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

Welcome back, everyone, to Piper Sandler's Global Exchange & FinTech Conference. I've said that about 20 times now. But we are very pleased to have the next exchange here, the Cboe. And Ed Tilly, who's been a friend and leader of the Cboe for the past 9 years, really a leader for longer than that, but in the CEO and more recently the Chairman position as well. And the Cboe has done very well under his leadership.

So Ed, when you look at the current environment, all this volatility, the Cboe stands for volatility or certainly invented the product. So I guess the question as you look at your 4 to 6 products, they're up double-digit percentages year-to-date versus the full year last year. Every product category in 2Q is up double digits, so you are fulfilling on this idea that volatility is a benefit. Can you connect the current environment, I guess, with how well your volumes are running? And what do you find particularly interesting across -- now you're global, and more products, but across the globe, the geographies and the different product set?

Well, I think you framed it perfectly. So it's across asset class and across geography that we're seeing engagement more broadly in the market. And in this higher or elevated volatility as measured by VIX for us, we do see engagement, and it is across product. And for us, it's a combination between the orderly transfer of risk, which we're in that business, and the ability to do so in extended trading hours and with an extension of products. So for us, the environment is good for us, but more importantly, so is the extension of our existing product line into new products as well.

And you've taken that product line well. Your products -- not only that expand the horizons -- I want to say expand. The products expand the horizon maybe [ should ]. You expand it to customers with like new retail products. So I guess, could you go through what you're most excited about? And on the flip side of all this positive volatility, what are you cautious about? I know you're a conservative guy that you are.

We are. I think if I take the first -- the last question first. I don't know that -- cautious or concerned, we look at the regulatory environment as changing, and with that comes opportunity. So big reveal on the Chair's position and what he'd like to accomplish over the next years. That for us is an opportunity to help define market structure in the future. So I don't know that I would say concerned, but rather it's really exciting to be able to define with the industry what the future could look like. So I really see opportunity there. I wouldn't put that as far as cautious. As for products, we have identified 2 key user groups for us. Nothing new. We have institutions more broadly who are engaging in our large notional cash settle contracts, and we have retail. And it's traditional retail and new retail. And retail really likes that super short-dated exposure. Markets like today, our first one-on-one, we were joking that the market didn't move much. We were only up 3 spoos at the time. We're down 17. So we have a 20 spoo move in the last hour. That's really interesting, and it's an incredible trade in super short-dated exposures. So we've rolled out contracts that allow for daily expiry in the 500, bite size for new retail, super small notional value contracts in Nano. So we've really tried to answer the demand from a growing base of potential customers.

I just wanted to point out that our fireside chat is well on its way. The fire's keeping up over the years.

It's warm. It's awesome.

So before we get on to, you've mentioned regulation and we definitely want to talk about that, but since we're still on the products, proprietary products, when you talk about index option, we talked about it earlier. How well lit -- can you sort of give a picture of the color, what's driving -- they weren't record, but they were pretty dang near record index volumes. And then the futures product, the VIX futures are doing well. So these proprietary product sets were -- if I just was to simply say investors value them very -- you should cover them. What's driving the nice increases we're seeing in proprietary product?

So there is a macro market driver more broadly. You're able to represent an opinion in the broad market, and the liquidity, especially in the 500, is there. We've got an incredible deep pool of liquidity. I would say I'd put it up against any pool of liquidity in any product in the world. That really gives you the confidence that not only can you get into the exposure that you're looking for, whether it's a hedge or speculative, but you can get out. And that is a key when markets are under stress and super important when we are describing the benefits of having exposure in listed Cboe products. And then I said, as I mentioned earlier, the extension in adding a Tuesday, Thursday expiry to the S&P 500. That means that there is a daily expiry. So you're able to take advantage of and express interest in very short-dated exposures. That's resonated well.

It's -- I don't know who thought of those products, but it's fascinating. It seems like it's an obvious one, but...

We listened. So this is customer-driven. We watched the customer interest grow on expiries and opening positions with less than 1 day to expiration and said, well, we're missing 2 days then. Doesn't it make sense to give customers the opportunity to have an expiry every day? And that's what we did. We're just listening. And then large notional exposure is quite expensive for new retail. If you look a $4,400 underlying, which is roughly where the S&P 500 is today, that's expensive for retail to engage with us. So we launched a Nano contract with the 1 multiplier. Really inexpensive, but it opens up exposure to cash-settled S&P 500 to all users, and that's the position we take.

I just want to go back to a term that you use, because I -- the point I want to make is Ed comes from a background of actually trading on the floor.

Yes.

When you said a spoo, could you just define it?

Our SPX contract is the security exposure to the S&P 500. It's cash settled and traded exclusively at Cboe.

And just so you know, I've been looking for those missing couple days for less. So I'm going to follow your model.

I like it.

