutional and retail, and made solid progress on this initiative in the first quarter. Last month, we extended equity trading hours on our EDGX exchange to allow for trading beginning at 4 a.m. Eastern, and the volume we are handling during this early market session has exceeded our expectations. EDGX is now handling more than 11 percent of the volume during the early trading session. Earlier this month, we also received approval from the SEC to launch our innovative Periodic Auctions in the U.S., paving the way for us to provide customers with an on-exchange alternative to off-exchange electronic block trading by enabling them to trade in size while helping to reduce market impact. As I mentioned earlier, we continue to see strong customer adoption of a related product in Europe, and we're excited to build on its success by providing a new version of this product to the U.S. customer base. This long-awaited approval in the U.S. was the result of our steadfast commitment to improving markets for our customers, and we look forward to launching this offering in the third quarter of this year. We are also planning to extend global trading hours for VIX and SPX options in the fourth quarter of this year as part of our 24/5 initiative, subject to regulatory review. The extended global trading hours will complement our planned entry into Asia Pacific and are designed to help meet growing investor demand for the ability to manage risk more efficiently, react to global macroeconomic events as they are happening, and adjust SPX index options positions around the clock. The uptick in market engagement from retail and institutional investors alike reinforces the importance of our ongoing commitment to education. Our new core derivatives curriculum from the Options Institute has been met with positive feedback from early participants at all experience levels. We've expanded the derivatives education webinar series to include foundational knowledge on options pricing models and strategies, and we are on track to launch our first set of online demand courses in June to further build understanding of derivative strategies and applications. Additionally, to meet customer demand for even more learning opportunities, the Options Institute is expected to be launching the Adjunct Faculty Program this June. The program features distinguished practitioners specializing in derivative products, operations and risk management, decision theory and research. Turning now to our plans to acquire Chi-X Asia Pacific, we believe this deal significantly advances our mission to build one of the world's largest global derivatives and securities trading networks, enabling the further expansion of our product offerings to a global network of customers. We believe this exciting investment will complement our North American and European operations and provide a foothold in the key Asia Pacific region, positioning us to become a truly global marketplace for our customers. Chi-X is one of the most successful alternative market operators in Asia Pacific, with core exchange operations in Australia and Japan and a significant sales presence in the region. Asia Pacific is an untapped market for Cboe, and we are excited about the potential to offer our unique proprietary products and other services to clients in the region. As I noted earlier, the acquisition provides the opportunity for us to expand our global equities business, including bringing BIDS to the region. Dave Howson, President of Cboe's European and Asia Pacific operations, will lead our planned expansion into the region, working closely with the Cboe team and Chi-X's local management teams. Chi-X's leadership has shown an incredible commitment to innovation across market operations, customer service, and technology, and I look forward to leveraging the expertise of the team to expand Cboe's geographic reach, enhance existing capabilities, and offer new market solutions to investors in the region. The transaction is expected to close in the second or third quarter of 2021, subject to regulatory review and other customary closing conditions. We look forward to welcoming the Chi-X team into the Cboe Global Markets family. With that, I'll turn it over to Brian.

Thank you, Brian. In closing, I'm very pleased with the progress we have made as we continue to execute against our strategic growth plan and focus on building one of the world's largest global derivatives and securities networks. Earlier this week, Cboe celebrated its 48th anniversary. The pioneering spirit that drove the creation of our company now fuels our leadership as a global multi-asset market operator. While every year has been remarkable in its own right, the unprecedented events of this past year have reaffirmed what I already knew: the entrepreneurial and collaborative team spirit that has always defined Cboe has never been stronger. I am very proud of what we have accomplished as a team, and I look forward to delivering on our vision as the year progresses. With that, I'll turn to Debbie for instructions on the Q&A portion of the call.

Thanks, Rich. Brian, why don't you jump in?

