Cboe Global Markets, Inc. (ETF:CBOE) Q3 2023 Earnings Call Transcript

Cboe Global Markets, Inc. (ETF:CBOE) Q3 2023 Earnings Call Transcript November 3, 2023

Cboe Global Markets, Inc. beats earnings expectations. Reported EPS is $2.06, expectations were $1.86.

Operator: Good morning, and welcome to the Cboe Global Markets Third Quarter 2023 Earnings Call. Please note that this call is being recorded. All participants are in listen-only mode at this time. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Ken Hill, Vice President of Investor Relations. Please go ahead, sir.

Kenneth Hill: Good morning. Thank you for joining us for our third quarter earnings conference call. On the call today, Fred Tomczyk, our Chairman and CEO, and David Howson, our Global President will discuss our performance for the quarter and provide an update on our strategic initiatives. Then Jill Griebenow, our Executive Vice President, Chief Financial Officer, and Chief Accounting Officer, will provide an overview of our financial results for the quarter, as well as discuss our 2023 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer; and our Chief Strategy Officer, John Deters. I would like to point out that this presentation will include the use of slides.

We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we’ll make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call.

During the call this morning, we’ll be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now, I’d like to turn the call over to Fred.

Fred Tomczyk: Thank, Ken, and thanks everyone for joining the call this morning. Having CBo’es results I am Cboe team and our focus on our clients which has resulted in another strong quarter for the company. For today’s call, I will highlight our overall results and share my priorities as Cboe’s new CEO. I will then hand it over to our Global President David Howson to walk through the progress we made against our strategic priorities. I am pleased to report record third quarter adjusted earnings for Cboe. During the quarter, we grew net revenue by 9% year-over-year to $481 million and adjusted earnings per share by 18% to $2.06. These results were driven by record activity across our derivatives business and continued growth of our Data and Access Solutions business, lower third quarter operating expenses and a lowering corporate tax rate.

Our derivatives franchise delivered another record quarter as total organic net revenue increase 15%. As the uncertain macro geopolitical environment impacted markets globally, investors and traders relied on our suite of index options, and volatility products that help manage risk and generate income in an uncertain environment. We believe our derivatives business remains incredibly resilient, supported by a growing customer base and our options product that is becoming increasingly recurring in nature as the management shift to shorter duration explorations and more frequently positioned around changing market environments. During the quarter, organic net revenue in our Data and Access Solutions business increased 9%. Net revenue in our cash and spot markets business decreased by 6% during the quarter reflecting the muted volumes we saw across all global equity markets.

These solid results were made possible by the continuing execution of our strategy to build the world’s largest derivatives and securities network and positioned Cboe for a strong finish to the year. Now as a Cboe Board member for the last four years, I’ve been very close to the business and supported the team as Cboe expanded and evolved into the leading global derivatives and securities network that it is today. The company has a solid foundation, a global recognition and a strong management team that I’m honored to lead. In my new role I am primarily focused on three key priorities that I believe will further strengthen Cboe and enhance shareholder value. First, sharpening our strategic focus; second effective allocation of our capital and training developing talent management succession.

While I wholeheartedly support Cboe’s strategic direction, I see opportunity to refine this strategy to provide a clear focus on the core elements of our business that drive revenue and earnings growth/ I believe our sharpened strategy will help the margin profile of our business and increase shareholder value over the longer term. I will also focus on ensuring our capital allocation plan is delivering the kind of returns our shareholders expect from Cboe. I’m intent on increasing the efficiency of our investments that we make across the business to generate durable revenue growth. Finally, talent development and succession planning, which is always an important component of any CEOs duties and responsibilities will be a priority for me. I’ll now turn the call over to Dave Howson to talk through how we are driving results within our strategy.

David Howson: Thanks, Fred. As Fred noted, our strategy yielded solid results during the third quarter as we continued to advance our top strategic growth priorities, Derivatives, Data and Access Solutions, and Digital. Before moving to the record results for our Derivatives and D&A businesses, let me provide an update on our Digital segment. We are working with our customers and the CSEC on final preparation for the planned launch of Margin Futures in the first quarter of 2024 subject regulatory approvals. Within large Cboe Digital will be the first US regulated crypto native exchange and trading house to offer spot and leverage derivatives on a single platform. We look forward to bringing this unique product to market. Turning to Derivatives and Data and Access Solutions.

Last month we made important leadership changes to further support our global growth strategy. Cathy Clay, who previously led our Data and Access Solutions business was appointed the Global Head of Derivatives. A new role for the organization as we reorganize the team for the next chapter of global growth. Furthermore, we tapped our strong range of talent to promote Adam Inzirillo to Global Head of Data and Access Solutions. By aligning our organizational structure to the global nature of the business we anticipate harnessing the full strength of Cboe increasing efficiency and collaboration across business lines and regions, while enabling our competitive and our world-class products and services in a globally consistent manner to our clients.

Turning to Derivatives on Slide 8. It was another record of quarter for the business as traders and investors turned to our flagship S&P 500 and fixed index products while navigating the uncertain macro environment. SPX volumes surged 21% to a record ADV of 2.9 million contracts in the third quarter. While our mini SPX contract SXP jumped 82% year-over-year. Within SPX, the fastest growing segment continued to be the zero data expiry options gaining 33% year-over-year. Investors use these for hedging, income generation, expressing views on market direction and more. The diversity of using is what we expect to continue to see strong and sustainable use is zero DT options regardless of what the market is doing or where the fix is trading. These options opened up a whole new risk premium for investors to capture namely intraday risk.

