Q3 2020 Cboe Global Markets Inc Earnings Call
Hello, and welcome to the Cboes all markets Twentytwenty <unk> third quarter financial results Conference call.
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Now I'll turn the conference over Debbie Koopman Ms. Koeppen Scott.
Thank you good morning, and thank you for joining us for our third quarter earnings conference call on the call today, Ed Kelly, our chairman President and CEO will discuss the quarter and provide an update on our strategic initiatives in brain shell, our executive Vice President CFO and Treasurer will provide an overview of our financial results and provide updated 2020.
Right.
Following their comments, we will open the call to <unk> also joining us for Q unable to be our Chief operating officer, Chris I think I'm, the Chief strategy Officer, John Peterson.
In addition, I would like to point out that this presentation will likely be used if slides, we will be showing to fly to 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 FCC 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.
In the course of the call. This morning will be referenced 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 Siebel 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 and cash equities and multi listed options fueled by growth in retail trading we.
We also saw continued growth in our recurring proprietary non transactional revenues.
Last quarter I highlighted our strategy to strengthen our U.S. equities business to 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 in retail priority orders, which we launched last year and seaborne jacks represented nearly 23% of total body and helped propel the exchange to record Mark Marketshare last quarter, 6.8%.
We believe we are uniquely positioned to define the state of the art in equities trading to product and market innovation.
We took significant steps towards realizing that vision, the third quarter completion of our acquisition of Nash now and with our recently announced plans to acquire bids trading.
Match now you will recall is canadas largest alternative trading system I'm pleased to say, we are well on track with its integration, which enables us to expand our equities offerings achieve incremental scale and reach new market participants.
Importantly, we also see match now was a toehold in the Canadian market for additional siebel products and services.
[noise], 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've 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 an innovative partnership with bids trading began in 2016 with the launch of Siebel ally US now one of the largest block trading platforms in Europe.
Weve 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 sea both family.
Well bids will continue to operate as an independently managed venue separate from our U.S. securities exchanges, we have great faith and their expertise and ability to execute on our shared vision once the deal is approved.
Similar to match now we view the value of the bids transaction in terms of the significant new dimension that brings to equity trading at siebel 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 Cboes founding president.
His tireless advocacy for listed options market helped launched tivo and with it the entire options industry 47 years ago.
Joe is an amazing visionary and I Echo my condolences to his family here on behalf of our entire company.
Tivo 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 focused on accessing an engaging and broaden market through our acquisitions of hamlet of Ti options and trade alert the expansion of our options Institute offering and the introduction.
None of products for sophisticated retail market participants.
In the third quarter retail trading led the way to a 42% increase of equity options trading at sea, both smaller short term position trades.
Each of our four options exchanges or year over year increases and average daily volume.
Zero broker commissions and free trading apps, Oxford in the new generation of retail traders, who continued to contribute to record volumes in 2020.
Conversely market uncertainty continues to dampen institutional trading.
Ripple effects of the Copa 19 virus continues to be felt as the economy look to to stabilize during the third quarter.
Business is reopened and consumers slowly began resuming some semblance of typical activity, but the path forward was was and still is mark with massive uncertainty.
The lack of progress in negotiations to extend fiscal stimulus programs combined with the risk of additional shutdowns due to rising cold the 19 cases and the upcoming us elections.
Kept the VIX index elevated throughout the third quarter when it averaged 25.88 0.5 points over its five year average.
Election uncertainty continues to be seen in VIX futures term structure.
On August 30, Onest the spread between the September and October VIX futures was more than double the previous three 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.
Third quarter initiatives included the launch of product focus Webinars, which we plan to expand in 2021 and ongoing revamp of our education website and enhanced learning tools to optimize investor understanding.
And pilot testing of a new four 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 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 products, most notably with the August 9th launch of many VIX futures.
The smaller VIX futures contract to design to provide additional flexibility and volatility risk management and greater position when allocating among smaller managed accounts.
