Cboe Global Markets, Inc. (CBOE) Earnings Call Transcript & Summary

Hello. And welcome to the Cboe Global Markets 2020 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Debbie Koopman. Ms. Koopman, please go ahead.

Thank you. Good morning. And thank you for joining us for our second quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO, will discuss the quarter and provide an update on our strategic initiatives; then Brian Schell, our Executive Vice President and CFO, will provide an overview of our financial results and provide updated 2020 guidance for certain financial metrics. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our Chief Operating Officer, Chris Isaacson; and our Chief Strategy Officer, John Deters. In addition, 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 will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. During the course of the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now I'd like to turn the call over to Ed.

Thank you, Debbie. Good morning and thank you for joining us this morning. Before I begin, I would like to extend my sincere best wishes for the ongoing health and well-being of each of you and your loved ones as we continue to navigate these challenging times. I'm pleased to report solid financial results for the second quarter of 2020 at Cboe Global Markets, clearly highlighting the strength of the diversification of our revenues. Our strong results were driven by record-trading volumes in U.S. cash equities and multi-listed options, fueled by growth in retail trading activity and by continued growth in market data revenues. You'll note, I did not mention our proprietary products. I will cover those in a moment, but I want to pause here to quote a 2016 press release entitled, "Cboe Holdings Agrees to Acquire Bats Global Markets to Strengthen the Company's Global Position in Innovative Tradable Products and Services and Achieve Meaningful Cost and Operational Efficiencies." We went on to say in that release that "The Bats transaction will significantly expand Cboe Holdings product line across asset classes, broaden its geographic reach with Bats' strong pan-European equities and global FX positions and diversify its business mix with significant nontransactional revenue. And that Cboe expects to utilize Bats' leading proprietary trading technology by migrating trading in all of the combined company's markets onto a single, proven platform." This brief trip down memory lane will frame today's remarks because no quarter more emphatically illustrates the fruits of a strategy that began 4 years ago than the second quarter of 2020, both in terms of our near-term financial results and in enhancing our long-term franchise value. Our proprietary products are key to that strategy. But we have built upon them and created new revenue streams to grow in tandem with them. Our growth strategy has not changed since the close of our transformational deal, expand our product line across asset classes, broaden our geographic reach, diversify our business mix with recurring revenue and leverage our technology advantage. Let's take a look at the quarter through the lens of those growth drivers. The Bats acquisition enabled us to strengthen our product set with new asset classes for Cboe, including U.S. and European equities and global FX, and to expand our market for multi-listed options. Our expanded product line left us well positioned to offset unique challenges to trading in our proprietary products in a truly unprecedented environment with record activity in U.S. cash equities and equity options. Furthermore, these products provided the foundation to invest in scaling our proprietary market data to drive recurring revenue streams, extend our presence further across the value chain into equities clearing and broaden the reach of our core services into a new adjacent geography, examples of investments made just this year-to-date. As discussed on previous calls, we've continued to methodically strengthen equities trading at Cboe through the implementation of new trading mechanisms and market enhancements and by leveraging the ability to cross-sell and competitively price our expanded offering. We saw those efforts pay off in the second quarter when U.S. Equities trading at Cboe increased 82% over the previous year for an all-time quarterly average daily volume high of 2 billion shares traded. Continued uptake in our retail priority program helped drive the record results. You'll recall, we created retail priority to help improve execution quality and trading outcomes for individual investors and firms that facilitate their orders. Retail priority orders have increased each month since their launch on Cboe EDGX in November of 2019 and represented 12% of shares executed on Cboe EDGX in the last 2 months. In another example of our focus on equity product innovation, we recently filed a proposal with the SEC to launch periodic auctions on our BYX Exchange, similar to our Cboe Europe offering. Cboe Europe periodic auctions, a lit order book that runs auctions throughout the day, is designed to enable investors to quickly find liquidity and trade large quantities of stock with low-market impact. It has proved popular among market participants after launching in 2015 and remains the leading European periodic auction, accounting for around 2% of daily order book trading in European equities. We believe the U.S. market will also value executing trades in a venue designed to provide minimum market impact. Turning now to record trading and equity options. As you know, multi-listed options trading became highly competitive over the past decade in a market that became increasingly crowded with new entrants. We remain committed to being a leader in this space through the operating leverage inherent in our business model as equity options trading represented both incremental volume and revenue, complementing our proprietary product line. With that backdrop, it was something of a revelation when we were kicking the tires at Bats and saw the enviable profitability they achieved in equity options by leveraging the efficiencies of their superior technology. The addition of EDGX and BZX options to Cboe and C2 meant we cannot only compete with a broader array of market models, but that we could offer all 4 markets on the same advanced technology, further expanding our profit margin. This operating leverage provides a differentiated investment capacity and the flexibility to further capitalize on the opportunities inherent in each of our strategic growth drivers. In addition to expanding our product line by asset class, we continue to expand and leverage our global footprint. As you know, we closed our acquisition of EuroCCP on July 1, which enhances our European equities offering and enables us to extend our business into trading and clearing European derivatives. We plan to launch Cboe Europe derivatives in the first half of 2021 with futures and options on 6 key European equity indices. The development of derivatives products end markets is