And it’s uncertain to increase is regarding the longer term macro picture, interest in capturing shorter term trends and dislocations have led to a higher share going to zero DT options, now, comprising around 48% of all SPX volumes in the third quarter. However, it’s important to note that while the zero DT options are making up a bigger part of the pie, the pie itself is growing, as well. Other expiries are also seeing high volume including our standard monthly SPX options contracts that expires in the third Friday of every month. We believe that bonus are being used less as we diversify our equity risk and investors are increasingly turning to options to help hedge their portfolios. That hedging demand helps explain why VIX option volumes are been so strong with ADVs surging 60% year-over-year even as a world VIX levels are staying.

Investors use VIX options primarily to protect against potential black swan events, which typically happen when volatility levels are known or in the work when least expected. We believe the appeal of buying VIX call options is to potentially capture that context move and the VIX triples or quadruples something that is harder to do when the VIX index was in the mid-20s last year versus the mid-teens of this year. The macro and geopolitical risks rising across the world, we’re seeing strong global demand for our products. With SPX and VIX options ADV during global trading hours increasing 95% and 10% respectively year-over-year. As markets change our derivatives products remains well positioned for customers in any market environment. Our VIX plan-based products anchor a remarkable toolkit that allows customers to choose the right products, size and expiry to meet their needs, be it risk management or income generation.

Documenting the burgeoning activity posted by our derivatives business, Cboe is continuously working to expand its suite of data products to enhance the overall trading ecosystem. In collaboration with S&P Dow Jones indices, Cboe’s products innovation Cboe Labs recently launched several new benchmark indices for market participants. We were incredibly excited to bring to market Cboe S&P 500 dispersion index known by Ticker DSPX as well as our four new credit volatility, indices. Early market reception has been extremely favorable and B2B’s indices are designed to provide investors with key information to help them better manage their strategies and portfolios potentially fueling further growth in our tradable products. On the innovation front in Europe, we are excited about the upcoming launch of single stock options on the Cboe European Derivative Exchange beginning next week.

The commitment secured from leading market participants ahead of the launch highlight the opportunity to materially advance the European options market for clients. As we plan to introduce the liquidity provider and market maker programs in the first quarter of next year subject to regulatory approval, we anticipate volumes on the platform to grow. We see the largest single stock options as a key milestone for our European derivative initiatives and our broad ambition of creating the leading market growth, the management around the globe. Moving to Slide 10 our Data and Access Solutions business posted record results during the third quarter, with net revenue increasing 8.7% on an organic basis. The durable year-over-year growth was fueled by an expanding global customer base and an evolving portfolio of market data solutions.

Through our data offerings and cloud strategy, we can package high quality data from across markets and deliveries to customers globally in a consistent, and cost-effective manner extending the addressable markets for this business. We continue to see solid customer adoption of Cboe global cloud, a real-time data streaming service that provides simple, effective access to Cboe’s robust suite of market data. Nearly 80% of customers utilize this service are located outside of the Americas reflecting our expanding global footprint. Additionally, through our cross-region sales efforts many customers are subscribing to multiple data products offered by Cboe global cloud in the simple, efficient, access to high quality data service. As we look across our global network on slide11, we continue to build on a solid foundation of our global cash equity business while we have a strong presence in seven of the top 10 global equity markets, serving a diverse customer base.

While overall performance in our cash and spot market reflected the muted volumes we saw across global equity markets during the quarter, we are on upbeat about the long-term potential. With 80% of Cboe’s market share grew 17.9% in the third quarter, up from 16.7% in the previous year as momentum continued to build post our technology migration. Later this month, we expect to complete the technology migration of Cboe Japan from a world-class technology stack and launch Cboe with Japan subject to regulatory approvals further expanding our unique block trading network to this important market. We are grateful to our customers for that partnership and look forward to providing them with the best-in-class trading experience that our global customers have come to rely on at Cboe.

In Europe, the Cboe Europe equities business reported market share of 23.2%, while Cboe BIDS Europe experienced another strong quarter a remains the largest block trading venue in Europe. Cboe Clear Europe’s market share grew to 33.8% in the first quarter, up from 33.6% in the prior year quarter. In North America, Canadian1equities market share rose to 15.2%, up from 12.2% in the third quarter of 2022, while US equities market share fell to 12.7% compared to13.3% in the prior year period, Cboe’s addressable market share which excludes both the auctions and the foreign exchange volumes remained stable. Lastly, our global FX business had another record quarter. Net revenues were up 6% year-over-year in the third quarter as the business expanded spot market share to a record 20.2%, up from 17.8% a year ago.

Our NDF offering which trades on Cboe SEF our Swap Execution Facility continued to see strong results with the volumes increasing 19% year-over-year with ADV of $1.1 billion. These record results were driven by new prime growth and increasing utilization of our platforms by existing clients. In summary, Cboe delivered another outstanding quarter and we see strong momentum as we head into the final months of the year and into 2024. With our strong foundation of derivatives, cash and spot markets, coupled with our Data and Access Solutions, we will continue to harness the power of our markets to deliver innovative products and services to our customers. As we show up our strategy and focus we see even more opportunity for Cboe to maximize its global potential and drive further value for our shareholders.