Many 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 many VIX futures trading.
We also see opportunity to expand retail adoption of X SP, our mini SPX index options product, which has the benefits of cash settlement and potentially better tax treatment than spy options begin.
Beginning next week, we are moving ex SP toward BC ex exchange, which employs a maker taker pricing model that incents market makers to provide tire cord, which in turn enhance market quality.
Excess people also remain available for trading on our C. One hybrid exchange.
And 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, SG index in September.
We're pleased to expand our exclusive suite of S&P, Dow Jones, Dow Jones index options and to provide market participants with an efficient means to incorporate DSG values into an investment portfolios.
We continued to optimize and diversify our business mix with recurring revenue through Siebel information solutions, our comprehensive suite of data solutions analytics and indices.
Our information solutions offering provides value added recurring revenue stream and supports transactional growth our suite of proprietary products with tools that drive users to our markets and drive volumes is that reestablished their trading positions.
The ongoing expansion of Seabrook 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 a proprietary reoccurring non transactional 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 are also remain on track to launch several European derivatives in the first half of next year after making significant progress and 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, including firms to be participants from day one.
We're pleased with the progress made thus far 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.
Institutional foreign exchange trading among its benefits our Opex model provides greater control the training process, enabling better trade execution and lower transaction costs for our global customer base works.
We're excited about the opportunities for organic growth and continued to effectively evolve this market.
Over the last few months, we significantly expanded and diversified our FX offering with the launch of Siebel FX central our new central limit order book and Cebos Swiss Swiss a new venue for trading non deliverable forwards.
Alongside Cboes up the launch of Cboes Swiss expands our any of trading business to meet the diverse needs of the global client base we.
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 siebel team for extremely productive quarter their expertise unwavering focus on the execution of our strategic growth.
Growth initiatives enables us to launch new products, most highly strategic deals integrate new teams and services and expand our customer base.
Clearly each new initiative aims to strengthen at least one pillar of samples diversified product and services offerings.
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 continue to leverage the unique value proposition and strengthening 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 Im is unprecedented headwinds in institutional trading.
We continue to focus on that which we can effect as a result, we are confident we are well positioned to benefit when trading winds change as they inevitably do. Moreover, we are excited by the progress made in 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 will turn back turn it over to Brian.
Thanks, Ed and good morning, everyone I hope, everyone and their families are remaining safe and healthy.
And I'd also like to thank my fellow Cboes associates for their continued hard work and dedication in advancing cboes growth initiatives.
Let me remind everyone that unless specifically noted my comments relate to Threeq 20, as compared to Threeq 219, and are based on our non-GAAP adjusted results.
While earnings decline 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%.
Net transaction fees down 8%.
Non transaction revenue up 1%.
Adjusted operating expenses increased 13% driven by our acquisitions.
Adjusted EBITDA of $192 million was down 8%.
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 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.
And $5 million attributed to our acquisitions.
Organic growth reflects 11% growth in access to capacity and 8% in proprietary market data revenue driven by increased demand for historical data sales and subscriptions.
Growth in new accounts and strong uptake by new dataset offerings.
Organic growth proprietary market data and access to capacity fees continued to be driven by incremental subscriptions in units.
Accounting for 87% and 86% of the growth this quarter respectively.
And our last call. We also noted that certain for broker access to capacity feet were reinstated following the reopening of our trading floor on June 15th this.
This resulted in higher access capacity fees in Threeq eutwenty compared to Twoq, 2008, 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 in excess catastrophe category to the mid to high single digits versus our prior guidance of mid single digit.
And we now expect to reported growth rate for these non transaction fees to be low double digits versus our previous guidance range of mid to high single digit.
Now a review of our segments.
And our option segment.
For 1% or $2 million increase 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.
Options related proprietary market data revenue I.
Additionally, industry market data revenue increased 13%, primarily driven by growth in retail engagement.