a sweet spot for us. And we see a significant opportunity to expand the market for European equities derivatives through the introduction of a transparent, efficient, lit pan-European market. Our entire team is excited to bring our derivatives expertise to the European marketplace. We also announced our plans in Q2 to acquire MATCHNow, Canada's largest alternative trading system, which will enable us to broaden our North American equities business and expand our geographic reach. MATCHNow offers a profitable, innovative equities platform in a key capital market and a strategic pathway to build a more comprehensive equities platform in Canada. As I discussed earlier, this step into Canada demonstrates our commitment to profitable global expansion, thereby strengthening our combined offering, contributing to incremental scale and allowing us to reach important new participants. We expect to close the deal this quarter. Another promise we made to the marketplace through our acquisition of Bats was to optimize and diversify our business mix with recurring revenue through trading tools and market data services that help attract repeat users to our markets. We've worked to steadily increase the market data revenues afforded us by the Bats deal while successfully building out Cboe Information Solutions, our comprehensive suite of data solutions, analytics and indices, so much so that nontransactional-related services were a key driver of our second quarter revenue growth. Understanding risk has never been more important. And the groundwork we laid over the past few years enabled us to effectively respond to the heightened demand for historical data sets and sophisticated analytics, and we continue to expand our toolbox. Last quarter, we discussed our recent acquisitions of Hanweck and FT Options, which, similar to our previous Silexx investment, highlight our commitment to investing in tools to grow the utility of our product suite end markets. In June, we acquired Trade Alert, a real-time alerts and order flow analysis service provider, which allows us to deliver real-time trade data, market information and Cboe content directly to customers. Importantly, our integration of Trade Alert along with Hanweck and FT Options now allows us to interact with the client throughout the life cycle of a transaction pre trade, at trade, post trade with insights alpha opportunities, portfolio optimizations and seamless workforce. Each of these investments complements and strengthens our comprehensive suite of data and analytics solutions. And we've made great strides on their integration and optimization. We have enhanced LiveVol and Silexx with Hanweck volatility and Greek data and have demand -- and have seen increased demand for Trade Alert, especially since our acquisition. We're also incorporating Hanweck data within our growing indices offering and plan to use Hanweck to drive real-time data in Silexx beginning this quarter. Turning now to our proprietary products. As noted, we grew our quarterly revenues and earnings despite an unprecedented environment that offered institutions limited opportunity to trade volatility or broad-based indexes. The COVID-19 pandemic continues to severely impact the global marketplace. The failure, thus far, to contain the virus in the U.S., recent increases in unemployment and historic declines in GDP, among other key events, continue to drive elevated levels of market uncertainty. The average daily closing price of the VIX Index in 2Q 2020 was 34.5%, a higher quarterly value than any quarter over the past 5 years in levels not observed since the 2008 financial crisis. We are finding that the increased levels of uncertainty that drove institutional investors to derisk and resulted in record volumes in the first quarter are now keeping institutional investors on the sidelines, waiting for more clarity around the longer-term impacts of the COVID-19 virus. This resulted in lower second quarter volumes from most of our proprietary products compared to the first quarter numbers. As we've said before, when these participants have clear views on where the market is headed, we expect, once again, to see elevated volumes. We continue to see uptake, however, in our Cboe iBoxx iShares high-yield corporate bond index futures where we've seen gradual but steady market adoption since their launch in 2018. In response to investor demand, we recently announced our planned launch of Mini VIX futures on August 10, subject to regulatory review. The smaller VIX futures contract is designed to provide additional flexibility and volatility risk management and greater precision when allocating among smaller managed accounts. iBoxx and Mini VIX futures exemplify our ability to continue to expand our proprietary product offering. In other proprietary product news, Cboe further strengthened its strategic relationship with FTSE Russell by extending its 2015 exclusive licensing agreement through 2030. We are excited to continue to work side-by-side with FTSE Russell in providing exclusive access to a suite of Russell-derived products. The extension of our agreement further solidifies Cboe's vantage point as the home for every major index provider. Turning now to trading floor. On June 15, we successfully and safely reopened the C1 trading floor and resumed hybrid trading. The return to Cboe's best-in-class hybrid trading once again provides investors unparalleled access to liquidity across the wide range of Cboe products. Our ability to quickly transition to an all-electronic trading environment then to reconfigure our floor for a safe and orderly reopening is a credit to the ongoing collaboration with our trading floor community. I would like to thank them for their efforts and willingness to work with us through these 2 historic firsts. I would also like to thank the entire team, Cboe team, for a great quarter despite a backdrop of global pandemic that continue to proliferate alongside a historic uprising against racial injustice. The spotlight on racial inequity, past and present, has prompted us as a team to listen, reflect and define how Cboe can play a greater role in the solution by supporting organizations that fight for social justice and by redoubling our efforts internally to strengthen our culture of diversity and inclusivity. Our continued ability to generate positive financial results, reward shareholders, create new products and services, close highly strategic deals and integrate new teams and services, all with an environment that we can never have imagined is a testimony to the expertise, discipline and competitive spirit of the Cboe team. Our disciplined approach and technology advantage have enabled us to expand and enhance our products and services, which include additional streams of complementary recurring revenue, reinforce our leading industry operating efficiency and provide the flexibility to invest organically and inorganically in new growth vectors to sustain underlying momentum in the business. Thank you. And with that, I will turn it over to Brian.

