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

Hello, and welcome to the Cboe Global Markets 2020 Third 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 third 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, CFO and Treasurer, will provide an overview of our financial results and provide updated 2020 guidance. 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'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 Ed Tilly.

Thank you, Debbie. Good morning, and thank you for joining us today. I hope everyone continues to remain safe and healthy as the pandemic continues to take its toll around the globe. I'm pleased to report solid financial results for the third quarter of 2020 at Cboe Global Markets, where we continue to advance our strategic growth plan to strengthen our product line across asset classes and geographies, broaden our customer reach, diversify our business mix with recurring revenue and leverage our superior technology. Thanks to this ongoing disciplined approach, we were well positioned to navigate market conditions that left many institutional investors on the sidelines. Much as we saw in the previous quarter, our third quarter results were driven by increased trading volumes in cash equities and multi-listed options, fueled by growth in retail trading. We also saw continued growth in our recurring proprietary nontransactional revenues. Last quarter, I highlighted our strategy to strengthen our U.S. Equities business through new markets and new trading mechanisms, such as retail priority and periodic auctions. Growing retail participation helped drive a 26% year-over-year increase in U.S. Equities trading for the quarter. Volume and retail priority orders, which we launched last year on Cboe EDGX, represented nearly 23% of total volume and helped propel the exchange to record market share last quarter of 6.8%. We believe we are uniquely positioned to define the state of the art in equities trading through product and market innovation. We took significant steps towards realizing that vision with the third quarter completion of our acquisition of MATCHNow and with our recently announced plans to acquire BIDS Trading. MATCHNow, you will recall, is Canada's largest alternative trading system. I'm pleased to say we are well on track with its integration, which enables us to expand our equities offering, achieve incremental scale and reach new market participants. Importantly, we also see MATCHNow as a toehold in the Canadian market for additional Cboe products and services. We were delighted this month to announce our planned acquisition of BIDS Trading, which is expected to provide us with meaningful presence in the substantial off-exchange U.S. Equities market. We received great feedback on the deal from our customers and couldn't be more excited about the opportunities ahead in this growing space. Our successful and innovative partnership with BIDS Trading began in 2016 with the launch of Cboe LIS, now one of the largest block trading platforms in Europe. We've since enjoyed a collaborative and fruitful relationship with Tim Mahoney and the entire BIDS team and are pleased that they will remain part of the Cboe family. While BIDS will continue to operate as an independently managed venue separate from our U.S. securities exchanges, we have great faith in their expertise and ability to execute on our shared vision once the deal is approved. Similar to MATCHNow, we view the value of the BIDS transaction in terms of the significant new dimension it brings to equity trading at Cboe and for how it enables us to grow our entire product ecosystem. In addition to expanding our equity trading market and customer base, the acquisition of BIDS and its leading block trading platform provides opportunities for us to bring off-exchange trading and services to other products and geographies, including Canada. Turning now to multi-listed options trading. This is a fitting point for me to take a moment to note the passing of Joe Sullivan, Cboe's Founding President. His tireless advocacy for a listed options market helped launch Cboe and with it the entire options industry 47 years ago. Joe was an amazing visionary, and I echo my condolences to his family here on behalf of our entire company. Cboe has since become known for other products and services, but we have always remained committed to being a leader in the equity options space. Our recent initiatives have focused on accessing and engaging in broad market through our acquisitions of Hanweck, FT Options and Trade Alert, the expansion of our Options Institute offering and the introduction of products for sophisticated retail market participants. In the third quarter, retail trading led the way to a 42% increase in equity options trading at Cboe with smaller short-term positioning trades. Each of our 4 options exchanges saw year-over-year increases in average daily volume. Zero broker commissions and free trading apps ushered in a new generation of retail traders who continue to contribute to record volumes in 2020. Conversely, market uncertainty continues to dampen institutional trading. The ripple effects of the COVID-19 virus continued to be felt as the economy looked to stabilize during the third quarter. Business is reopened, and consumers slowly began resuming some semblance of typical activity. But the path forward was and still is marked with massive uncertainty. The lack of progress in negotiations to extend fiscal stimulus programs, combined with the risk of additional shutdowns due to rising COVID-19 cases, and the upcoming U.S. elections, kept the VIX Index elevated throughout the third quarter when it averaged 25.8, 8.5 points over its 5-year average. Election uncertainty continues to be seen in the VIX futures term structure. On August 31, the spread between the September and October VIX futures was more than double the previous 3 presidential elections. In times of heightened uncertainty, education becomes a key driver to investor adoption. We revamped -- I'm sorry, we ramped up our marketing and educational efforts accordingly. Third quarter initiatives included the launch of product-focused webinars, which we plan to expand in 2021; an ongoing revamp of our education website and enhanced learning tools to optimize investor understanding; and pilot testing of a new core derivatives education curriculum, which we plan to launch in the first quarter of 2021. Additionally, our experienced team continues to work closely with customers so they may better understand how to leverage our diverse product set and trading resources to navigate changing market conditions. We also continued in the third quarter to enhance our proprietary index product set, most notably with the August 9 launch of Mini VIX futures. The smaller VIX futures contract is designed to provide additional flexibility and volatility risk management and greater precision when allocating among smaller managed accounts. Mini VIX futures were launched in response to market demand and the growing opportunity we saw among sophisticated retail market participants. Since launch, we surpassed 1 million contracts traded and fully expect adoption to continue to grow as customers now have access to a smaller notional contract. We have rolled out ongoing marketing and education programs aimed at helping retail participants better understand how to leverage the benefits of Mini VIX futures trading. We also see opportunity to expand retail adoption of XSP, our Mini-SPX index options product, which has the benefits of cash settlement and potentially better tax treatment than SPY options. Beginning next week, we are moving XSP to our BZX Exchange, which employs a make or take or pricing model that incents market makers to provide tighter quotes which in turn enhance market quality. XSP will also remain available for trading on our C1 hybrid exchange. In other product news, we responded to the growing global demand for investment strategies focused on sustainability with the launch of