Also driven by strong retail engagement the average daily volume Radie for multi listed options rose 42%.
While RPC was unchanged.
Levy for index options declined 22%, while RPC increased 12%, resulting in a 20% decline index options and that transaction fees.
The index RPC increase was mainly due to a shift in volume mix as well as in SPX fee increase implemented earlier this year.
The decline in index RPC in Threeq versus Twoq reflects the reversal of certain second quarter fee changes after reopening before.
Turning to futures that 39% or $15 million a decrease in net revenue primarily reflects a 38% decline in HBV and a 13% decrease in RPC offset.
Offset somewhat by lower royalty fees.
Let me see variance was driven by two factors first the relaunch of many VIX futures on August nine which has a lower fee for contract given its at 110th the size of the standard VIX futures contract and.
It includes the impact of market maker incentives designed to promote liquidity in quality markets and second the growth of our Iboxx futures contracts, which also has a significantly lower net capture after incorporating the market maker incentives promoting liquidity.
Absolutely the RPC for the standard VIX futures contract grew nominally reflecting lower volumes.
In North American equities net revenue increased 1%, primarily due to higher net transaction fees offset by lower set market data revenue.
US equities volumes were strong again this quarter with Cboes 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 and increasing market share and attracting off exchange order flow, while optimizing revenue across our piano.
We manage our pricing dynamic by monitoring their 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.
Confident that our efforts to drive best execution for retail customers deploying unique order types, such as retail priority and see both midpoint discretionary order will allow us to continue to build our market share.
Our sales for the third quarter decreased year over year, primarily reflecting the growth in off exchange trading that reached new highs a 43% in Threeq, you 20 versus 36% entry to 90.
The decrease in CIPP market data revenue was driven by our lower market share and $3 million decrease in audit recoveries.
Net revenue for European equities increased $11 million or 53% on a us dollar basis and 47% on a local currency basis, primarily reflecting over $10 million in revenue from Europe TCP 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 last volume.
Decline in market share was primarily result of market profile shift impact to order flow this tivo and higher share in systematic internalize your activity. However.
However market share for the third quarter increased 190 basis points compared to the second quarter of 2020, reflecting positive response to new pricing program and strong performance from our periodic auctions offering.
This quarter also included nearly $9 million in net clearing fees, reflecting transaction cleared each other by your LCCP.
Turning to non transaction revenue the growth in excess of capacity. It was primarily the result of incremental connections to the opening of our answer any of office in October 2019, and the addition of Euro CCP. The increase in other revenue primarily reflects additional interest income earned on euro CCP cash collateral accounts.
Net revenue for global effects increased 1% this quarter driven by higher non transaction 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 and 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 a $109 million for the quarter up 13% against last years 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.
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 promotion.
Previously 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 production, we now expect core expense decreased by approximately 7% year over year.
One point I made last quarter bears repeating while a portion of the decline in core expense growth. It certainly attributable to the COVID-19 environment its impact on expenses that I just noted.
Migration of the C. One platform in 2019 provides the underpinning enabling the decrease in core expenses.
Turning to income taxes, our effective tax rate on adjusted earnings for the quarter was 30.8% above our guidance range and last year's third quarter rate of 24.1% higher tax rate accounted for nearly 60% of the year over year decline in our adjusted diluted earnings per share.
Thats into high rate earnings per share decline would have been only 6%, which reflects the impact of lower earnings netted against 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 us federal income tax return.
Our 2020 full year effective tax rate on adjusted earnings now expected to be in a range of 27% to 29% up from 26.5% to 28%, reflecting 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 amortization to be $32 million to $36 million for 2020 down from $34 million to $38 million the.
Remember that our 2020 guidance reflects a reduction of $8 million in software development capitalization, which increases compensation expenses this year, but overtime decreases our depreciation amortization expense.
This updated guidance excludes the amortization of intangibles of approximately hundred $24 million, which provides from our prior estimate of $120 million.
