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

Welcome back, everyone, to Piper Sandler's Global Exchange & FinTech Conference. We're now moving into the U.S. Exchanges. And it's always a pleasure, and I always have fun talking to the Chairman and CEO, Ed Tilly; as well as Chris Isaacson, the COO. So Ed, where has time flown, CEO since 2013, it's been a while now?

Yes. It has, Rich. Good to be here with you. This is great. Thank you.

As well as Chris. And Chris came over in February of 2018 or '17 with the BAT's acquisition.

Yes. 2017, exactly. Thanks for having us, Rich.

So anybody who's been following the story here lately now, I think has a better idea of what these pieces that you've been bringing together, I think that was probably the headline that came out of most analysts notes that they see the network, and we're going to talk about networks and virtual cycles and so forth. But they see the logic and the thought behind the acquisition. So I guess my question would be, as you went through these acquisitions, was this a planned out sort of strategy over years or did certain thing opportunities pop up? I'm just trying to just trying to see really how smart you were?

Well, the -- my trading philosophy was better lucky than smart, but this actually was by design, Rich. This was years in the making. The BIDS transaction that we closed at the first of the year was really about 2 years, and it took us quite some time to position ourselves in a really regulatory, sound and safe position according to the SEC. So that was a big design. We would love to have been able to execute that earlier, but we're unable, and that is totally fine. The SEC -- it was very thorough and careful. And we were ultimately able to present a governance structure that allowed us to move forward with operating an exchange and then walled off in the U.S. operating a block trading mechanism that is BIDS and really got to know them over those years. So it was not a wasted time. It was good time actually. The operation in Europe really kicked in. We loved the team and loved the traction we were gaining in Europe. But when we bought MATCHNow, and we were buying the data and access solutions at the time access and data services. We were unable to tell the story of how all the pieces fit together. But here we are after having announced our move into APAC and the successful closing of BIDS and integrating all of those trading services in a really, really good position to be able to tell a much more global story and happy to be able to weave that together now as we had intended.

Yes. I think investors now can sort of one-off, it was tougher to understand some of the moves. You add them all together, it seems like 1 plus 1 now equals more than 2.

That was our goal, Rich, I'm glad -- and I know you saw -- you saw it instantly, and I appreciate that. It did make sense. And there was an aha moment when BIDS came out and then the Chi-X announcement and the ability to move BIDS from the U.S. into Europe, Canada with MATCHNow, and then ultimately, into Japan and Australia, always part of the plan. But it is great to be able to tell the story and get that rolling.

Yes. So we will get more into sort of a global trading network in a bit. But first, just if there's one question would be, and it's really not a question because -- but you did this consciously knowing your focus would still be transactional. I guess, there is Chi-X Asia Pacific, much to my surprise, a lot of subscription-based revenue. But I guess this balance of transaction versus subscription-based, could you talk to that as well as even in your, what you call, nontransaction, you put out some pretty high guidance post or guide reels, so to speak?

Yes, I think -- and Chris will jump in here. But the nontransaction business and the reoccurring nature, that is growing really quickly, and we love that. That is the great addition to core great trading platforms. We think we have an advantage here, Rich. If there's a jurisdiction around the globe that allows for competition. We really think we should be there because we have a technological advantage. We know how to run a trusted market, and if you can compete in the U.S. and Europe, there's a pretty good chance, you have a good opportunity, and we'll be fairly successful competing anywhere that the jurisdiction allows competition. So while we don't have to do another deal in another country, we're on the lookout for other competitive arenas where we think we can actually shine. And as a result, we continue to build data and access services and solutions for our customers, and that is a terrific offshoot of the core business of matching equities from equities data, from data, derived data and derivatives and up the chain as far as sophistication. That's really what we're good at. But Chris jump in.

Yes. I'd just say, Rich, obviously, we see the value of nontransaction revenues. Shareholders see that as well. It's one of our top strategic priorities. But as Ed mentioned, it's -- when you have great underlying markets, cash markets, they spin off a lot of data that's highly, highly valuable. And then you move up the ladder to your derivatives, et cetera for that. And we see that across all the jurisdictions that we're that we're operating in. I think Europe is a great example of what we've done. We started in cash equities, have a great business there, have a lot of data. Now we're launching derivatives come this fall. So I'm really excited about that. And we do expect nontransaction revenues to grow at a higher clip than we do transaction revenues. But we also welcome growth in the transaction revenue business because we expect to see it.