options on the S&P 500 ESG Index in September. We're pleased to expand our exclusive suite of S&P Dow Jones index options and to provide market participants with an efficient means to incorporate ESG values into their investment portfolios. We continue to optimize and diversify our business mix with recurring revenue through Cboe Information Solutions, our comprehensive suite of data solutions, analytics and indices. Our Information Solutions offering provides a value-added recurring revenue stream and supports transactional growth in our suite of proprietary products with tools that draw users to our markets and drive volumes as they reestablish their trading positions. The ongoing expansion of Cboe Information Solutions positioned us to effectively respond to the heightened demand we now see for historical data sales and subscriptions, contributing to the strong organic and inorganic growth of our proprietary recurring nontransactional revenue in the third quarter. Last quarter, I provided a detailed update on the integration of the acquisitions made over the past year to further expand our Information Solutions offering. So I will just add here that those integrations remain on track, and we expect to see greater customer demand as a result. We also remain on track to launch Cboe Europe Derivatives in the first half of next year after making significant progress in its build out during the third quarter. The platform is available for early testing with customers, and we have secured commitments from major sell-side firms, market makers and clearing firms to be participants from day 1. We're pleased with the progress made thus far, and I look forward to providing ongoing updates. Turning now to our FX business, where we leverage the product innovation and technology expertise we deploy across all our markets to bring the benefits of an independent, transparent market structure to institutional foreign exchange trading. Among its benefits, our FX model provides greater control of the trading process, enabling better trade execution and lower transaction costs for our global customer base. We're excited about the opportunities for organic growth and continue to effectively evolve this market. Over the last few months, we significantly expanded and diversified our FX offering with the launch of Cboe FX Central, our new central limit order book and Cboe Swiss, a new venue for trading nondeliverable forwards. Alongside Cboe SEF, the launch of Cboe Swiss expands our NDF trading business to meet the diverse needs of a global client base. We see the continued electronification of the NDF market as a unique opportunity for further expansion, given our strong technology platform, innovative data-driven approach to liquidity management and robust global footprint. In closing, I would like to thank the entire Cboe team for an extremely productive quarter. Their expertise, unwavering focus on the execution of our strategic growth initiatives enables us to launch new products, close highly strategic deals, integrate new teams and services and expand our customer base. Clearly, each new initiative aims to strengthen at least 1 pillar of Cboe's diversified product and services offering, but it's important to note that each is also designed to further leverage the entirety of our unique product ecosystem, which, powered by superior technology, enables us to synergistically shape and capture revenue from every phase of the trading cycle. This past quarter, we continued to leverage that unique value proposition and strengthened our leading industry operating efficiency by launching new products, attracting new users to our marketplace, enhancing recurring revenue streams and setting the stage to expand our products and services into new markets and geographies. Significantly, we accomplished all of this while continuing to generate positive financial results amidst unprecedented headwinds in institutional trading. We continue to focus on that which we can affect. As a result, we are confident we are well positioned to benefit when trading wins change as they inevitably do. Moreover, we are excited by the progress made and the new opportunities created in the third quarter to continue to further define markets, create opportunities for our customers and reward our shareholders. With that, I thank you for your attention, and we'll turn back -- turn 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 my fellow Cboe associates for their continued hard work and dedication in advancing Cboe's growth initiatives. Let me remind everyone that unless specifically noted, my comments relate to 3Q '20 as compared to 3Q '19 and are based on our non-GAAP adjusted results. While earnings declined year-over-year, we reported solid financial results for the quarter, again, highlighting the diversification of our revenue streams and the contributions from our investments, reinforcing our strategic initiatives. Our net revenue decreased 1%, with net transaction fees down 8% and nontransaction revenue up 1%. Adjusted operating expenses increased 13%, driven by our acquisitions. Adjusted EBITDA of $192 million was down 8%. And finally, our adjusted diluted earnings per share decreased 14% to $1.11, reflecting a higher effective tax rate. We grew our quarterly recurring revenue stream of proprietary market data and access to capacity fees by 14% compared to third quarter 2019, exceeding our prior guidance of mid- to high single digits. This increase includes organic growth of 10% and $5 million attributed to our acquisitions. The organic growth reflects 11% growth in access and capacity fees and 8% in proprietary market data revenue, driven by increased demand for historical data sales and subscriptions, growth in new accounts and strong uptake on new data set offerings. The organic growth in proprietary market data and access and capacity fees continue to be driven by incremental subscriptions and units, accounting for 87% and 86% of the growth this quarter, respectively. In our last call, we also noted that certain floor broker access and capacity fees were reinstated following the reopening of our trading floor on June 15. This resulted in higher access and capacity fees in 3Q '20 compared to 2Q '20, which were offset by lower revenue per contract, RPC, for index options. Looking ahead to year-end, we now expect the underlying organic growth for the proprietary market data and access and capacity fee category to be mid- to high single digits versus our prior guidance of mid-single digits. And we now expect the reported growth rate for these nontransaction fees to be low double digits versus our previous guidance range of mid- to high single digit. Now a review of our segments. In our options segment, the 1% or $2 million increase in net revenue primarily reflects strong trading volumes in our multi-listed options and growth in our market data revenue, offset somewhat by lower trading volumes in our index options. Acquisitions contributed $4.5 million in options related proprietary market data revenue. Additionally, industry market data revenue increased 13%, primarily driven by growth in retail engagement. Also driven by strong retail engagement, the average daily volume or ADV for multi-listed adoptions rose 42%, while RPC was unchanged. The ADV for index options declined 22% while RPC increased 12%, resulting in a 20% decline in index options in net transaction fees. The index RPC increase was mainly due to a shift in volume mix, as well as an SPX fee increase implemented earlier this year. The decline in index RPC in 3Q versus 2Q reflects the reversal of certain second quarter fee changes after reopening the floor. Turning to futures. The 39% or $15 million decrease in net revenue primarily reflects a 38% decline in ADV and a 13% decrease in RPC, offset somewhat by lower royalty fees. The RPC variance was driven by 2 factors: first, the relaunch of Mini VIX futures on August 9, which has a lower fee for contract given it's at 1/10 the size of the