Turning to capital allocation.
The 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 generation capability capabilities enabled us to continue to return cash to shareholders.
During the third quarter, we retired 46 million to shareholders through dividends and $42 million through share repurchases.
We repurchased an additional $32 million due the 29th of this month.
Have availability of about $256 million remaining under our share repurchase program as of October 21, 2020.
At quarter end debt increased by $70 million versus Twoq 20, reflecting borrowings used towards funding our acquisition of match now and third quarter tax payments.
Our leverage ratio was 1.1 times at quarter end up slightly from the one total at June Thirtyth, and we ended the quarter with adjusted cash of $213 million, reflecting in part higher balance associated with the additional regulatory and operating cash needs that Euroseas CKD.
As previously announced we plan to finance the pending acquisition of bids trading with long term debt, taking advantage of historically low interest rates and thereby lowering our cost of capital.
In closing Cboes financial.
During <unk> 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 Q and a portion of the call.
Thanks, Brian.
At this point, we would be happy to take questions. We ask that you. Please limit your questions to one per person to allow time to get to everyone. So we can get back in the queue and if time permits we'll take the second question Keith.
Yes. Thank you want I'll begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if you.
We are using a speakerphone please pick up your handset before pressing the keys to try your question. Please press Star then two and this time, we will pause momentarily to assemble the roster.
And the first question comes from Rich Repetto with Piper Sadler.
Yes, excuse me good morning, you added and team.
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 Ken can you also update us on what the takeaway so far what you learned in regards to Memex and.
The two related care the RPC in memory.
Hey, good morning, rich thanks for thanks for joining thanks for the question.
Great and then next yes, they just they just rolled out all their symbols yesterday. So as we've said before we expect strong strong competition from them going forward, but.
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.
Better compete with off exchange trading as well as other exchange operators. It's had the desired impact were up almost a full percentage point.
Jackson setting new records with Reid.
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 price.
Pricing in October and likely will be in November as well. This is as you know very dynamic market very competitive.
And we will be adjusting caps.
Capture and pricing.
Remain competitive we like the business.
We think the innovations we brought to the market with retail priority.
We should protection Tivo market close we think Ryan and great step there are quite excited about.
Roddick auctions as well.
As soon as we get.
You see approval.
So we should see a rebound in the RPC in October is that what you're saying Chris yes.
Yes, and we're we're we're adjusting always.
What's the appropriate capture it.
Versus the market share so you can.
I'm 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 from two key ingredients.
Okay, great. Thank you very much Chris.
Thank you and then ask kind of comes from Dan Fannon with Jefferies.
Hi, This is James steels filling in for Dan Good morning.
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 you mentioned investor education, and there is some new products. There. So I was just hoping you could distill what you're most excited about what the reason for the uptick in Guidances.
So this is Brian I will I would say, it's continuing trend I mean, I think what we're seeing is.
We we've been seeing this growth for several years in this category.
And it's coming from across the business is coming with an option thats coming within equities as we continue to compete aggressively I think that 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 derive.
Demand from our customers I will say that with the acquisitions with 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 that demand for that data. So it's a continuing trend that we've actually been seeing the last the last few years within everything that we're doing across all the asset classes and we don't necessarily have a projection for the growth rate beyond this year, yet as we continued.
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.
Thank you.
Thank you and the next question comes from Ken Worthington with JP Morgan.
Hi, Thank you for taking my question.
Can you talk about retail distribution for CBLI futures and proprietary options are there opportunities to expand distribution for these areas and.
And you continue to highlight Investor Education is this more retail or institutional education, and how much is education move the needle in terms of driving trading activity.
Great questions. Let me start and then we can with the second part of the question on education always important for us and the options Institute and the way Weve redesign that and the reference I had in prepared remarks.
Was really what we are doing and webinars were setting them up we've had two already and those are aimed more fashion also thats a financial professional webinars. The first was managing global risk exposure and the second was shielding against downturn, so couldn't be more timely.
