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

Welcome back to the Global Exchange & FinTech Conference. We're going to stay focused on the U.S. publicly traded exchanges. It's my pleasure to welcome Ed Tilly, the Chairman and CEO of the Cboe. The Cboe has had some fantastic results in key -- derivatives have been growing. Options have been growing. We'll get more into the details of that. But Ed, we've known each other for a while, comes from a trading background. So I think he's able to understand and communicate more of the trading environment than, I would say, most. I don't want to...

Thanks, Rich.

I could even make it higher, but I'll just leave it at that. So Ed gives us a good vision of market conditions.

So right now, we're seeing low VIX, but we're seeing your products hang right in there. So just can you give us sort of the latest update on what traders are interested in, what you see in market conditions, the outlook and how it's contributing to the solid volumes in the index options every day [indiscernible]?

I think you summarized, I think, the state of trading really well. The lift in volumes across the globe and across asset class last year has been replaced really this year in derivatives and, in particular, U.S. derivatives. And for us, that's primarily in the 500 complex. So the adoption of and the flexibility inherent in the risk profile and exposure that derivatives allow, really limiting exposure, but still participating in the marketplace is really resonating, not just with institutional investors but with retail and not just in traditional exposures that are longer dated, but really been pulled down into short-duration exposure. And that has been where we've seen the greatest growth this year, is the exposure that's captured in daily or short term, primarily driving the demand for U.S. exposure.

So we actually -- and again, I think I said this yesterday, we devoted a full panel to more or less one product category, and you're the beneficiary index options. So I guess, in your view, maybe one thing we didn't highlight or discuss as much is sort of this marrying of liquidity of -- the SPX pit was strong to begin with. And now you made modifications last May -- or May of 2022 to expand the Weeklys, and it enhanced retail flow. Can you talk about, I guess, what you view is the mesh between the 2? How big of a role is that? And as a trader, this 1-day VIX gauge that you introduced as well, how important or what role will that play?

Sure. So your reference in expanding the weekly contract that we started in 2005 to dailies last year in May, we rolled out Thursday, which really rounded out the week, we were seeing a new user, a new use case in exposure to the U.S. markets, and it really is the super short dated, taking advantage of daily news cycles and being able to be very specific in the exposure. And in this instance, the time and the exposure, the amount of premium someone was buying for their desired, either hedge or speculation for the U.S. market. That pull is not at the expense of the traditional institutional investor who still finds great use case in the third Friday. That has grown too, but has been overshadowed by the adoption of the new use case. You mentioned retail, it's really retail platform and not necessarily pure retail. This is still the SPX, a very large, notionally sized contract, which was really built for institutional investors. So the retail platforms are the ones that are engaging in the daily, and retail would probably find a better use case or a more appropriate wallet to trade the cash-settled XSP, which is 1/10 the size of SPX. So we've seen growth there, too. But I think as retail starts adopting much more of the short end of the curve, we'll find them more attracted to XSP.

So when you say retail platforms, how are you breaking out -- what is the retail platform?

So think IB, thinkorswim. One enables for algo. The other is more traditional point and click. But it's more of a sophisticated retail trader who has the wallet to be able to trade a very expensive underlying security.

So this product has caught on. It's a proprietary product. So you get a -- it's not as commoditized as multi-listed options. It's a significant contributor to your revenue overall. I calculate 30 -- it's hard to get the exact number because of royalties and stuff, but 30% of your revenue or so, maybe a little bit higher. Maybe you'll tell me something.

But you're going away.

But -- so I guess the question is, how do you continue -- is there any way to spin off other -- and I know you've gotten this question a lot, but other applications, why does or doesn't it work with VIX? And we've got feedback, pro and con...