So the topic du jour yesterday was regulation, and it wasn't a specific outline, but certainly enough details to get some sort of a picture. So if I had to just -- my gut feeling that there was pros and cons for the Cboe. Well, tell me what you think. And then could you also talk about what happens in options, I guess? Because Chair Gensler did talk about this order-by-order competition somewhat resembling, in his vision, the options market. I think he mentioned that.

So I would look at the -- if the Chair outlined maybe 5 topics that he is open for discussion and shared his vision, I would say that they are very favorable to lit markets and broadening competition more generally. So from Cboe's perspective, this aligns very well with the comment letters that we have made over the last year or so, is allow lit markets to compete with off-exchange venues. It's pretty simple, and the Chair recognized that odd lots and the trading increment are 2 perfect angles to attack that competition. We're in favor of that. The Chair wants more definitions around NBBO and what is considered a best execution. I don't see where the debate is there. More information is usually better. In and around payment for order flow and exchange-sponsored rebate programs, we think there's great discussion there. All PFOF is not a bad thing. Transparency and disclosure, I think, really sheds light on a practice that has served customers more broadly, probably better than that. So a lot of opportunity. I think what the Chair -- we were encouraged by is that there's dialogue. This isn't happening tomorrow, but we will all play a role in defining what the markets look like in the U.S. in years to come.

So just plain interpret a little bit. When Ed talks about odd lots, sizes below 100 shares now can potentially be included in the NBBO.

Can potentially be protected in the NBBO on lit markets.

As well as that same applies to -- if tick sizes were less dependent, so it would make the exchanges, I guess, more competitive with the way trades are executed on the wholesale market?

That's exactly right.

So you have, I think, the largest retail order -- retail exchange in edge -- I get the letter EDGX, is that correct?

We protect -- we give priority to retail flow. That is a model that we took really from the derivatives background that is Cboe, customer-protected, top of the market in priority. That's a big thing for us. And I think the chair mentioned auctions also, and that is that order-by-order competition that you referred to, Rich. We learned -- we will learn and inform, I think, the debate around equity market structure by what we know in the derivatives market. The big primary difference is we are in a quote-driven market model in derivatives. We rely on continuous quotes day in, day out. And equities tend to be more order-driven, where orders are making up the PBO. As a result, in derivatives in the millions of strikes, auctions have worked quite well. And the competition on order by order in a moment of time allows for that competition order by order. So that's what the Chair is referring to when you hear him reference auctions that work well in derivatives.

And to be fair, you also threw a few curve balls, because he did mention rebates in regards to being in his sort of lens of areas to sort of...

Yes. The big difference and we will maintain in part of the discussion is the differentiation between PFOF and rebates. Rebates are exchange sponsored. There is an incentive to make a market. That is open for all market participants and not for a select few. And I think that's a point that will be debated over the next months. It is a big, big difference than the wholesale pay for order flow that the Chair seems to be more focused on. I think recognizing the difference, and we will continue to try to elevate those points, but exchange-sponsored rebate is open for anyone who wants to make or set price.

The -- also the order by -- I will be calling you over the next few days because I understand -- there are also, what I understand, differences in the order-by-order competition between options, the market structure after the auction and behind it.

So the SEC requires that options be exposed on -- in the marketplace for all market participants to be able to compete order by order. So even a paired order, that means a buyer and seller, buy order and a sell order, can be sent to an exchange, and that would trigger an auction. And that auction allows for price discovery and then price improvement order by order. That's one of the other differences. All options orders are exposed, and as you know, the equity market allows for off-exchange or ETFs trading.

I think there was going to be plenty of discussion, debate...

Lots of discussion.

And more and more people's positions and information on both sides of this. Back to the Cboe. So I know you guys are excited about data and the data offering. And you get -- you appointed a new head -- call it new now, but you have a head of data. You've sort of aggregated the product. You've got pretty aggressive targets as well. So what is the thing -- what excites you? Can you sort of expand upon what I just outlined, the data offering and why Cboe is so excited about what you're doing there?

Well, I think you've laid it out for us. So data for us, the exhaust from our exchange is now 25 around the globe, really generates a lot of unique data set in aggregate. And so the collection of that data and being able to sell that and expose that across the globe is appealing. Running 25 exchanges gives us a lot of exhaust from those exchanges, and that first line of sales is important. We're also in the derived data business or enhanced data business. So the information off of derivatives exchanges are extremely rich, and we have the opportunity now to look across geography and look at a Cboe One offering in multiple jurisdictions and across asset class. Great opportunity for us. And we're also in the resale business of data. So we announced the Morningstar deal that we can redistribute their data. So not only looking at what Cboe generates as data, enhancing that data and then also, with our partners, being able to distribute more broadly data.