Thanks, Ed, and good morning, everyone. I hope everyone and their families are remaining safe and healthy. And I'd also like to thank all of the Cboe associates for their hard work and dedication helping make these results possible. Let me remind everyone that, unless specifically noted, my comments relate to 2Q '20 as compared to 2Q '19 and are based on our non-GAAP adjusted results. As Ed noted, we reported strong financial results for the quarter, highlighting the diversification of our revenue streams and the contributions from our investments, delivering on our strategic initiatives. Our net revenue grew 5% with net transaction fees up 2% and nontransaction revenue up 7%. Adjusted operating expenses decreased 7%, which, combined with our revenue growth, resulted in adjusted EBITDA growth of 9%, resulting in an expanded margin of over 71%. The adjusted EBITDA margin on the incremental net revenue was 127%. And finally, our adjusted diluted earnings per share increased 16% to $1.31. We grew our quarterly recurring revenue stream of proprietary market data and access capacity fees by 8% compared to second quarter 2019, slightly above our prior year guidance. This increase includes over $3 million in market data revenue attributed to our first quarter acquisitions of Hanweck and FT Options. Organic growth was 10%, which excludes the acquisitions, and a shift of approximately $1 million in revenue reported in access capacity fees in 2Q '19, which is now reported in transaction fee as well as the temporary realignment of fees associated with the trading floor closure of over $3 million. The growth in proprietary market data and access capacity fees continued to be driven by incremental subscriptions and units, accounting for 83% and 69% of the growth this quarter, respectively. In our last call, we noted that certain floor broker access capacity fees were suspended due to the temporary floor closure and that we implemented comparable transaction-related fees targeted to achieve a neutral net revenue impact, all else remaining equal. This action shifted revenue in the second quarter resulting in incremental transaction fee revenue associated with higher revenue per contract, or RPC, for our index options and lower access capacity fees. In conjunction with the floor reopening, certain floor broker fees were reinstated. Looking ahead, we now expect the underlying organic growth for the proprietary market data and access capacity fee category to be mid-single digit. However, we now expect the reported growth rate for these nontransaction fees to be in the mid to high single digits versus our previous guidance of low to mid-single digits, reflecting the reinstatement of certain fees as well as the acquisition of Trade Alert. Now a review of our segments. In our Options segment, the 7% or $10 million increase in net revenue reflects growth in net transaction fees driven by our multi-listed options as well as higher market data revenue. Cboe's expanded suite of information solution services accounted for the growth in options, market data revenue, benefiting from our recent acquisition. The average daily volume, or ADV, for multi-listed options rose 57%, hitting a new quarterly high while RPC fell 12%. The RPC decline primarily reflects higher volume rebates and a shift in volume mix compared to the second quarter of 2019. ADV for index options declined 18% while RPC increased by 18%, resulting in a 3% decline in index options net transaction fee. Index RPC increase was mainly due to, one, a shift in volume mix as well as, two, the impact of temporary free -- fee alignment I referenced earlier. And then finally, the FPX fee increase implemented earlier this year. Assuming all else remains equal, we would expect index RPC to decline slightly in the third quarter, reflecting the reversal of certain second quarter fee changes post the floor reopening. Turning to futures. The 36% or $12 million decrease in net revenue primarily reflects a 44% decline in ADV and relatively stable RPC, offset somewhat by lower royalty fees. In U.S. Equities, net revenue increased 22% or $17 million primarily due to higher transaction fees with equities volume benefiting from the surge in retail trading activity. Our market share also increased year-over-year, reflecting our focus on innovative products with particularly strong response to retail priority as well as enhanced direct marketing programs and greater dialogue with clients. The increase in market data revenue was driven by our higher market share as well as an increase in the total SIP revenue pool. Net revenue for European equities decreased 6% on a U.S. dollar basis and 2% on a local currency basis, reflecting lower market volumes and lower market share, offset somewhat by higher net capture. The higher capture resulted from continued strong periodic auction and LIS volume. The net revenue decrease reflects a 13% decrease in transaction fees and a 14% increase in nontransaction revenue. The growth in nontransaction revenue reflects increases in access capacity fees primarily reflecting incremental connections with the opening of our Amsterdam office in October 2019. Decline in market share was primarily a result of significant market profile shifts and short sale bans, which reduced order flow to Cboe. Net revenue for global FX increased 5% this quarter, reflecting higher market share and a 5% increase in net capture, offsetting a 2% decrease in average daily notional value. The increase in market share primarily results from positive response to functionality