With that, I will turn the call over to Jill.

Jill Griebenow: Thanks, Dave. As Fred and Dave highlighted, Cboe posted a record third quarter with adjusted diluted earnings per share of 18% on a year-over-year basis to $2.06. I want to provide some high level takeaways from the record quarter before delving into an assessment of the segment results. Our third quarter net revenue increased 9% to finish at $481 million. The growth was again driven by the strength in our Derivatives Markets categories and the solid results from our Data and Access Solutions business. Specifically, Derivatives Markets produced 15% year-over-year organic net revenue growth in the third quarter as traders and investors saw increasing utility in our toolkit of proprietary products. Data and Access Solutions net revenues increased 9% on an organic basis during the quarter.

We are pleased with the revenue growth acceleration we have seen through 2023 and remain excited by the continued momentum into year end. Cash and Spot Markets net revenues decreased 6% during the quarter on an organic basis, as the trading environment remained muted across the globe. Adjusted operating expenses increased to a modest 4% to $180 million with a year-over-year growth tempered by a $10 million benefit from changes made during the quarter. And adjusted EBITDA of $321 million grew a solid 12% versus third quarter of 2022. Turning to the key drivers by segment, our press release and the appendix of our slide deck includes information detailing the key metrics for each of our business segments. So I’ll provide some highlights for each.

The Options segment again provided the highest growth of any segments for the quarter. Net revenue grew a robust 14% led by strong contribution from our Index business and favorable revenue per contract trends given the mix shift in VIX options. Total options ADV was at 8% as our higher priced Options ADV increased 28% over third quarter of 2022 levels. Revenue per contract moved 12% higher, given a continued positive contribution of higher captured investment products. In market data and asset capacity these were up 19% and 5% respectively as compared to third quarter of 2022. North American equities net revenue was 2% percent on a year-over-year basis in the third quarter, while access to capacity fees increased 6% and proprietary market data was at 4%.

US industry volumes remains a headwind for the segment. Net transaction fees were down 11% given softer industry volumes and market share on our US business segments. And while our US on-exchange market share have trended lower on an absolute basis, our share remains stable and adjusting for the increased on-exchange market volume and Option activity during the third quarter. The Europe and APAC segment reported a 2% year-over-year increase in net revenue, as stronger non-transaction revenues and favorable foreign exchange trends were tempered by volume headwinds. Market Data, access to capacity and others, which includes the positive impact of interest income during the quarter were up a combined 18% on a year-over-year basis. This outperformance was tempered by softer industry volumes in Europe, down 13% versus the third quarter of ’22.

In the Futures segment, third quarter net revenue was up 14% as net transaction fees, access to capacity fees and market data revenue each produced double-digit year-over-year revenue for the quarter. Activity in the complex accelerated as volumes increased 12% on a year-over-year basis. Our non-transaction volume, access to capacity fees continued to perform well, up 14% versus the third quarter of last year and Market Data revenues increased by 16%. And finally, net revenue in the FX segment notched another quarterly gain, growing by 6% making it the tenth consecutive quarter of year-over-year net revenue gains for the segment. Net transaction fees revenue was at 5% as average daily notional volume increased by 8% and market share had another record at 20.2% for the quarter.

Turning now to Cboe’s Data and Access Solutions business, net revenues were up a strong 8.7% on an organic basis. Net revenue growth continued to be driven by additional subscriptions and units accounting for two-thirds of the organic market data growth and just over half of the organic access and capacity fee growth in the third quarter. The uptick in pricing for Access and Capacity fees was driven by the first pricing increase we have passed through at over five years for physical connectivity to our multi-exchange network. Last quarter, we spoke to selectively increasing pricing to support innovation and keep pace with the utility we provide to the market. We intend to continue to lead with new user and unit growth as we provide exceptional value to our customers.

But we’ll remain mindful of competitor pricing and our need to support continued innovation for our products. We are pleased with the overall acceleration and organic net revenue trends for the segment and believe the momentum positions us well in our full year and medium term guidance range of 7% to 10%. More specifically, we expect to see continued strengths from proprietary data sales benefiting from the sustained growth across our Derivative complex. In Australia, we continue to see a solid uptick in data sales in access and the migration. We expect that momentum to continue. And finally, we anticipate a continued focus on our sales efforts to distribute our content globally adding to the enhanced position capability that Cboe Global – that.

Turning to expenses, total adjusted, operating expenses were approximately 180 million for the quarter, up 4% compared to last year. The modest increase was the product of higher technology support services and professional and outside services fees to support some of our key growth initiatives and an increased travel and promotional spend given higher ongoing corporate marketing expenses. The entire year-over-year changes were partially offset by a 6% year-over-year decline in compensational benefits T given a $10 million benefit for executive changes. As we have historically guided, we did not adjust for the impact of executive departures, and we would not expect the impact to be a recurring element in the Cboe expense page. Moving to our expense guidance, we are lowering our full year 2023 expense guidance range by $12 million to $754 million to $762 million, from $766 million to $774 million.

The three basic components of the full year expense notes are outlined on slide 18 of our earnings presentation; expenses from 2022 acquisitions, core expense growth and growth investments. Looking at the details of our three expense categories. The incremental 2023 expenses from our 2022 acquisition, remains at $30 million to $31 million, following a reduction in expenses growing our newness. The market change in our overall expense forecast comes to support that category now calling for growth of $51 million to $55 million versus our prior expectation of $59 million to $54 million. The reduction is a product of the strong expense management trends we have seen this year as highlighted in our third quarter results and modest growth expectations moving forward.