So with the data -- the data that I believe has actually come from -- partly from your acquisition strategy, that gave you capabilities globally and made the data offering more robust -- let's say, globally robust. So I guess the question is the transformation to Cboe being more global, can you give us an update on European Derivatives? We know it's still early, but it's progressing, from what I understand. And not only are you going in new areas with a product you're very familiar with, but this retail -- an update on Nanos as well. And you probably need to explain what Nanos is, but update on those...

So Europe, in general, I mean, more broadly, our European equity business is phenomenal, really at levels of share that we haven't seen in years. So it's just a terrific starting point. And from there, derivatives and the indices we built in Europe use our own data. Really important to us. So we're not going out and buying some other exchanges' data to create indices that represent exposure country-specific in Europe or Pan-European exposure. So the construction itself and the products that we've launched are Cboe's. That's important to us. The launch last September kicked us off with that broad European exposure and country-specific exposure, all cleared at one CCP, EuroCCP, which we own. Big, big difference than what's out there with the incumbents. So very -- the very engine that's driving our success in the U.S. that's higher volatility, day-to-day vol, is the one that fought us a little bit in launching new indices in Europe. Hard to get someone's attention in this marketplace. That said, we think we're off to a good start. The dialogue with our customers has still been incredibly positive. So we know we're on to something, and we'll be catching you up to date on that success over the months. We're also interested, obviously, in single-name exposure in European derivatives, and we'll be moving into that as well. You asked about Nanos.

Yes. Go ahead. Sorry.

So the Nano launch is back to a new retail. And again, it's the notional exposure, the expense that each of us would be looking at derivatives exposure and what we'd have to lay out with that exposure. Super expensive in the S&P 500. As I say, a $4,000 underlying roughly and derivatives priced off of that exposure are very, very expensive, kind of pricing out new retail. At the 100 multiplier effect on the premium you see on your access to the marketplace, your individual broker's website, very expensive. We said 1 multiplier means you click and pay with what you see. So a $4 option actually costs $4. So that's super retail-friendly and all the benefits of cash settlement and management that comes along with more broad exposure to the market.

I'm going to joke about this, but there's actually -- there's something more insightful behind it though as well. You were on TV, I think, was it last week? Was it last week or this week? No, it was last week.

Yes. Monday.

Monday. Okay. So the Cboe, with all electronics, the conversion to electronics, as we've talked about for the past 1.5 days, the Cboe opened the floor for SPX. And I guess the not joking part of it is, I know you wouldn't do it unless there was demand for it. And I guess, can you explain why you would do this? And it really talks -- this goes back to this index product and index volume that has been at super elevated levels, but you're bucking the trend.

Not a lot of new exchange floors being opened and entered into. And really, what we did is move the existing trading floor that has been home to the 500 and all our multi-listed options into a new facility, which is state-of-the-art and built for the added value from a concentrated pool of liquidity in one -- in a time/place format. So what does that mean? Customers have shown us by the way they access the exchange. We do not determine how our customers access Cboe. Our customers choose how they'd like their orders to be represented. They choose at roughly 33% of the time in the S&P 500 to hire a broker or use a broker to find them more liquidity or price improvement. We listened to them and built a new state-of-the-art facility to do just that. VIX options are higher than 40% average daily volume traded in open outcry. So we take our instruction by our customers who are voting by employing brokers to query that depth of liquidity and find them a better service and experience than they would have if they stayed 100% electronic. Again, we are not in the business of routing. We're in the business of choice and listening to customers, and we open that new floor on Monday. Really exciting and we think there's plenty of runway there left in open outcry.

I just want you know I respect the people that go their own -- that do the opposite of the way the stream is flowing. But no, we're obviously doing it for a reason because it's demand, and it's a great proprietary product is my point. Yesterday, we had Thomas Peterffy, and the intro to this is that index -- or excuse me, option volumes are -- when we talk about equity volumes being 2x running in the double 10 billion, 11 billion, 12 billion range when they used to run at 7 billion, multi-listed option volumes used to be 17.5 million, and they're running from 35 million to 40 million or somewhere around there. So super elevated as well. And Thomas Peterffy talked about his vision about that the globe could be -- there could be more utilization of options across the globe. And he's certainly betting on that. And I guess you've already positioned some products like that, but I -- on one of the calls, you actually described the mindset of why options are more appealing. We've had this democratization of finance, brought new people, but you were able to describe why options might be a way for these investors to express themselves to people.

First of all, we listen to Thomas. He is front line and listening to his customers who are, I think, among the most sophisticated retail. So we are informed by his direction and that is the globalization and exposure of derivatives more broadly. We're in that business. We're in the business of risk transfer and a sustainable investment and education for customers. All of that aligns perfectly with being able to change the payout scheme of a Delta One exposure. Delta One, an equity or a future, that just allows you to be long or short, you're right or wrong. Derivatives allow you to bend that payout scheme according to what you see and what you perceive as either risk or opportunity in the marketplace in a more levered and less risky way. That's the business of derivatives. I am a big believer that retail will benefit from being able to limit their exposure and risk and express the same long/short opinion with less risk in their own portfolios. That is sustainable investing. That's where education and derivatives come into play.