enhancements and the increase in net capture reflects a mix shift in volume by customer type. We set a new marker share high and continue to reach new ADNV highs in our full amount offering as well as Cboe SEF for NDS. Turning to expenses. Total adjusted operating expenses were about $96 million for the quarter, down 7% against last year's second quarter. The key expense variances include: one, a $7 million decrease in professional fees and outside services, primarily a result of lower legal fees; two, a $2 million decrease in travel and promotional expenses reflected -- reflecting the COVID-19 impact on travel and event sponsorships. All this offset these declined somewhat with compensation and benefits increased by $3 million, resulting from the net impact of a $4 million increase in bonus expense this quarter, a $3 million increase results from lower capitalized wages relating to software development and a $4 million decline in benefits expense due in part to a decrease in the adjustment of deferred compensation plan assets compared to the second quarter of 2019. Note that there is an offsetting charge in other income, resulting in no impact to earnings. Looking ahead to the second half of 2020. We have updated our guidance to include EuroCCP and expenses related to our European derivatives growth initiative. We increased our guidance for 2020 adjusted operating expenses to a range of $436 million to $444 million, up $17 million from our previous range of $419 million to $427 million, reflecting expenses of $24 million predominantly relating to our new initiatives in Europe, offset somewhat by expense reductions of $7 million in our existing operations primarily in compensation and benefits and travel and entertainment. I will also note that the 2020 expense guidance related to EuroCCP and the derivatives buildout includes onetime operating expenses of about $3 million that will not recur next year. We still expect total expenses to ramp up in the second half of the year as we redeploy some of the cost savings into marketing and promotional programs and we complete our Chicago headquarters buildout. As a result, we now expect our core expense growth to be down 1% to 2% versus our previous guidance of flat to up 1%. We included in the appendix an updated detailed 2019 to 2020 expense bridge, similar to what we provided in our last earnings call. A portion of the decline in the core expense growth is definitely attributable to the COVID-19 environment and its impact on travel and promotional -- professional fees and, to a certain extent, compensation expenses, but it was truly enabled by our migration of the C1 platform in 2019. Turning to income taxes. Our effective tax rate on adjusted earnings for the quarter was 26.7%, at the lower end of our guidance range and below last year's second quarter rate of 27.7%. The year-over-year tax rate decrease was primarily due to higher tax benefits recognized related to foreign-derived intangible income in the second quarter of 2020 versus 2019. We are reaffirming our 2020 full year tax rate on adjusted earnings, which is expected to be in the range of 26.5% to 28.5%. However, we expect third quarter to be at the higher end of that range. We're also reaffirming our capital spending guidance for 2020 of $65 million to $70 million. While our move into the new Chicago headquarters has been delayed due to COVID-19, capital spending for this project is expected to be completed this year. Furthermore, we still expect depreciation and amortization to be $34 million to $38 million for 2020, which excludes amortization of intangibles of approximately $120 million in 2020. Turning to capital allocation. Let me underscore, we remain focused on investing in the growth of our business to build upon our diversified business model while returning excess cash to shareholders through dividends and share repurchases. Our financial position remains strong. We had excellent cash flow generation capabilities and a solid balance sheet. During the quarter, we returned $100 million to shareholders through share repurchases and $39 million through dividends. And at June 30, our share repurchase authorization available was nearly $330 million, reflecting an additional $250 million authorized in June. At quarter end, our debt remained at $875 million, and we had $250 million in availability under our revolver, if a short-term funding need arises. Our leverage ratio remained at 1x at quarter end, and we ended the quarter with adjusted cash of $176 million. Summarizing the quarter. We reported very strong quarterly results, including double-digit EPS growth despite muted volumes in our proprietary products. We continue to deploy capital in strategic investments, which Ed previously highlighted. We successfully reopened our trading floor with a modified floor layout. And Cboe's team of associates have shown perseverance and a keen ability to adapt in this extended work-from-home environment, all while continuing to deliver on our long-term growth initiatives. The entire leadership team and I couldn't be prouder of what we've accomplished thus far this year. In closing, Cboe's financial strength and cash flow generating capabilities have positioned us well. We intend to remain opportunistic as we execute on our growth initiatives and focus on serving the needs of our customers and delivering sustainable returns to our shareholders while guarding the health and welfare of our associates. With that, I will turn it over to Debbie for instructions on the Q&A portion of the call.