In addition, we have recalibrated our capitalized cost given our updated expectations. Overall, we expect core expenses to grow by 8% in 2023. Moving on to growth generating investments, we anticipate that the investments we are making as a business to help drive incremental revenue to our bottom-line, will be in the range of $21 million to $24 million. Our new range of roughly $3 million to $4 million lower than our prior range. But we remain committed to investing in high return areas, by D&A expansion, a more addressable marketing campaigns and targeted product and services across our ecosystem. Looking at our full year guidance more broadly on the next slide, we are making some positive refinements to our forward outlook across our businesses.

At a high level, we are reaffirming our organic total net revenue growth range of 7% to 9% for 2023, we expect to finish at the high end of the range for the year. As a reminder, this remains above our medium term guidance of 5% to 7% introduced at our Investor Day nearly three years ago, a function of the durable innovation we have seen across the entire ecosystem at Cboe. As mentioned earlier, we are reaffirming our D&A organic net revenue growth rate of 7% to 10% for 2023, in line with our medium term expectations. Given the company’s positive marks on its investment in the 7Ridge Fund, which owns Trading Technologies, we are again increasing our expected benefit from the other income line. Our new guidance range of $38 million to $44 million, is $4 million above our prior range of $34 million to $40 million.

Our full year guidance on depreciation and amortization remains at $40 million to $44 million, and we expect the effective tax rate on adjusted earnings under the current tax laws to come in at 27.5% to 29.5% down from our prior guidance of $28.5% and $30.5% in 2023. Outside of our annual guidance, net interest expense for the third quarter of 2023 was $12 million. For fourth quarter, we expect net interest expense to be in the range of $11 million to $12 million. On the capital front, our focus remains maximizing long-term shareholder value through effective capital management. In the third quarter, we returned a total of $58.5 million to shareholders in the form of a $0.55 per share quarterly dividend. In addition, last week we announced to increase our share repurchase authorization at an $250 million to preserve total capacity to $390 million available for share repurchases.

We remain well positioned to invest in our business, support our dividends and opportunistically repurchase shares given our continued strong free cash flow generation. Turning to our balance sheet, we paid down $99 on our term loan facility that matures in December of this year during the quarter. Our third quarter leverage ratio declined slightly to 1.3x from 1.4x in the prior quarter, as a result of the debt paydowns. Since the end of the third quarter, we have paid down the remaining $75 million on our term loan facility. Overall, we remain comfortable with our debt profile having locked in low medium longer term fixed rates averaging to low 20% on our option in debt. Moving forward, we will continue to put capital to work in value-enhancing ways across our ecosystem while looking to strike the right values between investing in future growth and driving margin efficiencies.

Before I turn the call over to Fred for some closing remarks, I want to congratulate Ken Hill, who was recently promoted to Treasurer and Vice President, Investor Relations. Since joining Cboe in 2021, Ken has made an incredible impact with our Investor Relations programs and I am delighted with him to expand his leadership with the Treasurer role. Now, I’d like to turn it back over to Fred for some closing comments before we open it up for Q&A.

Fred Tomczyk: Thanks, Jill. In summary, I want to thank the entire Cboe team for the warm welcome, and the incredible achievements over the last quarter. Cboe’s success this year and over the last 50 years is a testament to the enduring strengths and resiliency of the team who continue to rise to any occasion and deliver results. I’m very excited about the future of Cboe Global Markets. At this point, we’d be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back into queue, and if time permits, we’ll take the second question.

Operator: [Operator Instructions] Our first question comes from Patrick Moley with Piper Sandler. Your line is open.

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Q&A Session

Patrick Moley: Yes. Good morning. Thanks for taking my question. Fred, I just wanted to dig into the three key priorities you laid out in your prepared remarks. I was hoping you can maybe elaborate on the comments you made about refining the strategic vision. What areas are you focused on? Where you see the most opportunity for improving efficiencies? And what impact would you expect this to have on your overall expense growth going forward? Thanks.

Fred Tomczyk: Thanks Patrick. So, obviously I have been following the strategies from a Board level and I’m providing my input comments to the management team through the process. I generally agree with the direction as – clearly as a board member I have my input to that. However, I have been clear that I consider that the current strategy is to brought – let me just say new asset classes, new geographies. So I use to say that my predecessor anything fits in there. And so, I think it a good strategy provides greater direction and focus to an organization. So that’s the first point Second, all good strategies starts with a good organic strategy. So we’re definitely going to focus on that to make sure we have a good solid organic strategy.

And then the inorganic parts of that strategy will complement that organic strategy, but not be the main game source to be. I also believe that any good strategy has to be built by the management team with everybody providing their input along the way and it has to be reviewed and approved by the Board. To me, what’s important as the first step is to have a common frame of reference. And what I mean by that is, we all agree on what the trends are in the business, where the world’s going to between what I call secular and cyclical trends and you always line up your strategies to go with the secular trends and you adjust over the short term for cyclical trends. Also, they’re good competitive analysis and then a good SWOT analysis of what Cboe is really good at and what it can bring to different parts of the world.