standard VIX futures contract and includes the impact of market maker incentives designed to promote liquidity and quality markets; and second, the growth of our iBoxx futures contracts, which also has significantly lower net capture after incorporating the market maker incentives, promoting liquidity. Absent these, the RPC for the standard VIX futures contract grew nominally reflecting lower volumes. In North American equity, net revenue increased 1%, primarily due to higher net transaction fees, offset by lower SIP market data revenue. U.S. Equities volumes were strong again this quarter, with Cboe's matched volume up 25%, benefiting from the growth in retail trading activity, offset somewhat by a 15% decrease in net capture. The lower capture reflects pricing adjustments during the quarter aimed at increasing market share and attracting off-exchange order flow, while optimizing revenue across our P&L. We manage our pricing dynamically by monitoring the response to these changes and modify accordingly as we have done so already with pricing changes implemented in October. Since August, our market share has increased nearly 100 basis points as of October month-to-date results. Additionally, we now have the second largest market share during continuous trading among the exchange groups during the month of October. We are confident that our efforts to drive best execution for retail customers, deploying unique order types such as retail priority and Cboe's midpoint discretionary order, will allow us to continue to build our market share. Our share for the third quarter decreased year-over-year, primarily reflecting the growth in off-exchange trading, that reached new high of 43% in 3Q '20 versus 36% in 3Q '19. The decrease in SIP market data revenue was driven by our lower market share and a $3 million decrease in audit recoveries. Net revenue for European equities increased $11 million or 53% on a U.S. dollar basis and 47% on a local currency basis, primarily reflecting over $10 million in revenue from EuroCCP this quarter. The decline in net transaction fees reflects lower market volumes and market share, offset somewhat by higher net capture. The higher capture resulted from continued strong periodic auction and LIS volume. Decline in market share was primarily a result of market profile shifts that impacted order flow to Cboe and higher share in systematic internalizer activity. However, market share for the third quarter increased 190 basis points compared to the second quarter of 2020, reflecting positive response to a new pricing program and strong performance from our periodic auctions offering. This quarter also included nearly $9 million in net clearing fees, reflecting transactions cleared and settled by EuroCCP. Turning to nontransaction revenue. The growth in access and capacity fees was primarily a result of incremental connections due to the opening of our Amsterdam office in October of 2019 and the addition of EuroCCP. The increase in other revenue primarily reflects additional interest income earned on EuroCCP cash collateral accounts. Net revenue for global FX increased 1% this quarter, driven by higher nontransaction revenue. Despite weaker industry volumes, our market share increased primarily as a result of positive response to our expanded offerings, including new and enhanced functionality in our platform. A decrease in net capture reflected a mix shift in volume by customer type. As Ed mentioned previously, we are quite pleased with the results of our FX business as we have continued to expand and diversify revenue streams, providing a more comprehensive suite of global FX trading services in spite of the challenging market conditions. Turning to expenses. Total adjusted operating expenses were about $109 million for the quarter, up 13% against last year's third quarter. Excluding the impact of acquisitions, adjusted operating expenses would have been down 2%. The key expense variances related to the acquisitions were in compensation and benefits and technology and support services. Moving to guidance. We are lowering our 2020 adjusted operating expenses to a range of $415 million to $420 million, down $21 million from the previous range of $436 million to $444 million. We also tightened the range by $3 million, adjusting for the difference at the high end of the range. This decrease reflects lower operating expenses related to compensation costs, including incentive compensation, professional fees, technology services and travel and promotion. Previously we noted that we expected to see a ramp-up in expenses as the year progressed. However, as we have reassessed our expense priorities as part of our ongoing disciplined expense management, with this reduction, we now expect core expenses to decrease by approximately 7% year-over-year. One point I made last quarter bears repeating. While a portion of the decline in core expense growth is certainly attributable to the COVID-19 environment and its impact on expenses that I just noted, our migration of the C1 platform in 2019 provides the underpinning, enabling the decrease in core expenses. Turning to income taxes. Our effective tax rate and adjusted earnings for the quarter was 30.8%, above our guidance range and last year's third quarter rate of 24.1%. The higher tax rate accounted for nearly 60% of the year-over-year decline in our adjusted diluted earnings per share. Absent the higher rate, earnings per share decline would have been only 6%, which reflects the impact of lower earnings netted against the incremental benefit of reducing our share count by nearly 3% over the last 12 months. The higher effective tax rate on adjusted earnings was primarily due to additional expense recognition upon the completion of our 2019 U.S. federal income tax return. Our 2020 full year effective tax rate on adjusted earnings is now expected to be in the range of 27% to 29%, up from 26.5% to 28.5%, reflecting the higher third quarter rate and a lower benefit from foreign operations in the fourth quarter. We are decreasing our capital spending guidance for 2020 to $45 million to $50 million from our previous guidance range of $65 million to $70 million, reflecting changes in timing for certain projects, including the build-out of our new trading floor and lower spending and others, including the build-out of our new global headquarters. Furthermore, we now expect depreciation and amortization to be $32 million to $36 million for 2020, down from $34 million to $38 million. Remember that our 2020 guidance reflects a reduction of $8 million in software development capitalization, which increases compensation expenses this year, but over time, decreases our depreciation and amortization expense. This updated guidance excludes the amortization of intangibles of approximately $124 million, which we revised from our prior estimate of $120 million. 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, and our cash flow generously capabilities enabled us to continue to return cash to shareholders. During the third quarter, we returned $46 million to shareholders through dividends and $42 million through share repurchases and repurchased an additional $32 million through the 29th of this month. We have availability of about $256 million remaining under our share repurchase program as of October 29, 2020. At quarter-end, debt increased by $70 million versus 2Q '20, reflecting borrowings used towards funding our acquisition of MATCHNow and third quarter tax payments. Our leverage ratio was 1.1x at quarter end, up slightly from the 1 time at June 30. And we ended the quarter with adjusted cash of $213 million, reflecting, in part, higher balances associated with the additional regulatory and operating cash needs at EuroCCP. As previously announced, we plan to finance the pending acquisition of BIDS Trading with long-term debt, taking advantage of a historically low interest rates and thereby lowering our cost of capital. 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.