And we had 550.
Registered for those two 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 mixed some 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 reference now the last two quarters and it couldn't be more clear in multi list options for example, and of course in us equities just.
Influence over read the retail adoption in this new environment.
We think theres, a great opportunity to take the success and the interest that retail has had in equities and to teach the basic properties of 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 Cboes proprietary products stack, that's not acceptable for us so with that education, and making things bite size I think our small launch with many VIX. That's the push from now all through next year. So we're going to hit the potus.
Actual on two fronts definitely on the institutional side with different lease constructed educational seminars and retail is back to basics.
If youre trading short term low premium products for Delta one we can teach you how to change the risk profile by introducing derivatives thats the goal.
Great. Thank you thanks guys. Thank.
Thank you and the next question comes from my carrier with Bank of America.
Hi, good morning, Thanks for taking the question.
Brian just on the expense.
That's helpful. Just given many in the moving parts, including the core which is the revenue backdrop, you've got the acquisition then some possible normalization to a t. any post cobi I know, it's early but can you provide as maybe some early thoughts on just how you're thinking about 2021. Thanks.
Yeah, no good question and something that 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 leave you with a couple of thoughts so.
As we've done in the past and including the share we're going to execute against the plan to grow the business and make adjustments along the way as as the conditions weren't in our our organization has done a great job of this historically.
We know the expense base will grow in 21 with a 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 I guess that look for a little bit more clarity on the next call.
Got it thanks.
Thank you and the next question comes from Alex Kramm of CBS.
Hey, good morning, everyone.
Just quickly on bids.
You mentioned that you will.
And this is an independent entity, but clearly CBL, we should have some sort of vision for those assets. 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 and now we're with can you maybe impact market structure, where they where they may have been handled in the past.
You do can do something better and great Gainshare here. Thanks, Greg Thanks, Alex I'll I'll give you the I'll start it off and I'll invite Chris to jump and when we say independent to be clear. It is independent in the us equities market.
And so for US that's really access for the first time to the 40% of the US equities market Thats trading off exchange. So thats. The goal there so that independent stops at the border and our ability to continue to work in Europe with bids is we have an ally us that is not encumbered and will not be run.
Separately, nor will be expansion.
Onto the you us be run independently. So the strategy is 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're very mindful of the guidance.
That we received from the FCC.
Super important for us to comply with all that guidance in 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 housing and the team in Europe.
Any other comments a bit just.
I'd, just say I mean, Alex we're Super excited about there is nearly 500 investment managers that are connected to bids and as Ed mentioned it will be an independently run business from the us.
Securities perspective, but we're excited about the opportunities outside of that jurisdiction as I mentioned, Canada I'll highlight is in Europe has been a great success working with Dave housing Tim Mahoney has a great team. We also obviously, we highlighted the FX growth we've seen this.
This quarter and over the past past years since we that's as a purchase that entity back in 2015. So we 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 on the independents, we need as it relates to your securities but excited.
Outside of that.
Hi, 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 and other geographies.
Very helpful. Thank you.
Yes.
Thank you and the next question comes from Ryan Modality, such a bank.
Great. Thanks, Good morning, guys.
Just a question going back to the non transaction revenue growth, particularly in the information solutions, just how should we think about revenue from the analytic capabilities that you missed out on slide 11.
As a proportion of that proprietary market data.
On slide 17 is it is it 5 million that has come from acquisitions or is there more to that and then.
And growing that non transaction revenue how should we think about.
The growth path of access and capacity fees from either new subscriber perspective.
You mentioned, maybe more access through bids trading for example.
Or or expanding new services to existing.
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 FC analytic.
And trade alert is very important to give that some perspective well Brian.
We'll come back and answer the first part yes.