Sure, Dan. Thank you. Let me start with M&A in general. We made comments in the past, and yes, you're right, we've been quite active on the data and analytics solution. We said we kind of like where we are. We're in full integration mode. Brian mentioned that pre-trade and post-trade solutions for our customers, we like that, and that's poised for further movement, growth, and globalization. So I kind of like where we are on that respect. On M&A, as for the other M&A, you notice in the core business of us matching trades, if a region is open for competition, that makes sense for us to take a hard look at. And with Japan and Australia new to the region, we like going into those regions who are looking for alternatives to the incumbents in an open way. So we'll keep looking in that regard. Nothing imminent, but certainly always on our radar. Chris, you want to jump in on FX?

businesses but there's also we think more opportunity across our other asset classes including FX as we really move into the Asian region.

Yeah, Brian, you might start with recurring, and Chris, can we move into the SIP?

All right, thank you. Let me start. It's great, and I appreciate you pointing that out. Certainly now, if we look back over our activity over the last 18 months or so, I hope this story is coming together in your head exactly right. We're just so pleased yesterday to announce the launch of European derivatives. That was an effort that we began well over a year ago, and being able to come to market in September is quite exciting. And then taking the incredible leadership that Dave Hausen as he shepherded that effort with Eddie Cordell in Europe, being able to take Dave's expertise and have him oversee the integration of Chi-X, it makes perfect sense for us at a build-out. But importantly, you can see the effect and the vision we had with our purchase of BIDS, our partner for years in Europe, being able to move into Canada with our MATCHNow ATS acquisition, and then now moving that network and reach into the APAC region. So it's just terrific. And putting Brian Harkins in charge of that growth and that rollout, I think we're well positioned to take full advantage of all of the deals that we've expressed to you over the past 18 months. So it's great, it is coming together. I appreciate you pointing that out. And let me turn over to Chris.

It's a great question. And we do, I think on the macro level, this is exactly what institutions were telling us in the second half of last year, and of course, we were passing that information along to you. And I think no better place to look is that SPX volume is right around 1.2 million contracts a day, very consistent for the first four months of the year. What's been interesting is to see the VIX options growth in the first quarter of the year, and that's changed a bit in April. And really the efficiency of our institutional users who saw an advantage using VIX options at a time where the difference between realized volatility and implied volatility, buying vol and the exposure of VIX options was relatively cheap. And so we saw institutions in a big way move to using VIX options for hedging purposes. That's changed now in April as we're looking at a more normal realized to implied vol level. So that's exactly the right move from our institutions, so really behaving in a very logical way. And then the overall levels of VIX, you know, in the fourth quarter really around 25 and a half percent or so, second quarter about 23, and then if you take out today, right around 20 or just below 20. So moving to a more normal contango shape, which should kick in the roll-down trade that we've seen in years past. So this is exactly what we expect out of our institutions, and no reason to think that that won't continue. So I appreciate that question.

Thank you. Chris, you want to give a little background on how we're doing on our near 24.5 effort?

Chris, let me jump in one more time. And again, I think if you look at the M&A activity, important to note, we've really outperformed, particularly on the market data sales in APAC. We have a very, very small team who works very, very hard, but having a presence with Chi-X now and really a sales team on the ground, the timing of 24.5 and the awareness that there is demand for exposure into the U.S. near around the clock really comes together nicely. If we look at hopefully the approval and closing of Chi-X, so it's coming together for us pretty nicely. But yeah, back to you, Brian.

Let me finish up also, Brian. You know, it's important we're on the lookout always for new sources of data as well. And CoinRoutes, great example of us moving into a cryptocurrency market data. That is just incredible opportunity for us to look at the potential of derived data in crypto, the analytics associated with it, and real price data. So, you know, there's more to come. We're just getting this up and going.

Okay, nobody answered that question. That's too forward-looking. Debbie's going to be mad at us, Brian.

It's a great question. Let me, before I turn over to John on the product, I think it's important for us to recognize it's very top of mind for all of our associates and what that means to Cboe before we even move to what's tradable, what indices are out there, and how our customers can take advantage of investing in ESG. So important for me to mention that on the front end. This is a big deal for us. It's a report that's very important to us. I just reviewed the report that we're about to send out, and all of our associates, this is top of mind. So I want to start there. John, I want to move to what's tradable and some of our index partners and the opportunities we see.