Thanks, Brian. At this point, we'd be happy to take questions. [Operator Instructions] Keith?

[Operator Instructions] And the first question comes from Rich Repetto with Piper Sandler.

First, Ed, I agree. Cboe is much more diverse platform than it was 5 years ago, for sure. So -- but the question still -- with investors still gravitates back to the proprietary products and the VIX products, et cetera. So I guess the question, open interest is low. You talked about a little bit the uncertainty, but do what you think will actually get -- we're starting to see a little build in the VIX futures open interest. But what will get investors back? Because we -- prior, we thought the uncertainty is that's when you use the products, I guess. And now we're saying the uncertainty is uncertain, and we're in sort of a stalemate position.

Rich, it is a great question, and it's one that we continue to ask institutional investors. You are right. The stalemate is probably the best description I would use. I'm with you. We look at a relatively flat vol surface is really the most uncertain of times. There is no conviction either way. And as we said actually last quarter, you need to see the end of the event that's causing the uncertainty. And there's no end in sight, quite honestly. We don't know how this pandemic ends. We don't know when it's going to end. We don't know when institutions who have gone to the sidelines more aggressively, actually 2x more -- greater the move to cash than we saw at the end of the financial crisis. That's incredible from an institutional perspective. So I don't know. None of us know when the event is going to end, but it is at that point that we think we'll see institutions reengage. It's when an uncorrelated market finds institutions back and hedging goes back to macro hedging as opposed to micro single-name hedging. So I don't have a clear answer for you, but it's the same answer I gave you last quarter. When the event -- when we can see the end of the event -- now to be clear, the event doesn't have to end. We have to be able to see through the event. And that's when I think we get institutions to reengage off the sidelines, out of cash and reengaging in the unique products that we have at Cboe.

Ed, would you say -- would you agree that we are starting to see some steepness at least between the front month -- on the VIX curve front and the...

We see an ebb and flow there, Rich. What I think is really interesting -- and I'm anticipating a pickup more on the interest in around the October and November. Still, we have the bump in October and November, that's going to be interesting, too. I think we do turn our attention as most are reading to the election cycle beginning in mid-August. So I think we'll see trade around there and just positioning for the long term. That's an institutional play. A little bit more color on engagement. And we see retail really trading very, very short-dated options. In SPY, for example, 20% of the trades in SPY are opened the day the contract expires, 40% of the volumes within 2 days of expiry. That's not an institutional trading pattern. I think more likely, we will see some positioning around the election and positioning for the longer term regardless of whether or not COVID is behind us so there's an end in sight. You need to position for this election.

And the next question comes from Michael Carrier with Bank of America.

Brian, thanks for the updated expense guidance. Just two clarifications there. Can you maybe help us out, and I know it's tough to do. But as we think about '21, you've got some of the depressed like COVID costs, then you have a lot of the acquisition-related costs. But just some expectation kind of heading there. And then I think on one of the slides you mentioned some of the revenues associated with the deals. But any context around that? Because you obviously will price in the expenses, but if you can give us some color on any related revenues, that would be helpful.