From that we’ll follow your key strategic things. Why they’re important? And then your various actions will follow off over the next two to three years, but between organic and organic. And when I talk about efficiencies, obviously, I clearly recognize that even op margins of the following last three or four years that – I’m okay with even our margins falling slightly as long as it’s for a good reason. But I think we want to sort of stabilize that trend and start to turn it into the future looking forward. Does that answer your question?

Patrick Moley: Yes, it does. I’ll hop back in the queue. Thanks.

Operator: Our next question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon: Thanks. Good morning. Wanted to follow up on that and maybe if you could talk about capital allocation going forward, the authorization last week and then the message we heard this morning sounds similar in terms of how you guys have allocated capital previously, but should given the organic and sharpening focus of the business should we think about buybacks and as more of a focus here in the near term.

Fred Tomczyk: I would lay it out this way. I would say, we’ll have discipline, number one. The first and foremost, we think the best use of our capital is to invest in organic initiatives. We’ve seen some good returns from some of those initiatives and so that will continue to be a focus. Secondly, obviously we have the dividend. We consider that as something, we just have to do almost like an interest payment to return capital to our shareholders through a form of a regular dividend. Third, I think right now, as you can see us from Jill’s comments, we’ve been paying down our floating rate debt, given the rise of interest rates and we’re happy that we’ve got that back down to essentially zero. And that we will look at share repurchases on an opportunistic basis from this point forward.

And then lastly, M&A, I think you should expect, you’ll see less M&A going and a more focused M&A strategy. I’m a much bigger fan of what I call deliberate M&A transactions. But right now, we’re going to focus on making sure our strategy is tight. We are all on the same page and making sure organic growth strategy is what we wanted to be.

Dan Fannon: Thank you.

Operator: Our next question comes from Chris Allen with Citi. Your line is open.

Chris Allen: Yeah, morning, everyone. I wanted to follow up on basically the last two questions. Just in terms of stabilizing EBITDA margins and potential room for improvement there. Any colors in terms of specific opportunities that you see and any color on a timeframe to expect some room for improvement there?

Fred Tomczyk: Well, I’m six weeks in. So I think you can ask me that question maybe next quarter, but I’ve suffice it to say that’s certainly an area of focus for me to try to stabilize those margins. And find ways to improve them going forward, which I think the management team will do where we get good operating leverage in the business. But at this point, six weeks in, I don’t have anything specific.

Operator: Our next question comes from Ben Budish with Barclays. Your line is open.

Ben Budish: Hi. Good morning and thanks for taking the question. To be original I’m going to continue to follow up on those first three questions. Maybe you talked about narrowing the strategic focus going forward. To what extent that that perhaps refer to divestitures as well? It sounds like maybe there was a little bit of disagreement with your predecessor about the breadth of the M&A strategy. So are you talking about, being more focused going forward or revisiting the existing portfolio? Are you thinking about balancing those two things? Thank you.

Fred Tomczyk: I wouldn’t say it was much of a disagreement between Ed and I, as much as I didn’t think there’s a strategy provided enough focus to the organization and focusing where we allocate our capital in terms of M&A. So that, but I don’t think there was a difference of opinion on strategies, so to speak. It’s much more about narrowing it. So, that’s – I don’t know what I’ll say there. Anybody else?

David Howson : In terms of the product lines that we’re in, we’ve got some exciting new events coming up with the launches and in our Digital business and margin Futures in the New Year with new product launches coming back. And we’ve got the Asia Pacific Re-platforming that’s going to happen later this year together onto a common technology platform. And what we saw with the Australian migration was that increasing Data and Access and capacity. That, so as we get these new acquisitions onto that common world-class technology platform, there’s some great opportunity to see that longer term growth come from some of those the more recent acquisitions.

John Deters : This is John. I think really integrations and focused today the press point for past acquisitions. And we do see as a consequence of the way, we approach integration deep integration that our return on invested capital for the tranches of deals that we pursue improves over time to be managed that those returns for three to five year outcomes. And so we’re still in process there.

Chris Isaacson : On divestitures, at this point, I don’t have anything specific in my mind with respect to divestitures. That’s something every management team considers over time. But right now, I would answer, no. Obviously we want to see how our Digital business does. The world has changed since we bought that asset and as we launch our managed futures our margin futures, we want to see how that starts to take. It’s clearly an asset class that doesn’t have the trajectory it used to have. But we still think there’s demand for the market for that particular asset class. And we do believe, given all that’s got on that our strategy is right in terms of turning that asset class into footing a place trusted markets where everybody has an appetite for it.

Ben Budish: Got it. Thanks for the incremental color. Thank you.

Operator: Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Craig Siegenthaler: Good morning, everyone and thanks for taking my question. And also want to wish both Fred and Ken a congrats on the new roles. Just starting with index options volume, the long-term trajectory here is obviously very robust. But there has been a deceleration over the near term. So, I wanted to see what you attribute the slowing to in your view? And then also, do you think this Zero Day contribution, which is now in the high 40% rate is close to secular equilibrium? Or do you think Zero Day mix could move higher? Thank you guys.

Fred Tomczyk: Thanks very much for the question. And certainly we had great Q3 with a number of records coming through Q3. Sales of SPX volume $2.9 million, contracts that are significantly over the prior year, VIX options up 60% versus the prior year. And then, as we think about momentum, we think about October as we’ve begun with some record there. And in fact, 2023 has seen nine of the top 10 SPX savings six of those have been in October. So, good momentum coming through that really driven in SPX by three factors, one would be the pick up in hedging as the vectors revisited during the year. The second would be that the vectors catching up with performance through SPX co-buying that. And then thirdly of course, the zero DT complex that you mentioned.