So this was sort of the my opportunity to talk about the virtuous cycle. Of market data and cash actually spun out in what you call aggregate market data. And Chris, you just talked about how it can elevate trading. You've added sort of a spin, the global network to it as well. So I guess, any more thoughts on sort of this virtuous cycle a network that you put in all working together. Any more thoughts on that?

Chris, why don't you walk through, I think the BIDS is a great example, and then I can jump in with the solutions that we provide, all of our market participants really any level, but why don't you start with BIDS and how that vision really came together and the globalization of that existing network and how we think we can expand?

Yes, sure. So BIDS, BIDS is a stand-alone entity, was purely U.S. equities and built a great business over 15-or-so years under Tim Mahoney's leadership. But then in 2016, we partnered with them -- that's Europe -- Cboe Europe, we partnered with them to bring Cboe LIS, which is a largest scale block trading platform to Europe, and now we're 26%-or-so in May, nearly the #1 block trade network in Europe. As we did MATCHNow last year, now we're bringing BIDS to Canada through MATCHNow also. And then we have plans to bring BIDS to APAC through our Chi-X Asia acquisition. So each of these, as we expand BIDS into a new jurisdiction, it allows BIDS' existing customers, say, almost 500 of the largest asset managers in the world that gives those existing customers access to new geographies, new securities they can trade, but it also adds people to the network that are in those jurisdictions that may not have been on the network. So it's really complementary and synergistic in both ways, and we're very excited about that.

And I think, Rich, further than with the data and access services group, the combination of Silexx Hanweck, FT Trade Alert and LiveVol really, when we solve an Hanweck solution analytics solves a math issue, a portfolio issue for FT or for Silexx empowers those solutions with Hanweck this, for example, that's really portable. We can go into other jurisdictions once we've solved the math of derivatives. It really is a prime and set up for the globalization to follow us as we move into different jurisdictions. So solutions for at -- pre and post-trade as really part of this equation as well. So we really are looking at solving solutions for our participants globally. As we know that many larger portfolios and our larger institutional customers have just global exposure, and we want to be there in the trusted network, trusted solutions and providing them the tools they need to trade really literally around the clock.

Again, just hitting home on the point how these acquisitions are -- the strategy is coming into the forefront, I guess. I guess, just a clarification. So you increased the training time zones. But can you differentiate that between extended trading hours and some of the proprietary products, like trading outage the VIX, SPX and VIX. And really maybe give an update, just May, I think, saw some good some solid volumes. We started June off softer in the proprietary products. But any comments on that because we still -- I think investors still watch that as a gauge to?

I think it's important to look at the products and how they're designed. And if you do recognize again that a lot of our participants are global and have exposure or are looking for exposure in different jurisdictions we want to be there to provide those solutions. And it does mean, for example, the extension of not only proprietary products in the U.S. and the global demand for them. We need to be present in those jurisdictions to tell the story to educate locally then and to show the utility of the product set that has always been unique to Cboe. But if we look into Europe and what we've built with European derivatives, and having pan-European exposure, all cleared in 1 CCP, EUROCCP, the CCP we own, we know that there will be global demand and local demand. And that is part of what we've been trying to build, be present locally, trade local exposure, but we have a sales force equipped and armed to tell the story that this trusted network that is Cboe. You can basically cover the globe and your risk. If there is open competition, we'd like to be there. You know the way in which we encourage our quarters and derivatives you know the way in which we have transparent and accessible markets in equities. And we will have the solutions for you to manage that pre and post-trade. And so it really is an extension and proprietary products is a perfect example. We know by adding the clock, adding the time zone that is APAC in general to what has our been basically Europe and the U.S., there's proprietary product demand. And Chris and the team extending that coverage is not just for U.S., but it is more for global demand for access into PFOF products. Chris?