I guess my question is going to be on equities. And you talked about the lower RPC in the third quarter. And I guess we can back into some of the monthly reportings that September was particularly low. Could you talk about, I guess, what the strategy was with the RPC MEMEX fully launched yesterday, still not even 1%? But -- and can you also update us on what the takeaway so far, what you learned in regards to MEMEX and are the 2 related here, the RPC and MEMEX?

Thanks for joining. Thanks for the question. If I look at the MEMEX -- yes, they just rolled out all their symbols yesterday. So as we've said before, we expect strong competition from them going forward. But as we're always doing, we're optimizing our net revenue capture as well as our market share and the changes we made for September were to grow our market share to better compete with off-exchange trading as well as other exchange operators. It's had the desired impact. We're up almost a full percentage point. EDGX is setting new records with retail priority. And we expect MEMEX will continue to be competitive and we're going to be very competitive but optimizing that revenue capture. And as Brian mentioned in his prepared remarks, we've already adjusted pricing in October and likely will be in November as well. This is, as you know, a very dynamic market, very competitive, and we'll be adjusting capture and pricing to remain competitive. We like the business. And we think the innovations we brought to the market with retail priority, Quote Depletion Protection, Cboe Market Close, we think we're in great stead there. I'm quite excited about periodic auctions as well as soon as we get SEC approval.

So we should see a rebound in that RPC in October. Is that what you're saying, Chris?

Yes. We're adjusting always what's the appropriate capture versus the market share. So you can -- not going to predict what the capture will be, but we're going to optimize for net revenue over the long term, which market share and capture, obviously, are probably 2 key ingredients.

And the next question comes from Dan Fannon with Jefferies.

This is James Steele filling in for Dan. My question is on the access and capacity fees. If I heard correctly, it sounded like you're increasing the growth expectation there. I know that you mentioned investor education and there's some new products there. So I was just hoping you could distill what you're most excited about and what the reason for the uptick in guidance is?

So this is Brian. I will -- I'd say it's a continuing trend. I mean, I think what we're seeing is we've been seeing this growth for several years in this category. And it's coming from across the business. It's coming within options. It's coming within equities as we continue to compete aggressively. I think as people are realizing both the value of what's coming out of the exchange as well as the enhanced market data that we're able to drive demand from our customers. I will say that with the acquisitions within our Information Solutions group is that we're seeing continued increased demand as we pull that together. That's just continuing that positive momentum and where we see demand for that data. So it's a continuing trend that we've actually been seeing in the last few years within everything that we've been doing across all the asset classes. And we don't necessarily have a projection for the growth rates beyond this year yet as we continue to evaluate our pipeline, but we still are very excited about that category. It is relatively small for us, but continuing to grow. And I would say that's definitely something we continue to be excited about.

And the next question comes from Ken Worthington with JPMorgan.