Well, let's go to VIX. So part of your -- the first question was, so with the big buildup in 0 days or 1 day, there was critical articles written that cash, the VIX isn't capturing 50% of the volume that's trading. Well, VIX wasn't intended to measure 1-day exposure or the implied volatility of 1-day exposure to the market. It was built for 30-day exposure. What does the market see? What does the world -- how does the world price exposure to the U.S. in volatility terms, 30 days forward? That was an incredible measure of the risk inherent in the U.S. market. When the trade began to pick up in 0 days and 1 days, we were not measuring the implied volatility or what short-dated exposure meant to investors. So we came up with VIX 1 day. So VIX 1 day is a snapshot into the risk inherent in exposures in the very, very short end of the curve. How does this grow? What is the other -- what are the other applications once we realize the full potential of success in 0s in the 500? We really do believe that XSP, the cash-settled equivalent 1/10-size SPX, same notional size as SPDR, should appeal to retail investors. Well, what's missing? SPDRs -- XSP has not been recognized as covered exposure to a SPDR position. So from a margin perspective, you were considered with a long SPDR position and a naked, exposed XSP position, while the SEC has granted us relief and will recognize as good margin or a covered position, having a long SPDR position and an overrided XSP for example. So we think there's great opportunity for those investors looking for both short-end exposure and overriding capability in cash settled by employing XSP. So we think there's great opportunity for expansion in both 0s and in XSP as the market adopts the new margin rule for XSP.

And I've been looking down, I was doing some quick calculations.

I don't like that.

So you've been the CEO for -- is it 10 years, since 2013? Is that...

Feels like yesterday, but yes.

It feels like yesterday. But what you really should know about Ed is that he started on the floor, I believe, was it 35 years prior?

'87.

'87. And so -- yes, 35 or 36. And I met Ed before the Cboe went public. But I guess my question is, how good is it -- how much input -- as a trading CEO person -- floor person prior then becoming the CEO and then to see a product like this sort of grow and contribute to the Cboe's results?

Look, it's great. I mean it's an incredible opportunity to realize all of the potential of what the -- Cboe was celebrating our 50 years of operating in a trusted market. So we launched in 1973, and watching the evolution of Cboe has been incredible and sitting in the seat, it's been incredibly rewarding. But what's really cool is each and every day, we wake up and we listen to customers and we ask what the potential is, what could be next? That's really a lot of fun. And we recognize that we really don't operate markets without liquidity. So when we develop products, when we think of new ideas, when we hear the challenges of retail investors, institutional investors, global investors, we start with listening and then the application from a liquidity provider's perspective, can you post a liquid, fair, transparent market in real time all day long? That's been a lot of fun. So when we develop things and solutions, we start with liquidity to answer the questions in the gaps in the marketplace that institutions and retailers have.

You want to talk -- I can talk about the 0DTE the rest of the morning.

Me, too.

But the -- I want to talk about market data because that's a big -- that's a part of even the 0DTE story as well as the whole Cboe story. So you consolidated market data. So you brought out this very talented person. I know that you trust in her leadership, but also the market data. Can you just talk about Cboe's market data efforts in general? And then not to get off the 0DTE, but from what we understand, still, market data could lead -- I guess, you're still expanding market data in the 0DTE area that could lead to even more -- keep that growth rate up in this [indiscernible].

So from the top is we put Cathy Clay, an incredible leader that we have overseeing the business of data and access. And if you look at the pillars of that business, obviously, the exhaust from our now 26-or-so markets across the globe really afford us really consistent and equal exposure to all participants and through distribution, cloud distribution, primarily anyone available to have access to that data. That's the expansion of being able to operate markets across the globe where jurisdictions are open for competition. So we love that primary distribution. We also have enhanced distribution and risk analytics. That is a really growing business and potential in every one of the markets that we operate. We take that basic exhaust and we can enhance it based on the users' demand. That's a growing business and an aspect of DnA. And then if we look at that, really back to the distribution and the potential, what happens when you're operating markets across the globe? You have the opportunity for index calculation and an index business. So we can take basic strategy. We can marry the observation, we'll just take the U.S. market, with underlying exposure and overlaying with covered call writing, for example. And we can calculate indices that various institutions want to replicate through notes and other products. So that's another growing aspect of that data business. And then back to 0s. The first demand, before you engage in any new product or any new duration, is to take the data that's available in the market and back test it. So we've seen demand for data and for the purpose of testing theory to employ a 0-day expiry, for example. So growing demand, growing business, every one of those pillars really executing right now, and Cathy Clay is the right leader to bring that to potential.