48% as utilization agency quote that of the SPX volume coming from Zero Day to expiry using an increase in the proportion there of institutional engagement as more funds and more strategies have been set up to trade this incredibly balanced ecosystem, where hedging income generation tactical strategy, and systematic trading have all come to life. And so, in terms of the sustainability there, we see that really persisting. And why do we seeing that? We are seeing that because it’s continued over the last 18 months through different market cycles and different volatility regions. And so, as we look forward, we really think about the continued uncertainty in the marketplace, because we think about Fed, we think about inflation, we think about geopolitical issues there and really options, and our volatility toolkit really being replaced to come to manage your risk.

And then, when you think about options themselves, it’s a real durable recurring income stream. Options expire every day, every week, every month, every year and in fact, as we’ll continue to reposition and reengage around that uncertainty that is really forecasted for the rest of next year.

David Howson : Yeah, just to add on that – having seen index options slow down and continue to rise, equity volumes are off as they are relevantly low. But index options continue to grow and into October it continues to grow.

John Deters : And then we just mentioned also the global trading hours in the script you heard us talking about 95% year-over-year growth of SPX index box option volumes, the global trading hours, VIX is growing as well. We still see opportunities for growth and access and distribution around the world and around the clock.

Operator: Our next question comes from Alex Kram with UBS. Your line is open.

Alex Kram: Yes. Hey, good morning, everyone, and Fred good to be talking again. It’s been a few years. But good to have you again. In terms of the topic as you are and maybe this is a continuation from Ben’s question earlier as it comes to divestitures, maybe getting more specific the one area that you didn’t highlight was the European derivative expansion? Now we’ve been at this for a while now and I know there’s some new milestones coming here early next year. But just wondering if you look at an initiative like that where now when we talk to clients we hear limited appetites. Just wondering if maybe your patience with a project like that maybe more limited than than what’s been done before. And then maybe, for Jill, on the same topic, can you just remind us how much the drag is of the European derivatives business today in terms of expenses? Thank you.

Fred Tomczyk: Yeah, maybe I’ll start and I’ll turn it over to Dave for a second. But we just launched European derivatives. So it’s a little early to make a judgment on it. Contrary to it I think there’s two different ways of people look at derivatives in different markets. Sometimes they want access to the US, and if you talk to our clients, our bigger clients, they continue to tell me anyway that there’s a lot of demand for liquidity moving into the US. So that’s one point. And second point, obviously, it’s very early with respect to the multi-list European option expansion here. So I don’t, I wouldn’t pre-judge it at this point. The last thing we have some better perspective on that.

David Howson : Yeah, thanks Fred and thanks, Alex for the question here. When we think about European derivatives, and we’ve always seen this, it’s going to be a journey and not an event – in an event in time, when you’re launching a brand new exchange, a brand new clearing house, and a brand new product, what we need just one of those at a time, they all need time to gain critical mass. And we’re really looking forward to the launch of single stock options in a couple of weeks whereby we’ve got some strong support from industry participants. And when you look at the growth so far, we can see second best quarter for us in Q3 for the index options and futures in Europe with some new participants, new futures and options market makers and some new non-bank FCMs. So, traction, continuing to build there.

And then when we look at the value proposition that that white space to move into for the European derivatives market, it’s significantly still there. 10 years ago, Europe and the US had market sizes around about the same. Now, it’s 8 to 10 times different in those market sizes, clearly a number of factors there when we see roots of growth expand the European market by bringing that US market structure to that. And with regards to the project itself and the build cost and the build effort going forward, it’s purely incremental. We already have the largest PAN European equity exchange in Europe. We already have the largest cash equity clearing house in Europe and the staff to run them. So, by leveraging our global technology platform and re-using this, the functionality from US, it was a marginal incremental effort for them.

So for others it’s not a significant burn that concerns us well. We really look to take advantage of this real gap in the market that we think over time, we can move into. We can move into with the great cost development and great partnerships with our customers there. So certainly we remain committed and committed to this process.

Alex Kram: Very Good. Thanks for the color.

Operator: Our next question comes from Owen Lau with Oppenheimer. Your line is open.

Owen Lau: Good morning, and thank you for taking my question. So massive speculation about the future ownership of Cboe recently. And Fred, you also mentioned the succession planning in your prepared remarks. Could you please elaborate that point a little bit more? Thank you.

Fred Tomczyk: Could you repeat the second part of your question for me for a second, Owen?

Owen Lau: Sorry. You mentioned the succession planning in your prepared remark. Could you please just elaborate that point a little bit more? Thank you.

Fred Tomczyk: Maybe I’ll start with the second one, first. So, I always remember for the first time I became a CEO and I was pretty young that my Board was very clear to me that my job priority one on my first day in the job was to plan for my own succession. And so, clearly, that’s going to be a focus here in terms of making sure we have the talent in the organization that we need and then we have the leadership and the place is set up for our orderly succession. In my experience, when you surround yourself with really good people and I’ve got a good team around here. Basically business becomes easier when you’re fighting, when you don’t have good people and good leadership in the organization, things got harder. But you should assume that I’m going to continue to work on developing the talent and the team around me as they grow into their jobs and hopefully more bigger jobs.