Can you talk about retail distribution for Cboe futures and proprietary options? Are there opportunities to expand distribution for these areas? And you continue to highlight investor education. Is this more retail or institutional education? And how much does education move the needle in terms of driving trading activity?

Well great questions. Let me start, and then we can -- with the second part of the question on education. Always important for us in the Options Institute, in the way we've redesigned that, in the reference I had in prepared remarks was really what we're doing on webinars. We're setting them up. We've had 2 already. And those are aimed more professional, so it's a financial professional webinar. The first was managing global risk exposure and the second was shielding against downturns. So couldn't be more timely. And we had 550 registered for those 2 new webinars. So that's kind of the focus. And of course, we have the opportunity to teach in real time. And this market know better example of how to use our proprietary mix of products in managing for downturns and global risk. So that's kind of a sense of the focus for us on institutional. And then retail, super important for us, and we've referenced now the last 2 quarters, and it couldn't be more clear in multi-listed options, for example, and, of course, in U.S. Equities, just the influence over retail adoption in this new environment. We think there's a great opportunity to take the success and the interest that retail has had in equities and to teach the basic properties of trading derivatives. So if you look at the newest entrants in retail equities, there's no exposure and access for many of those new accounts into Cboe's proprietary product stack. That's not acceptable for us. So with education and making things bite sized, think our small launch of Mini VIX, that's the push from now all through next year. So we're going to hit the potential on 2 fronts. Definitely on the institutional side with differently constructed educational seminars. In retail, it's back to basics. If you're trading short term, low premium products or delta one, we can teach you how to change the risk profile by introducing derivatives. That's the goal.

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

Brian, just on the expense update. That's helpful. Just given many of the moving parts, including the core, with just the revenue backdrop, you've got the acquisitions and then some possible normalization of T&E post COVID. I know it's early, but can you provide us maybe some early thoughts on just how you're thinking about 2021?

Yes. No, good question and something that we expect to come up. We're still in the middle of our 2021 business planning process and it really is too early to provide that guidance. But I'd do leave you with a couple of thoughts, though. As we've done in the past and including this year, we're going to execute against the plan to grow the business and make adjustments along the way as the conditions warrant. And our organization has done a great job of this historically. We know the expense base will grow in '21, with the run rate of expenses from the acquisitions, as you've noted. And in 2020, we've already said that we are going to grow our derivatives effort in Europe. But again, at the end of the day, our goal is to grow the business, make the right investments for long-term shareholder value and really balance that expense discipline, while remaining flexible enough to take advantage of a changing environment opportunities that may present themselves. So like I said, look for a little bit more clarity on the next call.

And the next question comes from Alex Kramm of UBS.

Just quickly on BIDS. You mentioned that you will run this as an independent entity, but clearly, Cboe should have some sort of vision for this asset. So just wondering what you think you can bring to the table there? What kind of improvement do you think you can make, both on the efficiency side, on the cost side, but also then where can you maybe impact market structure where they may have been hindered in the past where you can do something better and gain share here?

Thanks, Alex. I'll give -- I'll start it off and then I'll invite Chris to jump in. When we say independent, to be clear, it is independent in the U.S. Equities market. And so for us, that's really access for the first time to the 40% of the U.S. Equities market that's trading off exchange. So that's the goal there. So there are independent stops at the border. And our ability to continue to work in Europe with BIDS as we have on LIS, that is not encumbered. It will not be run separately, nor will the expansion beyond the U.S. be run independently. So the strategies that I mentioned in our prepared remarks allows us to move into Canada. That will be strategically looking at how block trading and the BIDS offering can move into other geographies. So I want to be really clear. We are very mindful of the guidance that we received from the SEC. That is super important for us to comply with all that guidance and the U.S. operation will be independent. Chris, anything to add on BIDS, its ability to scale up and now having the technology and influence and all of the history with Dave Howson and the team in Europe, any other comments on BIDS?

Yes. I'd just say, I mean, Alex, we're super excited about. There's nearly 500 investment managers that are connected to BIDS. And as I've mentioned, it will be an independently run business from a U.S. securities perspective, but we're excited about the opportunities outside of that jurisdiction. As I mentioned, Canada, LIS in Europe has been a great success working with Dave Howson. Tim Mahoney has a great team. We also -- obviously, we highlighted the FX growth we've seen this quarter and over the past years since we purchased that entity back in 2015. So we see nexus across additional geographies as well as additional asset classes for these nearly 500 investment managers. So quite excited. We're very mindful of the restrictions and the independence we need as it relates to U.S. securities, but excited outside of that.

Alex, this is John. One thing I'd just add to that is that this is a network business. And so as we expand internationally with it, every new user that we add internationally increases the value of the entire experience for all the other users. We learned that very directly through our relationship in Europe. And we think we have quite a bit of opportunity to continue doing that as we grow the business in other geographies.

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

Just a question going back to the nontransaction revenue growth, particularly in the Information Solutions. Just how should we think about revenue from the analytics capabilities that you list out on Slide 11 as a proportion of that proprietary market data on Slide 17? Is it the $5 million that has come from acquisitions? Or is there more to that? And then in growing that nontransaction revenue, how should we think about the growth path of access and capacity fees from other new subscriber perspective? You mentioned maybe more access through BIDS Trading, for example, or expanding new services to existing customers.