Yes, Rich, I just hit on the point, when we were, I think looking at Chi-X Asia. This is really what that got us convinced this was a wonderful acquisition for us, is not just the existing markets that we're purchasing there and the entry we get in those cash markets. But on top of that, the existing data we have from U.S., Europe, Canada to selling that into that region as well as our products as we're expanding the time frame in distribution on those products. So layering that on top of the existing great businesses we're buying that, as you mentioned, in the case of Australia has some great nonrecurring -- recurring revenues. That's a bit surprising. It's -- it all clicked together for us and brought -- brings much of this into focus.

You would had to have a big smile what you saw the actual revenue, the recurrent revenue. No, I would not have guessed that there was such a high percentage of recurring revenues there. So the European derivatives launch, you talked a little bit local and global there. And we're getting closer. So any updates on what you're seeing on, I guess, the customers' connections or expectations and so forth?

Sure. I think we are -- first week of September. Chris, I think a readiness from your perspective is probably the most relevant. So why don't you hit on the readiness of both Cboe and our perspective, EuroCCP and then customer?

Yes. We're excited in all fronts. So as we announced within the last month or 2, September 6 is to date. We have a great ecosystem that has signed up and committed to this from clearing firms to order flow centers to market makers and then obviously, CCP itself EuroCCP, which we own, working through regulatory approval with the regulatory authorities there. That's going very well. And then technically, we're ready to go. And our customer engagement, they're testing with us on a daily basis now and going through a weekend test when we ask them to. So we're quite excited for September 6. We think we have a great representation and entire ecosystem to get started with these first 6 index products, index derivative products that are on indices that we've created ourselves.

Great. I mean, it would only be appropriate to the Chicago Board options exchange launches, be that product in Europe. So speaking of options, one of the things that you could continually be amazed at is the number of retail options at a trade every day. I mean you've seen maybe a small pullback, but nothing still well above 2019 levels. And really, in equities now pick back up. But anyway, back auctions, that's the opportunity on the retail side. What's your view of the elevated volumes maintaining, sustaining? And then what can you do to package more retail? I know you can go -- well, I'll let you talk about the margins?

Well, I think the good news is you can finish by sentence, Rich, because we do believe that for this to be sustainable, particularly in derivatives. In the U.S. retail market, it must -- we must embrace and lead on the education front. It is an incredible opportunity to teach the difference in fractional share ownership that has a payout scheme that's while it's easy, it is pretty binary, right? And your stock, it needs to go up for you to make money. And if it goes down, you're losing money. That is pretty simple. It's easy to understand. What we need to teach is how to bend that payout scheme, so that option use can limit the downside allow for the upside in teaching that responsible trading and exposure is really what the educational process is all about. And that's how we sustained the growth and the interest in trading U.S. derivatives, in particular. For us, the opportunity is even greater. We have very little participation, actually none of new retail and new retail firms in our proprietary products. So the opportunity is to connect with those that are introducing the new retail participant to see those proprietary products. Not surprising for you, Rich as you have been following the story. Our more traditional online retailers, the most active are very interested in huge participants in super short-dated, low premium options. Our SPX, weeklies, dailies and low premium is great participation in the more traditional retail traders. So we see a great opportunity to connect with new retail and showing the benefits of trading cash settled U.S. exposure and see those proprietary product set. Chris?

Yes. I think absolutely. There's a great opportunity for them to trade our existing products since we have not penetrated yet new retail. I'd also say, Rich, I think as we launch European derivatives also, that's primarily institutional or retail coming in directly. But over time, hopefully, we can help that part of the market in Europe grow also. And retail is accessing our options and our PFOF products, sometimes indirectly through things like target outcome ETPs that are making heavy use through flex options or options of products. So a very, very healthy ecosystem.

We -- the elevated volumes. So let's turn to regulation a bit. And we had Chairman Gensler speak yesterday. If I could summarize the same comments from his early may testimony, except for maybe a little bit more forceful. Again and no backing off. Again, that's my interpretation. But I -- the question comes, given some of the things he's focused on gamification, certainly, I think investor education can address some of that, payment for order flow. We didn't -- I don't think, specifically, you mentioned rebates yesterday. We talked about, certainly, market-making concentration. I guess -- I know it's only been a limited amount of time since yesterday. You may not have read the whole -- in his prepared remarks. But any -- what do you see as being impactful to the Cboe that he's focused on right now? We know there's still a long road before anything becomes proposals or rules.