So thanks, Michael. Good questions. And I think that you're right, the crystal ball for '21 is a bit of a challenge, and we're going through that process now. I think that we've tried to give pretty good color on the acquisition related. So when you get to -- I think it will be a little cleaner in the third quarter. We'll highlight that. So when we get to the third quarter, we'll see that. But I think you should get a pretty good sense of the acquisition run rate. You should get a pretty good picture now when you look at the quarter and what the incrementality of, I would say, the largest piece of that kind of on a go-forward right now is the EuroCCP and the European derivatives buildout costs with -- I mentioned that kind of a -- I'll call that onetime kind of start-up fees with getting that going, that I don't expect to be part of the 2021 run rate. The COVID-19 cost, that's also I think is a really good question that a lot of firms are going to look at. There may be a -- we're going to balance the going back to normal, which, again, what is the new normal? And are there things we can actually do as an organization and all organizations can do that actually are probably at a lower cost and get the job done than maybe what we were doing in the past? And so it probably -- it does not look like what the structure looked like previously before the pandemic. So we're going to work our way through this. We'll give you more guidance on what does that look like as we're getting closer to the fourth quarter and what does that run rate look like. On the revenue associated, we tried to give some visibility to that with the EuroCCP when we provided the full year financials. And then with the acquisitions within the group -- within the information services group with Hanweck and FT and Trade Alert, I think you're seeing that run rate effectively now when you look along there. So when you add all those components, that should give you a pretty good sense of that at least base without any incremental growth going into 2021.

And the next question comes from Ken Worthington with JPMorgan.

I wanted to follow up on Rich's question. You mentioned how well the multi-listed options and cash equity volumes are doing, but how poor the environment is for index. And to Rich, you mentioned the micro versus the macro hedging, but we do continue to see high volumes for SPY, which you say is retail. But we also are seeing high volumes for the E-minis, which is definitely more institutional. And you have weekly options that I believe are designed for short-term hedging. So could there be other explanations here beyond just the uncertainty? Because it seems like things still aren't quite lining up given what we're seeing at competing products.

No. I thought -- I'm sorry, I thought I explained the SPY. So the SPY in very short term, those are day trades. If -- of the 20% of the contracts that are traded within 1 day of expiry, meaning expiration day, 50% of those are opening. So 50% are closing. So I'd make believe that those are a day trade in SPY, not an institutional action. The statistics for SPX are a bit different. 40% of those trades -- sorry, 20% of those trades are in within a few days, and that's just different. It's -- and the notional size of the contract for SPX has really been pure institutional and the bite-size really retail on SPY. So a little different on the observations of what SPY is being used for. It doesn't appear to be a macro hedge. It appears to be a day trade. And SPX has not really been a day trade. There has been premium strategies used in the weeklies, but those tend to be days and not hours. And that's a difference in the trading pattern that we've observed in this cycle. So I don't know what other insight to give you, just that notional size being so different in SPX is just not gaining the day trade attraction that small notional SPY is.

And Ken, this is not -- I mean it's somewhat obvious, but this is not a Cboe-specific issue. When it comes to SPX in retail, we're actually seeing increased activity, but it is a more institutional product than others. And when you look across institutional products, I mean I'd look to Europe, for example, great, great example because those exchanges tend to trade and be more levered to institutional market participants. You've seen the results there. In the U.S., look, I mean there are not a lot of index options products out there outside of Cboe. There is at least 1 example you can look to that's not a Cboe product, and you'll see that the results there are quite similar, if not more dramatic. So the evidence is out there everywhere in terms of institutional participants on the sideline, and that's impacting our numbers in terms of SPX index.

Yes. I guess my point was the E-mini is more institutional, and that's seeing very high volume. So that's why I thought that maybe the institutional was doing well in the U.S. in macro hedging. I was trying to compare that with...

Yes. I think your observation of the June contract might be right. But as of late, it looks like the same pattern we see in SPX. So love to see -- maybe that's your internal data, but that's now -- I'm looking at E-mini volume now, and I don't have the same observation you do, Ken, but we'll certainly dig into it for you.

And the next question comes from Dan Fannon with Jefferies.

This is actually James Steele calling in for Dan. So just on retail order priority, I'm just curious, what was the genesis of this offering? And kind of how should we think about the market opportunity? And where can this take share on EDGX?

Let me talk more broadly -- thank you for the question. Let me speak more broadly and Chris will dive down into retail priority and then periodic auction. This is a continuation to offer more services and order types to our customers who are looking for differences in trading U.S. equities. We look at the opportunities out there, and just launching another exchange that doesn't have any new value add is interesting. But we think more interesting is offering more order types and solutions for our customers. So with your specific question, let me turn to Chris. But think of our longer-term view as more broadly offering solutions to our customers, whether it's U.S. equities, the U.S. derivatives, European equities, building European derivatives, that's really what we're about. So Chris can go more specific into customer priority and then perhaps a word or 2 on periodic auctions in the U.S.