When you look at other growth opportunities -- you brought in assets in Canada, in Asia Pac. So certainly -- and in Europe, you're doing things as well with option and derivatives. So when you look at growth initiatives, like besides -- 0DTE carries itself. But beyond that, can you talk about what excites you? What other investors should be looking at beyond the proprietary product, I guess?

So operating -- jurisdictionally, you nailed it. We're in the U.K. We're in broader Europe, through Amsterdam, Canada, Japan, Australia. The network that we also offer is the bids block trading mechanism. So tying those markets together and watching the demand for a consistent and equal access to those markets from an institutional block trading standpoint is very powerful. And we're just beginning to realize that as we migrate technology in the various jurisdictions that we operate. So we successfully migrated Cboe technology in Australia and are looking for a fourth quarter ultimate migration in Japan, where we'll operate Cboe tech and our PTS in Japan. All of that allows for the block trading mechanism bids to operate as well. So building that connectivity around the globe is very important to us. That is one opportunity. The other is to continue and to begin to realize the potential that we have seen and our customers have seen in operating a derivatives platform in Europe, which really required us to own and operate what is now a very successful Cboe Clear so that we can clear derivatives. And we're in the futures and index business in Europe and going into single stock in a few months. So we see great potential in being able to bring the experience that U.S. investors have in a lit, easily accessible market in Europe. And then more broadly, if we look at the potential in the different trading styles around the globe, we recognize that different jurisdictions are engaged and trading in different ways. And in particular, in Japan, looking -- and believe that the economy looking -- for the first time, going from a savings economy to an investing economy and being there and operating a PTS is a great beginning for us to take advantage of and be present when the potential for market structure changes occur and the tone of investing pivots to -- from savings to investing.

I guess this is a two-part question. One of your growth initiatives is Cboe Digital, crypto platform but doing it in a more conventional way, if I could summarize. Well, maybe we'll start there, and then we'll get your comments on regulation overall. But Cboe Digital, how does that -- given what's happened over the last couple of days and where the SEC has taken a stance not on -- trying to -- I had to summarize, push towards a more conventional -- if there's a process to get to the conventional structure. But what's your reaction to what's going and the positioning of Cboe Digital?

Well, a little different than the reaction to what's going on, but the way Cboe Digital has really continued with the vision of ErisX. ErisX is what we built. It's now named Cboe Digital, and it was really for a more traditional, absolutely highly regulated view and potential for digital exposure. And so when ErisX set out and when Cboe picked up the effort in buying ErisX, it was to operate a trusted digital market, and that means regulation is part of that equation. So we have state-by-state approval in the U.S. We're a DCO, DCM. We've just recently received approval from the CFTC for margin futures. So it is not unique to what you would expect a traditional exchange to go into nontraditional finance. But from a user's perspective, that trusted market in a new asset class is relatively new. We also employ and embrace the intermediation that our introducing brokers offer. They know their clients. They know what is appropriate. And we are absolutely aligned with that structure that we're very familiar with in more traditional finance. So from us, it's -- we can read the headlines, but that was really not the business that we were chasing anyway. It is, I think, what we're all looking for in the U.S. as we operate markets around the world, is some clarity out of the SEC and the CFTC. So that all of our -- we know that our partners in Cboe Digital don't want to break rules, but they want to know what the rules are. And so any opportunity for clarity, we think, is opportunity in general to grow the space and to grow it in a very regulated and trusted way.

Regulatory clarity, the issue is echoed by -- it seems like across the industry. But that state-owned regulation, just for [indiscernible]...

Yes, yes.

Adena just talked about her position -- or NASDAQ's position with the equity market structure proposal. I believe your position isn't too far from hers, a little bit more conservative, a little bit more -- these 4 separate proposals might -- ought to be looked at for their interdependence and maybe a phase-in approach, if I summarize it correctly, and you can...