Right. I think the most encouraging for us, and it's not just for Cboe, but it's for the health of the U.S. equities market is the Chair's focus on a holistic approach. Chair didn't say, hey, this is broken and everything else is okay. Or everything over here doesn't work, but this is just marginally, okay. I think the holistic approach is the right one, and we've been asking for that comprehensive review of where we find ourselves in a state today where retail is engaged, the markets are different. There are a lot of practices that have served customers well, and some, we believe, can serve customers even better. And I think the Chair recognizing that, hey, scratching your head, is the BVO representative -- representing the interest in the market and price discovery, if 50% percent of the volume is traded away. And I don't mean 50% of blocks, but there are 1 lots in 2 lots, trading away off of the lit markets. Is that really the best that we're looking at when we see a screen? Asking those questions without judging them. I think this is exactly where we should be and we're looking at the marketplace. We -- big proponents of exchanges being able to trade in increments that are not a penny in lower-priced stocks. You heard Doug Cifu pounding the table on CNBC yesterday, saying, hey, competition is good. We need the end customer to have a good experience. The Virtu business relies on it. Citadel's business relies on it. None of those internalizers are afraid of competition. We exchanges in lit and transparent market, we owe the BVO and the price discovery mechanism, we should be participating in that and love the debate. As for the gamification, I think the SEC should be looking at suitability, for contracts and how retail participants enter the market. I think that's a healthy conversation. I have no judgment. I think education solves a lot of gamification. If you know what you're accessing and there is an assessment of the suitability of products for you. I think investors should be able to place their money their exposure where they think it's best for them as individual investors. So I think there's a lot of good in the debate. And again, I think most welcome is the holistic approach that Chair has outlined. Chris, I'm sure I've missed a lot in there. What do you got?

You covered it well, in the holistic review, we welcome that. We're encouraged by what the Chair Gensler's comments. And I think the focus on these trade issues, what's the best experience for the end customer. We think there's room for improvement on minimum price increments on exchanges across the market, more transparency around incentives. And then proper I focused on best execution, all about the end customer, and we welcome that.

I think it's interesting, Rich, the word the Chair used is, it's best cost execution, not better execution. And the BVO, as it is today, may not be the best comparison. And I think to a drilling down and what best means is just a very, very healthy debate. And again, without any preconceived notion of where we end, I love the conversation. I like the way it's set up.

Got it. Got it. I got time for one more question. And first, I want to show you my cup.

Oh, I saw. I saw the cup.

Deeply extended. I've been holding back. I've been keeping it down here.

I noticed it wasn't a Red Sox cup, though.

Not yet. We got to see though. They're hard to brake because you got to wait until at least till September till you start breaking the cups. Anyway, we're having fun, but a serious last question. You guys have checked the box on our discussion about networks, virtuous cycles. And now that we understand and see the pieces of the puzzle. The last question would be, do you have all the pieces now? Is this the other parts or pieces of the puzzle that you need to add on to complete your virtuous cycle and network? Or is it about execution from going forward here, Ed?

Need is the key word there, Rich. I think, need, I would say, there's nothing we need to go do today. But my words that if there is a jurisdiction that's open for competition, we'll be taking a very, very hard look at bringing the advantages of a trusted network, a trusted exchange operator. And from our shareholders' perspective, the advantage that is the technology stack that we have, the consistency in what we can apply for our customers globally. We'll take a hard look at jurisdictions that are open for competition. So need -- I wouldn't go as far as need, but our eyes are always open for the next, that is for sure.

Great. That -- it's always fun and informative, talking to you guys, both Chris and Ed. That wraps up our session. I hope we'll get to maybe even go physically to Chicago maybe in the summertime as we've done in the past.

We're opening Friday, Rich. So come on out. I'd love to see you. The mayor is opening up our city, and we -- happy to see you here.

I will be there.

Excellent.

Again, I want to thank Ed and Chris. That ends up session here. Next up will be our private exchange peel, and you're both welcome to view it, if you like, with MEMEX, MIAX and IEX. So thank you, Ed and Chris. And again, always informative and always fun as well.

Awesome, thank you.

Thank you, Rich. Have a great day.

Great. Take care.