Yes. Thanks, Ed. So James, as Ed mentioned, this is really focusing on the diversity of our business. So if you think about retail priority in U.S. equities, we all know that with 0 commissions, there's been a large retail push. In our work-from-home environment, retail trading has really picked up. You've seen reports where retail trading or retail percentage of the market has gone up to maybe 25% of the market. So where retail priority has been above 100 million shares a day for us in ADV, we continue to see growth as more and more retail brokers as well as wholesalers sign on to this because of the execution quality that's getting -- that is noticeably better. It's all data-driven based on [ Best Ex ]. So we see further growth here for retail priority as obviously a bunch of this volume that remains elevated despite the high volatility is coming from retail. I'd also mention periodic auctions. As we said in the script, that's something we created basically out of nothing in Europe. In 2015, Dave Howson and team built periodic auctions, and now it's 2 percentage -- about 2 percentage points of the entire European market. We like to bring something very similar here in the U.S. The market structure is a bit different, but we think the opportunity is similar, to provide a higher trading size, lower impact, innovation in our equities markets. These 2 things are really highlighting the fact that we plan to bring innovation in every market in which we operate. And we operate a lot of markets across 5 business lines in 15 markets every day. And we plan to compete and innovate in each one of them. And these are just 2 examples of that.

And the next question comes from Chris Allen with Compass Point.

I was just wondering if you could give us some color in terms of what the revenues for EuroCCP were running in the first half of this year, how the outlook there is the second? And maybe give us some incremental color just in terms of what you're doing to support the index launches in the first half of next year. We signed up market makers. What are the kind of the plans there?

Brian, why don't you start off with the model, and Chris and I can talk about the indices?

Yes. Chris, the -- looking to kind of pull the first half numbers, we can certainly update that later. But I would say that the first quarter number -- excuse me, the first half numbers looked, there was growth versus kind of -- because I think we had published the 2019 numbers, but they saw a nice increase in the first quarter as overall volumes increase. So they are running ahead of last year, at least the first 6 months to date. But let me -- we'll have to get back. We can publish that number for you to get that -- let's say, I don't have that right at hand. I don't know, Debbie, if you have it or not, but it's certainly running ahead on a year-to-date basis relative to the prior year.

And so let me begin. So the indices, and Chris can talk a bit about the model. But we'll start with 6 European indices, the Cboe Eurozone 50, Cboe UK 100, Cboe Netherlands 25, Cboe Switzerland 20, Cboe Germany 30 and the Cboe France 40 and will be calculated using Cboe market data with the exception of Cboe Switzerland 20. But the goal is really to light up these markets similar to U.S. market where there's continuous quoting from the open to the close. That is unique in the European model. And it's something we're really good at. We've got interest from our market makers, liquidity providers who are eager to post markets from the open to the close. And most importantly, the demand for access to Europe in a unified way is coming pretty broadly. So there's been incredible buzz around our efforts since we announced the plan to offer derivatives. Chris, do you want to add anything?

Just -- as Ed said, we were very excited about European derivatives because we've learned a lot of lessons over many decades in the U.S., especially recently, including during while the trading floor was closed and then reopened, and we plan to apply in the European derivatives to bring that liquidity to the screen with better tight quotes than there are today where the markets -- frankly, our Colorado market was wide quote. So a lot of demand here from market makers, and we think the end users will be there as well as they see the quality. So very excited about launching European derivatives in the first half next year as we're integrating EuroCCP and then building upon our technology advantage with utilizing the Cboe technologies we have in the U.S. in Europe to really catapult us into launching that market.

And the next question comes from Alex Kramm with UBS.

I guess you addressed some of this already a couple of questions ago when you talked about equities, but -- and how you differentiate yourself. But considering that MEMEX is starting up here and a couple of other exchanges in the next couple of months before we talk next, any other color you can provide how you prepare yourself for that to be able to compete aggressively day 1 when these others are going to compete aggressively on day 1?

Well I think it's -- you're right, Alex. We did try to differentiate. We're going to differentiate by uniqueness in handling customer orders with our customer priority or a periodic auction, those are differences. I think you point out with a MEMEX launch, it's not a new story. MEMEX, our gas will be aggressive bordering on irrational pricing in the beginning to earn share. That's not surprising. We tend not to chase irrational pricing in any of our models, but we anticipate that's how they'll begin. We will continue to offer solutions to customers and Chris spent a little bit of time on that. So nothing new to add there. Sorry, if that doesn't answer your question. We think this is an exchange that's just coming in on price and really not anything unique on order handling at this point. Now we could be surprised in the future, but right now, that's the way we look at MEMEX. Chris?