You have. We start with -- look, most of us who observe and operate in the U.S. markets, they really are amazing. And the first question is, and I think Adena made the same, it would be great to improve them. Every market across the globe that we operate has room for improvement. But at the end of the day, what is best for and how are investors better off if, fill in the blank and you adopt 1 of the 4 pillars, all the 4 pillars, how have we served the investors? And that has to be the question at the end of the day, not just regulation change for the sake of it, but how is the experience better? And I think the best example that we all use, and we have variations on our views on tick size, it's really data-driven. You heard Adena say tick constrained. Our entire paper is about tick constrained and using data to predict and to suggest a gradual approach to changing tick. We have under 100 classes constrained by tick, let's start there. Let's start with $0.005. And if there is room then beyond that, we'll do it. But we can slowly walk into change instead of radical change overnight.

So as an options expert, as a former trader, this -- I just have one follow-up with regulation. One of the proposals that probably, I believe -- again, this is my consensus view of reading the comments. The most opposed is this auction proposal. So as I think the mirror is what's going on in the options market. They do have auctions, price improvement auctions. Do you see that as a viable alternative that could be implemented into...

For us, it can be implemented. I think the chase is order-by-order competition. That is one way to get to order-by-order competition, but it's not the only way. The difference in market structure in the U.S. in options on the security side and Delta One stocks is that options -- all options that are cleared at OCC must be exposed on an exchange, and an auction is an efficient way to do that. The ability for dark pools to grow in derivatives is not available. There are gray pools. Offers can be -- orders can be matched off exchange but need to go to an exchange, and an auction satisfies that exposure requirement that is really different than the structure, obviously, in U.S. equity trading. So there's a different application for auction. It is one way to achieve order-by-order competition.

So we'll probably get one -- time for one last conclusion. So I've gone back to my date book.

Your Wayback Machine, okay.

Exactly. So I know when we've met. So the Cboe went public in 2010.

June '10.

June -- right around this time of the conference, I remember you couldn't participate because you were part of the IPO process. But we met several years before that. And so I know the trading background you came from. You bought Bats, a major equity exchange. You bought assets, clearing assets in Europe and trading platforms in Canada and as well as Australia and Asia Pac. So where do you see -- the conclusion question, where do you see the Cboe going next? What does the Cboe look like 3 years from now? Is it anything different? Or is it really a focus on consolidating the things that you've built with some tailwinds of the proprietary products behind it?

Yes. So the platform and the pattern, really, if you look at what we've done since the Bats acquisition, it is really asset class diversification, geographic diversification. We're accomplishing that in jurisdictions that are open for competition. We love that. We love the constant and the reliability of an experience across geography according to local regulation that is uniform. Customers -- our liquidity providers are global. Customers are becoming global. If the experience is the same, we think that's a great opportunity for growth. We like to be in markets that are open for competition because the national treasure exchanges get better. We introduce new technology, new solutions, new order types. Investors have a better experience. We just think the pie grows and our moving into a jurisdiction doesn't have to be a share play. We actually think markets are more engaged and there's more activity and customers are satisfied because we're in those markets. We want to continue that. We want further expansion and scale in the markets that we're in. But product development and answering solutions for investors with every wallet size is part of what we're after. We want small investors to have the experience, access to information in markets and contracts that are appropriate for them in the jurisdictions that we operate. So you see us with this incredibly successful 500 franchise in the U.S., offering contract size and notional value sizes for the smallest wallet. We think that's expandable across other geographies, and we started in Europe with building out derivatives with a U.S. model, meaning access for everyone. And that's our first expansion beyond the Delta One or the equity trade that was legacy Bats.

I just want to say it's been great to watch the last 2 CEOs, both yours and Adena, the growth in their roles, because I saw them before they were CEOs, when you were normal little people. You've done great. And the one last thing I want to say, thank you for the video. Yesterday, you commented on sports. And I have to just make it a [ pie ]. I've harassed your team...

Teams, yes, plural.

The Kansas City component of the team. So I can't harass them anymore. They won a Super Bowl. I can't harass you now in hockey because you've got the #1 draft there.

It was a heck of a draft, right?

Who's supposed to be the next Bobby Orr, Wayne Gretzky. So I'll just...

You'll think of something.

I will think of -- either that, I'll join you in Chicago or Kansas City, a fan, but thank you.

This has been great. And for all of us here, I mean, there's really nothing like it. You really set the bar and this has been incredible to know you these years. And we thank you for all of the coverage and everything you've done for the industry. Thank you very much.

It's been fun.

Awesome.