Well, that's a terrific question. I think the biggest observation we see is the change in the size of the contracts that are coming into the SPX complex. It's quite remarkable. Those really, really large trades that we saw before the pandemic have been replaced with smaller order size in general, which is very telling to us. And then in the super short-dated and low premium contracts, huge uptick in what we'll put in a category of traditional retail. That is retail access that's been around for years, but what has been missing in the SPX, the VIX options, mini futures, XSP, our mini SPX, and what we're looking at is to accommodate new retail, which still does not have access to our proprietary product set. So the rotation to smaller order size, the rotation of more traditional retail is what you see today. And at roughly 1.2 million contracts a day, and we're still working on providing access to new retail, which we think the more you look at our mini products and the more they allow access for their clients into SPX, I would predict that you'll see a movement like a traditional retail out of new retail. So that's our goal. But that's what we're seeing today. That's the biggest change I can tell you is trade size.

I think just volumes overall, Rich, we see the volumes retreating a little bit, but a couple weeks does not, for our opinion, a trend make. I actually like the momentum, particularly out of retail that we could have been spending some time on. Not surprisingly, individual names, the attention that individual trading has had has raised vol across the spectrum. So if you're providing that liquidity in the most volatile single names, you're looking for macro layoff as best you can. That had raised the interest for us, and what we saw in AUM and ETPs, we saw that in VIX options. As I said before, you really were buying implied volatility at a discount of what the market was trading at. That's since gone to a more normal relationship again, if we put today out of the mix. But then what we would expect traditionally is if that vol went to a more historical contango shape, we'll see the roll-down, we should see the roll-down trade again from our proprietary product perspective. We just see that as a normal rotation. The single-name excitement being replaced with more macro as vol contracts a bit, and then going back to a short vol capture trade or roll-down trade and going back to a more normal cadence. But it'll be interesting to see. I think the uniqueness of Cboe is having a product for any market environment, and that's not different. So again, and let me add one more comment on retail. We're after sustainable volume in retail. There's going to be flashes and we're going to have headlines, there's going to be interesting stories and shiny objects in the corner. We're after what education can provide for the long-term investor and the retail investor that's going to be here year in, year out. So we don't really chase those spikes, we chase sustainable growth. And that's what we're after. So I appreciate that.

Thank you. I think, Alex, you set me up perfectly with the data and the demand for data. So from an institutional perspective, the data and the back-testing is first before conversion. So that's, I love that, that kind of reflects some of the guidance we've seen as the demand for that data is increasing. But again, I really want to punch the fact that we've seen no conversion from new retail. Zero. There's no access from the most popular new retail sites. So those millions of new retail who are engaged more broadly in the market are not in our proprietary product set at all. So the low-hanging fruit for us is that conversion. We love the story, we like telling how the management of cash-settled European-style contracts are super easy. And so that's the educational effort, that's what we're going to be pointing at hopefully in the months and quarters to come. But start with data in your head as we watch those numbers, and then we'll look for conversion from new retail. That is a good opportunity for us and one that we'll be chasing the rest of this year.

Oh, sorry, Alex. The data reference was on institutional. Retail, we've not seen a history of retail back-testing. It really is access to the market, it's super short-dated. So that is lower-hanging fruit. And I referenced traditional retail really being a big mover into the SPX complex over the last quarter or quarters, and pointing out that the low-hanging fruit is the millions of customers who do not have access to our proprietary product set. That it's not instead of an effort on institutions. John, I think, pointed out that the institutions, the lead time's longer and it starts with data, back-testing, and derived data.

Thanks, Alex, for clarification.

Let me start with more broadly. John, you can go to CoinRoutes. But as we know, market participants are looking for exposure in crypto. Access has to be the driver. We've talked in the past, we're trying to build an ecosystem. So we start with access to market data, that's the CoinRoutes agreement. From there, you know, we have a VanEck Bitcoin Trust ETF in front of the SEC, so we'd love to deliver on a trusted way an ETF, which are really customer-friendly and easy to understand. And then throughout this effort, we need a focus on education. We've not done that in a big way. And then, you know, our way, if you take the educated investor in retail access and then you move from the ETF into satisfying demand for institutional participants, so all of that, pretty early innings if you look at crypto more broadly, and we're in it for the long haul. I think John, a couple words on CoinRoutes.

Welcome.