Before Brian jumps in to the first part of the question, I think, Chris, an update on the incredible progress we've made on integration on FT, Hanweck and Trade Alert is very important to give that some perspective, while Brian will come back and answer the first part.

Yes, absolutely. So obviously, we bought Hanweck, FT Options and Trade Alert in the first half of the year. And we knew we were getting great platforms there that we're going to add to our profitability, which Brian will cover. But the people that have stayed on, those founders of those firms and added to the Cboe team, we're just extremely pleased with. And even given the pandemic, we've made great progress with our integrations, frankly, better than I would have expected this year. So we're seeing Hanweck driving market data for Silexx. We're seeing Hanweck data being used across the other entities. There's just a lot of great cross-pollinization -- pollination across those entities that's now providing tremendous value to our customers. And we're just getting started there. We have a full 2021 road map under the Information Solutions group, as we call it, just great synergies there for that entity as well as being used across Cboe and for our customers. Brian, do you want to cover the rest?

Yes. Yes. I mean, I think that's actually linked in perfectly as far as how we're thinking about it and the opportunity that really presents itself on a go-forward basis is as those groups continue to work together, not only just on the cost side and how that infrastructure works together, but we're seeing it more and more on the client-facing side about how -- as these groups come together how we can continue to supplement those services to the clients. So like I said to the earlier question, and we love this focus on, like I said, we're very excited about this. And along with the investor education elements of what this can do is we continue to see a really nice growth pattern. On the overall base, you'll see the -- kind of we put the metrics out as far as the overall growth. But if you look at just that microcosm of within that growth, we expect to see, like I said, really good growth, and we see the expansion in the various analytics activities and then you're going to see a real focus there. So you did -- we did note that, that growth rate of the $5 million that you talked about broadly within that category, but that was mostly on the market data side from the acquisitions. But again, we're seeing growth within that group on top of the new growth that just adding it from a reporting standpoint to Cboe. You also noted on the access capacity fees. That's come from multiple areas across the organization. That is we've seen that as the demand for trading has continued to climb. And we've seen people continuing to add -- a need to add to their overall capacity. So that's where you're seeing the high 80s as a percentage of the growth coming from, I'll call it -- we call it subscription or numbers versus pricing changes continuing to drive that. So as people find more and more functionality and use by connecting with our platform, we're seeing that increased demand. Some of that's structural, say, for example, with the Brexit going on in Europe, but you're also just seeing it just from higher volatility and higher volumes.

Let me just -- Brian, let me just trickle back also one other point. If you think of that ISG is born here in the U.S. and the modeling that Jerry Hanweck and the team are working on and the platform that we got with Michael Izhaky. Once you solve a financial model, it's portable. So it's easy for us to move all the lessons learned for 1 into Europe and not on an accident, launching derivatives in Europe mid next year. Worst ISG has that top of mind. So once you solve once, a math is math and it's portable and it's scalable. And so we see great opportunity beyond the work that we've done here.

And just a quick follow-up. The guidance that you gave on the organic growth to mid- to high single digits. Was that 2020 for that whole nontransaction side? Or was that just the access fees?

That was for the whole category.

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

I guess just another quick follow-up on ISG guys. At the time of the Hanweck and FT deal, I believe there's very little overlap that you talked about between your core client base and the new acquisitions. So maybe do you have any numbers or stats around -- or just color on what client uptakes look like, product cross-sells and other components driving this? Just curious to see how that's moved over the last few months. And then in terms of the growth, what portion of that is U.S. versus not in the U.S.? and like you talked about the opportunity to kind of expand on the referring side with your non-U.S. customer base.

This is a great question. This is Chris. I mentioned this a little bit in previous remarks. But I guess when we got these platforms, where there was little overlap from the customer base, which is one of the surprises during diligence. And now that we've -- we're well into integration, we're seeing uptake across the different products within ISG, within Information Solutions. One of the stories here is Trade Alert, which was one of the smaller ones, we -- actually, we've seen great uptake in a work from home environment where the demand for data, both real-time and historical, has been growing dramatically. Also, for instance, with the entity we already had, LiveVol, we've been able to put more data into data shop and we've seen data shop subscriptions grow dramatically also. And then another thing that would be worth mentioning is here, it's called Cboe Theos, which is the 1 benchmark Cboe Theo price that we are creating with the new platforms and people that we brought on, especially the likes of Jerry Hanweck and Michael Izhaky, to provide that 1 pristine benchmark, Cboe Theo price. So we see great cross-pollination in that group and bringing all of them together. So it's one unified platform presented as Information Solutions to our customers. But real good growth with additional data sets on data shop for historical data, real-time alerting data from Trade Alert and then continued nice uptake with Hanweck and FT. John, what else would you like to add there?

Yes. Thanks, Chris. Thanks, Ari. It's a great question. And you think back, I mean, we did these 3 ISG-related acquisitions more or less concurrently with a vision that they fit together, fill gaps in our existing offering. And so to Chris' point, we saw a lot of opportunity, not only to weave together the capabilities, to create a comprehensive product offering, but to also cross sell. And there are plenty of great examples of that. One quite recent example, a large Boston-based global broker. We're able to get in there, consult with them in terms of what their needs are. And then as a result of that offer a suite of products, portfolio analytical products, pricing products with Cboe Theos, market alerts products with Trade Alert that are just powerful. We don't think they're really matched by anyone else in the business when it comes to equity derivatives. The other thing I'd mention is really interesting that we've seen, and it was a thesis we had here is that you grow the ISG product set. And then it grows your legacy capabilities as well. So we've seen, call it, a 16% uptick in the utilization in terms of the user numbers of our legacy LiveVol platform as a result of putting these pieces together.