And when the time comes for me to step down when someone’s ready, then, I’ll be the first one to say, I hand it over to my successor. With respect to Cboe ownership, I would emphasize these rumors have come and gone over the years. Having said that, I don’t think Cboe is more for sale today than it was two months ago or three months ago. We’re just continuing most important thing for us is keep our heads down and stay focused on running our business and we’ll deal with anything that comes at us in due course.

Owen Lau: Thanks a lot.

Operator: Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Alex Blostein: Hey, good morning everybody. Thanks for the question. I was hoping we could spend a couple of minutes and just again to some of the expense trends you highlighted both for the year and maybe get your own thoughts into ‘24. The specific area I was hoping to kind of double point into the consolidated audit trail. I know it’s been a pretty big drag on expenses for you guys this year. Just curious how do you see that evolving. There’s obviously things that come out of the SEC that could make this better for Cboe and others next year and beyond? So, maybe again help us frame the cat sort of costs drag this year. How you are thinking about it for next year? And your early thoughts for ‘24 expenses. Thanks.

Jill Griebenow : You bet. If I could just jump in and I’ll take this one. As you really see there has been I guess some noise with the CapEx here and we will see and we’ve taken a look and firmed up our guidance, as we head into the fourth quarter. You do notice that we that core cost – for the cat cost built into our core expenses and that’s really a function of the funding model being recently approved coupled with the fact that the CAT in a cycle build stage. So we’re just again getting that into our core expense base and really looking to see that moderate as it relates to 2024, too early to comment on that. We will share full year projections with you in February of next year. But again, for 2023, as we communicated today we did trim our expense guidance and that our core expense growth looking to come in at about an 8% growth over 2022.

Operator: Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell: Great. Thanks very much for taking my question. Welcome Fred. Great to hear your voice again and congrats to Ken, as well. My question maybe focus on Europe, actually just in terms of, I guess a two-part question, just bigger picture there. How important is the development of the consolidated tape to the overall European strategy? And then weaving in the derivatives part of that I guess, do you view that as a separate, completely separate strategy for your overall European business. And then, are you still looking for, I think you were trying to get to the $25 million annualized revenue run rate, I think exiting 2025. I just want to see if that’s still a plan on the derivatives?

Fred Tomczyk: Thanks very much for the question. Yeah, we’ve been huge proponents of the last decade of the benefits that a consolidated tape would bring Europe, clearly hugely beneficial for the US marketplace. So that single pane of glass of the globe into the equity markets. And then the fixed income markets in Europe is something we’ve really been pushing for. The recent developments show reasonably good structure coming through there is some consolidated tape, which we are very interested in I may even think about whether or not we would want to be the provider of that consolidated tape. And not likely to see an actual tape come through though till about 2026 given the way the process grown. So really important, really for that overall capital markets in Europe.

And as the PAN European exchange of the Pan European Clearing House, we really fit the comeback capital markets union model, very, very well that. I just don’t care what the derivatives market in many ways when you think about our approach being a PAN-European approach. Once again a single stop shop there enabling us to offer greater capital efficiency and let on the transparent on the model that with the Cboe Europe having the ability to access all of the CSDs around and provide a more cleaner and capital-efficient, post-trade solution. And then when we think about the prognosis for the business and how we’re going. You mentioned that that guide that we’ve got single stock options coming in a couple of weeks. And as that begins, we gain traction we will be able to take a look at how that’s building and consider the revenue profile, growth profile as that comes into that.

Brian Bedell: Okay, great. Thank you very much.

Operator: Our next question comes from Kyle Voigt with KBW. Your line is open.

Kyle Voigt: Hi. Good morning, maybe just a question on pricing. You noted the ability to raise price in areas where you’re clearly providing incremental value, which recently was a case in the Access Solutions business. But kind of porting that thinking over to the transaction side of the business, you’re clearly providing significantly more value in SPX and zero DT specifically, given the volume growth we’ve seen this year, I guess, under the contract with S&P can you remind us how much flexibility you have to make pricing changes across that SPX complex? And is this something that you be considering heading into 2024?

Fred Tomczyk: Thanks a lot. Excellent question. And we’ve, if I give you a little walk around the arc of pricing, we’ve got in Q3, 59% came from organic subscription and unit growth there. And so, when we think generally about pricing across the data franchise, we are really focusing on distribution and really great opportunity, particularly, over in Asian-Pacific and in EMEA to sell our data products there. We saw 39% of the growth in Q3 coming from outside of Americas. We see a good runway there. So focus predominantly on distribution and broadening access. We’ve got consistent pipes to deliver our data revenue – come out of revenue there, again 78% or nearly 80% of that revenue is coming internationally. So, good runway there.

Surprising but so, we could use when moving across the scale, really it’s about that runway of new users. But we are talking about the competitive markets that we go in for the transactional basis, that’s really looking to maximize the revenue per contract, the market share and the market quality down. That’s a, that’s still where teams have hooked down to a. fine art. And then when we come to the proprietary products there, the answer is yes. We can adjust the pricing of the trading of SPX options as we need to, but when you think look back to my earlier answer, that momentum was seen in that growth. At the moment it’s continuing and its broadened the adoption and as Chris mentioned fabulous opportunity there in global trading hours as we again look to that international capability.