And Alex, I just mentioned, MEMEX, obviously been a long time in the making. We have respect for their ownership base and them as competitors. We welcome the competition. But we feel like we're well prepared to compete. And as I mentioned previously, we have a lot of innovations we're bringing to the equities market. It's going -- has been very competitive and will remain very competitive, and we think we're well positioned into the future even as MEMEX and others join.

And the next question comes from Ari Ghosh with Crédit Suisse.

So just circling back to the recent deals that you talked about. Hanweck, FT Options, Trade Alert, they fit really nicely into your broader info services business. But can you maybe talk about the strategic vision for MATCHNow, areas you see right for disruption outside the acquired dark market in Canada? And then, Brian, any high-level color around sort of the magnitude of investment need around this initiative in 2021? And again, appreciate the fact that you might be limited in what you can say, but looking for more just a high-level commentary on this.

Brian, you want to start?

Yes. I mean as far as the magnitude of the need, I will say that I'll try to frame that in the context of what we've done. I'm not 100% sure what that question evolves, but I'll take a shot at the hypothesis of what you're asking for. The business that we have invested in that are now part of Cboe, the good news is that they are already profitable, they're already contributing, they're already integrated as far as what we have closed. Obviously, EuroCCP is a little bit further down the path there. But the ones you mentioned on the information services group, I will mention that. And so there's not a lot of necessary incremental investment or CapEx or things along those lines. If that was, call it, a tangent of one of your questions. From a broader capital allocation perspective, it's really a very similar story as continuing to look at those things that, again, continue to help drive the growth of proprietary products. They continue to help our expansion into the new jurisdictions. They continue to leverage the existing asset classes. So with our balance sheet, we have a lot of flexibility. If we have to access the capital markets from a debt perspective, that's easy to do from where we are. It's a terrific interest rate environment to be able to do that. So that's a very broad question, but I'll just say, I'll leave you with -- of what we've acquired, it's fairly well integrated. And I think we've laid out kind of what is required in the overall investment needs. So I'm not as concerned that, that need is going to be a big cash draw. And should something that come to fruition that requires more balance sheet leverage, we think we have the capacity to do that.

And then specific to MATCHNow, Chris and John?

Yes. I'd just say, Ari, that one of our strategic growth drivers, as Ed mentioned in the script, is obviously geographic expansion as well as asset class diversification. So MATCHNow fits very nicely into our North American equities business, lets us get into a new geography. If you look in the way in which we expanded in new geographies, given the Bats heritage in Europe, starting with a relatively small footprint and then over time, growing to great scale. We look forward to integrating MATCHNow into Cboe using our technology, world-class technology, and then over time, growing our footprint there potentially beyond where we're starting. So quite excited about this. And as Brian mentioned, it's a profitable business, which fits very nicely.

Yes. Ari, this is John. I'd really emphasize all those points. This is a strategic priority for us. You see it on the very first page of our deck. It's one of the top, call it, 7 global equity markets adjacent to us, very sophisticated market participants. We will continue to look at markets like this and pick our sweet spot for entry. We like this spot for entry because it's a unique platform in Canada, very, very strong position in the new and growing dark segment of the market. There's a very different market structure in Canada, and this is a new offering to the market. So we like that start point. We like it profitable. And from there, we're creating a map to grow our presence in Canada.

And the next question comes from Ken Hill with Rosenblatt.

I had a question on closing auction. I know that kind of got started here in the U.S. at the height of the pandemic beginning of March. I was hoping you can provide an update on what you're seeing from a volume perspective. And then maybe more broadly, how you would expect that to trend here going forward? And maybe what might help bring volumes up a little bit higher? Is it more interaction with customers? And are you still able to do that in this COVID environment?

Yes. Ken, good question. Thanks for asking. So we did see our first trades on Cboe closing cross or Cboe market closure in the U.S. here this summer. So we're excited about that. We have seen a lot of our large customers who would use this product kind of come out of change freezes as they've adapted to this COVID-19 work-from-home environment. So those change freezes have thawed. I'd also mentioned the 3C, the Cboe closing cross in Europe, has started to see some nice volumes. We've seen actually in June almost EUR 20 million a day across Cboe closing cross. So we're still very excited about both products, both in Europe and the U.S. We think there's demand for this given the relatively very high margins that the primary listing exchanges have during the closing cross, and that's still a large percentage of the market. If you look in first quarter and second quarter, it's still between 6% and -- 5% and 6% of overall volume was happening at the close. So it's a part of the market that we are competing in and plan to compete in even more aggressively.

And the next question comes from Brian Bedell with Deutsche Bank.