Is there some indication that's already happening?

Oh, it's definitely happening. You see the volume. You just stated those statistics in multi-list single-name option. We're seeing it in the S&P 500 as well. We're up in that 2 million contract a day range. Yesterday VIX was 700,000. So we see volume moving into derivatives and it's coming from retail brokers. Hard to tell if it's a retail investor, but coming from very typical retail platforms.

Half of my list expenses. I'm going to void you of that. Well, because I think, as we joke with your CFO, is that the Cboe's tradition has been to be very conservative with the guidance for expenses and to be very disciplined with expenses overall.

That has not changed.

I wouldn't expect it to change. So the guidance is, for the year, $617 million to $625 million. Barring any, what do you call, currency impacts or any acquisitions, will we make a $25 bet that it's below that range or at the lower end of that range?

I'm not allowed to bet. Okay.

No, I move away. Can you just give a color?

So the change in the guidance this year really represents the investment we've made in the future at Cboe. It is a little bit outside of what you're used to seeing, but we try to be very transparent. We have hired up to integrate the many businesses we've bought over the last 24 months. That expense we wanted to share with you, and we see that payout over time in different increments and installments. Meaning the investments we made are paying off quickly in Tuesday, Thursday expiry in the SPX, quickly in Nano. And if we look further out, European derivatives, for example, and the build there or we're looking further migrating our technology into Australia and Japan, those are longer payout schemes, but we want to be totally transparent with the direction and why we chose to give you this guidance and our expense change. It's not a change in philosophy. This is investing for the future.

So you sort of outlined a little bit the global strategy -- you've -- I wouldn't say -- put together. I was going to say cobbled together. This was a thoughtful -- maybe we thought it was cobbled at the beginning, but now I think investors have come around.

I acknowledge that it was difficult to see the vision in the manner in which we're required to disclose to all of you what deals were pending. Now I think you do see that in jurisdictions that allow for competitions and asset classes that are open for competition, we want to be there and want to be there in scale. And that's difficult to describe piecemeal, which is how we're required to disclose that to all of you. But yes, we've built now a global business and a network that thrives over a common technology platform and an experience that is uniform across asset class and across geography only tailored for the local regulations and requirements set by those jurisdictions. So yes, we're in a really good place to take advantage of the M&A activity that we've had over the past.

So as we look forward, every CEO had sort of the wrap-up question, because those zeros mean that we're done. Time's up. But the -- we tried to get the outlook of something further than just the cycle, the near to moderate term cycle that we're going to experience no matter what happens. So you have now -- the acquisitions have tied in. You have this global network. You have products. You have the data offering that's taking advantage of that -- of these things you pull together. So is it more about execution now? Or is there other components you could potentially add? Like how aggressively would you look at, I guess, components? Do you have the -- what do you call it, the guts of the framework right now to be what you envision?

I like the way you say that. I would say we have the guts of the framework. And if I can go back to any place we see competition that we're not at, we would -- not in that jurisdiction, we would look at, and scale is important to us. And I think the one asset class for us what will be exciting over the years will be our move into crypto with buying ErisX and closing on that just a month or so ago. So plenty of opportunity for us, but we are deep in integration mode and got most of the pieces I think we need for the time.

I think that covered -- we have certainly reviewed the network that you brought -- I want to say network, the group of companies you brought together. I do want to offer Ed's -- what do you call it, tutelage on this order-by-order process going on options. So you could expect a lot of phone calls over the next several months.

That's the O in Cboe. So we're ready.

Exactly. So it could be that the option markets are sort of the model that we move equity markets. I don't think it's going to be the same, but move -- to look more like options.

Last comment for me. There is a lot of good -- a ton of good in the U.S. equity market. It is absolutely an incredible market. And if our goal is to just make it better, I think we're in a good spot, and we keep the end user, their experience, top of mind. I think the potential for change, that has to benefit their experience, and we're all for helping to define that.

And are you concerned about any -- I mean not unintended consequence, as we make changes? Because it's not always that easy just to make changes that purely benefit...

Unintended, not yet. I think the intention is good, pure and in the right direction, more broadly. As I said, there's good components and value add around PFOF. All PFOF is not bad. Exposure and disclosure and sharing information really clears a lot of the rhetoric around bad PFOF. I just don't think all payment for order flow is bad.

I think that's it.

Cool.

A man who's dedicated his career to options. He's seeing things come his way.

Thanks, Rich.

Anyway, thanks, Ed Tilly and the Cboe. Next up, we'll have the CME.