And also think about those retail brokers coming through into next year. So, pricing is right priced at the moment. It’s cost-effectively placed to build liquidity, manage risk in that complex or something that in general we will look though to see where we can enhance some value in the same the pockets there, but broadly. But again that’s about expanding the access and distribution.

John Deters : Kyle, this is John. Just to be clear. We don’t have any constraints on any of our partnership relationships even beyond S&P in terms of being able to respond to the market environment with the correct pricing approach.

Kyle Voigt: Very clear. Thank you.

Operator: Our next question comes from Andrew Bond with Rosenblatt Securities. Your line is open.

Andrew Bond: Hey, good morning. Just want to get your thoughts on SEC’s latest market structure proposal, it looks to ban volume-based pricing to exchanges. Can you walk us through maybe why providing the tiers is important for liquidity provisioning? And how does it impact competition not just with other exchanges, but off exchange markets and the broker internalization?

Fred Tomczyk: Thanks very much. Good question there. Yes, the rule proposal that looks to folks on rebate tiers, not rebates alone, the rebate tiers for that agency flow. As a general principle there we don’t support government impose the price controls. In particular, in highly competitive markets as you mentioned. We’ve been – the minister told it maybe use to help us drive competition between the trading venues. And so, that utility there is really important for us to be able to have that and couldn’t even result in higher costs to the end users. Those costs will likely end up being passed back up the food chain. So for us, we really like to focus on competing on a level playing field. Some of the prior proposals coming in the back end of massive focused on leveling that playing field and this one, this potential folks here looks to going somewhat against that.

So all being engaging with it with common mechanism with the SEC and the industry participants to make sure that we have a, you know harm approach and actually think about the listing market structure first, because what’s better for any investors is better for the market and we look to enjoy competing within those constraints.

Andrew Bond: Okay. Thanks.

Operator: Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys: Hi, good morning. And thanks for taking the question. Wanted to ask on the index options suite with the SPX dailies. You now have SPX going out 30 days, but maybe you can just remind us on the SPX. expiries, what do you have the on 30 days? And to what extent might there be any sort of innovation opportunities to fill out more maturities to allow more precise hedging with longer duration? And potentially expand the user base even more? I guess in another way, why not have daily is going out 365 days instead of just 30 days?

David Howson: Yeah, great question, great. So we all see the last steamer continually thinking about how we can innovate around our volatility [Indiscernible]. There you saw the dispersion index. You saw the credit mix indices come out, as well. But purely on SPX, we’ve got five weeks of SPX weekly expiries going out now,for customers, we have to be able to utilize those. As we’ve go on striking expiries, and we always manage that find balance between liquidity provision and be able to manage the number of strikes and number of series that the market has to manage and digest and really conscious about adding value where it comes through. And in terms of longer data I would mention that Cboe is the pioneer, the leads options as longer dated options going out most full year.

That’s a great utility for some of these, say insurers and other asset managers out there and other buy side funds to really gain some real value there. So we’ve got a broad range of strikes and expiries now, Really, we’ll be customer-led. We want to give our end-customers and investors what they need. And also what the liquidity provided rates to support in a reliable and consistent manner. So, think about ways in which more may come through that.

John Deters : Mike, I just mentioned that we – so, we had Tuesday, Thursdays, about a year and a half ago, but we added the fifth, the fifth week of dailies, the Tuesdays Thursdays, in the last few months and that was based on customer demand. So as Dave said, his customers demand more and we think we have appropriate liquidity provision. We’ll continue to add strikes if the market wants.

Michael Cyprys: Okay. Thank you.

Operator: Our final question is a follow-up from Owen Lau with Oppenheimer. Your line is open.

Owen Lau: Hey. Thank you for taking my follow up. So, – recently launched a crypto futures trading together with their smart trading. Could you please talk about how Cboe Digital will compete in this space and the value proposition? And I guess more importantly, given the low trading volume for the industry, how do you think about the investments in this space longer term? Thanks a lot.

Fred Tomczyk: Thanks Owen. As we’ve been talking about, we’re really excited about the launch of our margin futures product in early 2024 that great engagement from customers and SCMs as we build out that project. As following that we do have further derivatives products in the pipeline. The thing that’s unique about Cboe Digital once we have that launched is that the spot and the margin futures will be on the same technology platform underneath the same regulatory umbrella. So, over the same APIs, over the same connections, you can trade both the spot and those physically and cash settle or cash settled margin futures all on the same platform there. So, real unique value being added to that. And then when we think about the prognosis for the future, we think about the – hopeful approval of those spot if and spot Bitcoin ETFs, which we will know more about in the New Year.

At Cboe, we’re supporting eight issuers of those ETS with five data sharing agreements in place. And so when they come to market, not only do we get to list of products and have to trading, but actually the ecosystem that we have there with that US-based regulated exchange and clearing house to support those authorized participants and market makers who will be supporting and needing to manage their exposure in those products. A good ecosystem benefit is coming there. And then when you look at the regulatory direction, although it may have slowed it’s certainly coming in Cboe’s direction where we run a transparent, regulated, customer first, intermediate-driven model.

Owen Lau: Got it. Thanks a lot.

Operator: There are no further questions at this time. I will now turn the call back to the management team for any closing remarks.

Fred Tomczyk: Thank you and thanks everyone for joining us this morning. I wish you all a good weekend and look forward to seeing you all in the future in person as I start to get out from the office. Take care.

Operator: This concludes today’s conference call. Thank you for joining us. You may now disconnect.