And the next question comes from Jeremy Campbell with Barclays.

Ed, you guys got a lot of irons in the fire. You've been very active around deal flow, developing new products, creating new data and analytics and expanding geographies. You were right in, Chris, I'll cover quite a bit of ground here with some great color in the prepared remarks and earlier Q&A, but just wanted to kind of maybe zoom out to the highest level here. What parts of the core business or new initiatives are you guys most excited about and would want to highlight to an investor base that seems on the hunt for sustainable or structural top line growth?

Yes. I think I'd go back to one of the first questions. And I think what perhaps the industry has not valued highly enough until it became just so obvious this year is the power of retail and the power of the new user. And it always starts in Delta One. And for us in the U.S. that's U.S. Equities. So if we look globally at where our reach is and always a little bit better, lucky than smart at times. When you start with table stakes as an exchange operator, if you look at equities, you've got to be in equities. And from there, you're introduced to the first and earliest movers. And if you have derivatives to back it up, that's where it gets really exciting. And when we look in the U.S. we've missed that. The new retail came in, came in, in a very, very big way, led a rally, led new subscriptions, new subscribers, all electronic platforms, every boat rise with the new retail. From a derivatives perspective, that's completely new, new ground. Those new retail traders are not in the derivatives yet and as one of the largest growing and fastest-growing doesn't have access yet to Cboe's proprietary product set. For us, are we light up. This is absolutely new opportunity and it starts with education and teaching the basics of derivatives. And then we look across, I said the better lucky than smart, we are obviously moving in from Europe with our base in pan-European equities, the ability to launch derivatives in 1 clearinghouse, EuroCCP, with broad exposure on country risk across Europe. I think our timing is really, really good. I'm really excited about the way this is coming together and the prospect of converting some of those new retail accounts into derivatives and then showing what we can do by importing a model that is very successful in U.S. in derivatives than into Europe. So I think that's what you'll hear us really focused on over the next months. And all of that is a headwind of institutions being on the sideline. So if we get any normalcy, we get through an election, some clarity on the pandemic and vaccine, I think you'll see institutions reengage, but that's just coming with the territory. That's the macro event that we can't affect, but it all comes together in an ecosystem that's incredibly powerful and we're very excited about the prospects in the months to come.

And the next question comes from Chris Harris with Wells Fargo.

A question on M&A. In a number of the exchange deals we've seen over the years, market share of the acquired asset actually ended up going down after those deals closed. So what are you guys doing or can do to prevent this sort of situation from happening with MATCHNow and BIDS?

Well let me start with BIDS. And part of the independence in the U.S., we refer to that really from a regulatory perspective. But not being a disintermediating platform is super important. So the relationships with the buy-side and the sell-side is intact. That's very, very important to us. It is very, very important to the model. It is the success of that model. We are mindful of that relationship and are not getting in the middle of those relationships. That's super important. And I think that goes a long way to maintaining that share. I think with MATCHNow a little different answer, picking up the breadth of Cboe and being part of a North American view on equities really broadens the reach for MATCHNow, but I'll turn it over to Chris for a couple of thoughts on both.

It's a great question and not every integration or acquisition has gone well for exchanges, but in our history, the Cboe plus Bats combined history, so we've done this a few times with the purchase of Chi-X in Europe, able to maintain and grow market share; the purchase of Direct Edge, able to maintain and grow market share there. So we've done this a few times, the most recently last year finishing the Bats integration. And all the while maintaining and growing market share in multi-list. So I think that we have a track record here. You have to stay close to your customers. It starts with the customer. You can't just simply replace a platform. You need to make sure you're delivering value to them and bringing them along and they see the value of that platform. So we need to use that same playbook for these entities also.

And this is John. I'd just add that with BIDS, in particular, we really do. And this is -- it should be said, this is true of all of our M&A activity. We look within that framework of asset class and geographic expansion and getting closer to our customers. We look for areas of clear secular growth. And when you talk about workflow enabled, customer-centric networks, that is a clear area of secular growth. So we don't see this being a market share attrition question. This is a question of growing that network like we described earlier. Specifically, on MATCHNow, that's a business that is in a more competitive area. We're aware of that. We were aware of it when we acquired the asset. Market share is down a little bit this year because of new rules that IIROC implemented up in Canada for small size trades. We are aware of that. Long-term growth prospects of that business, however, really are more centered on larger scale trades and connectivity with platforms like BIDS. So we see some real, real strong opportunity for growth in market share in that platform over time.

And the next question comes from Kyle Voigt with KBW.

Just maybe a follow-up on the U.S. cash equities discussion. Should we really think about this 14% or 15% market share figure as being a floor that you're willing to defend with pricing? And can you just talk about how important is to defend some minimum level of market share? In other words, if you dip below that level, does it start to reduce client demand for data or connectivity or other products?

Yes. So you can see, we were aggressive in changing price in September, and we continue to adjust, Kyle, as we move forward. Market share does matter to us. Obviously, there's SIP revenue and other things that come along with that and critical mass on the equities business. And we're really pleased with the results of these recent pricing changes. Intraday with continuous trading, we're #2 in equities this month of October. So yes, there is a critical mass of market share that we want to maintain and grow and we're going to be aggressive. But as I said in the opening kind of question -- I answered the question was we're going to optimize that revenue in the long term.

And the next question comes from Owen Lau with Oppenheimer.

Could you please give us an update of your trading floor situation? What's the progress of adding more capabilities and getting the approval to allow to trade complex products remotely?

Chris, do you want to start with what we've just done on expansion?

Yes. Yes. So actually, in September, we expanded the trading floor. We -- obviously, we reopened it in the latter half of June and then we expanded in September. So we're nearly back to 100% capacity of what we had pre COVID in a modified format, socially distance, safety first, but pleased with that, ready for the, obviously, election volatility we expect next week. And we remain committed. We're working with the SEC on a virtual trading floor solution. We have a filing out there, hope to get approved soon that, would allow us to go purely virtual if -- in the hopefully low likelihood that we would have to close the floor again due to COVID outbreak or other reasons. So that's truly from a business continuity perspective, and we're quite excited about that also on the long-term opportunities as we optimize it.

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

I just wanted to ask another quick one on BIDS. I understand the opportunity to expand in other asset classes or regions. But I believe BIDS, 100% of revenue, is driven by the U.S. So I'm just wondering like what it brings to the table from the U.S. business when you have to run basically separate liquidity pools? Any color on there would be helpful.

Chris, I'll just clarify. 100% is actually not driven by the U.S. There's actually -- with the partnership coming from Europe, there is a substantial portion that's also coming from there. I think the -- I think it's 15-ish percent that's already coming from our European operations. So just again, just to clarify that from that perspective.

And can you restate the second part of the question then, Chris?

Sure. Yes. No, I was wondering just what it brings to the table in the U.S.? And Brian had said 100%. Just going off your slide deck, it's at $42 million in North American equity. So apologies if I got that wrong, but...

No, it's okay. So -- yes, go ahead.

Just to clarify, Ed. From a reporting segment standpoint, it's going to stay there. But from where it's sourced, working with the European operations, that's where it is. So sorry, that's just a minor clarification. That's going to stay in that North American Equities business as far as how we report it, but a portion of that is actually coming from the work with our European Equities group. So just to clarify.

Yes. And Chris, in terms of the U.S., I mean, this is a platform that operates in the off-exchange ATS space. It's a very fragmented space. The competition tends to be in terms of independent platforms, small subscale platforms. And we believe BIDS is really -- it's the largest. We believe it's the winner there. We believe it will continue to be. One of the drivers behind that, it's not just the great operations that Tim and his team have established, but also the special relationships with the broker community through the sponsored access model, which will continue in place. Effectively, the brokers operate as our distributed sales force for that business and it rewards all parties to the network. So we feel good about its positioning in the U.S. and its ability to expand there as we work to expand the global penetration.

And the next question is a follow-up from Rich Repetto with Piper Sandler.

On the very first question, I thought I understood the answer, but I got a couple emails. I guess it wasn't clear. But Chris, are we talking in October -- are we expecting a rebound in equity RPC?

Yes, Rich. As I said, we don't -- we're not going to guide to RPC -- exact RPC, but we're optimizing capture -- ultimately optimizing net revenue. So we're adjusting price every -- almost every month as we want to remain competitive and grow share, but optimize net revenue overall. So I'm not going to answer specifically which direction it's going, but we're pleased with the market share growth and we'll optimize capture on net revenue.

Got it. Okay. And I got 1 other follow-up since we're in the follow-up mode over here. Ed, on Slide 9, you talked about the volatility in September, October being whatever, double that or much higher than prior collection periods, I guess. I guess the question I think you'd addressed this a little bit. But does this -- I think most expect this will be more volatile. But is this telling us anything about -- afterwards about the situation where we've got sort of a stalemate abuse? Is there any change to the longer-term outlook, I guess, on the VIX futures, the index -- the proprietary products based on the volatility picture right now?

Yes. Great question. So yes, the point we made was this is as uncertain as marked by the gap between the first 2 months if we were back in September and looking at the September, October which was really trying to highlight the election and now with October expired, looking at the next month. And then over the term structure, the backwardation that you're very familiar with, as unusual as that is, the entire curve is high and very, very high over time. So the election in and out of itself is the short-term cause and is big blip until we know what administration, what policies are going to carry us out into the new year. But importantly, we're not done with uncertainty. And in my prepared remarks that you referred to, the uncertainty around COVID, its continued effect on the globe and that is going to go to top of mind right after we have an administration in the U.S. So the effect then for us is when do institutions who have been on the sidelines and looking how to reengage in this market, how do they do that? That uncertainty looks like it's going to persist for some time. But some normalcy after the election at least allows you to start preparing for years ahead and reengaging in different ways. So that was really the point of the call out on the election and the unusually high spike between -- in the election effect, if I can rephrase that.

And as it was the last question, I would like to return the floor to management for any closing comments.

Thanks, Keith. That does complete our call this morning. We appreciate your interest in Cboe, and we'll be available for any follow-up today. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.