Absolutely. So we obviously bought handcuffed ft options and trade alert in the first half of the year and we we knew we were getting great platforms that we're going to add to our profitability, which Brian will cover but the people that have stayed on those founders of those terms and added to the CECO team, where we're just extremely pleased with and even given the.
Pandemic, we've we've made great progress with our integration side, I frankly, better than I would have expected. This year. So we're seeing.
Hamlet driving market data for silex were seeing him with data being used across the other entities Theres just a lot of great Cross Pollinization.
Pollination across those entities and that's now providing tremendous value to our customers and we're just getting started there we have a full 2020 on road map under information solutions group as we call. It just.
Just to create synergies there for that entity as well as being used across tivo and for our customers. Brian you want to cover the rest, yes, yes, I mean I think that's.
The actually can perfectly as far as how we're thinking about it and the opportunity.
Thats 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 continue to supplement those services to the clients. So I guess getting to the earlier question.
And we love this focus on like I said, we're very excited about that and along with the Investor education elements of what this can do.
As we continue to see a really nice growth pattern.
On the overall base you will see that kind of we put that metrics out as far as the overall growth, but if you look at just that microcosm up within that group.
We expect to see like I said really good growth.
And we see the expansion in that in the various analytics activities and then you 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 placebo. You also noted on the excess capacity feet. That's.
Thats come from multiple areas across the organization that is.
We've seen that as the dim.
Demand for trading.
As continued declines than we've seen people continuing to add a need to add to their overall capacity, so thats, where youre seeing the high eightys as a percentage of the growth coming from I'll call. It the cost 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 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 let me just Brian Let me circle back also one other point if you think of that as GE as is born here in the us and the modeling that Jerry had headwind and the team are working on and the platform that we got with Michael is Aki once you solve a financial model it's affordable.
So it's easy for us to move all the lessons learned for one into Europe and not on an accident launching derivatives in Europe mid next year.
Worst is GE has that.
Top of mind. So once you solve once a math is math and its portable and it's scalable and so we see great opportunity beyond the work that we've done here. Thanks.
Thanks for that.
Yes, and just a quick follow up the guidance that you gave on the organic growth to mid to high single digits.
Was that 2020 per that whole non transaction side or was that just yet.
[music].
That was that was for the whole category, okay. Okay great.
Great. Thank you.
Thank you and the next question comes from Ari Ghosh with credit Suisse.
Hey, good morning, everyone. I guess, it's just another quick follow up on it you guys.
At the time of the Hendrick NFC deal I believe is very little overlap that you talked about between your core client base and the new acquisition. So maybe you know do you have any numbers of stats around up or just color on what client uptake has looked like product cross sells and other components driving but just curious to see how that strategy.
How that's moved over the last few months and then in terms of the growth what portion of that is us versus non us and like you talked about the opportunity to kind of expand on the recurring side with all within non us customer base. Thanks, guys.
Yes, a great question I mean, this is Chris I mentioned, this a little bit and previous remarks, but.
I guess when we got these platforms, where there was little overlap from a 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 I asked you with that information solutions. One of the stories hears trailer, which was one of the smaller ones. We actually we've seen great uptake in to work from home environment.
And.
Where.
The demand for data both real time and historical has been growing dramatically also for instance, with a new.
Entity, we already had life all how we've been able to put more data into dance shop, and we've seen data shop subscriptions grow dramatically also.
Then another thing that would be worth mentioning is here.
Conceive of Fios, which is the.
The one benchmark seaborne steel price.
That we are creating with with the new platforms and people that we brought on.
Especially the likes of Jerry handler can Michael its Aki to provide that one pristine benchmark see both the oil price. So we see great.
Cross pollination and in that group and bringing all them together so its one unified platform.
Present, 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 Hamlin ft, John Yes would you like to add there yes. Thanks, Chris.
Thanks, sorry, it's a great question, if you think back I mean, we did.
These three is she related acquisitions more or less concurrently.
With the vision that they.
They fit together fill gaps in our existing offerings.
And so to Chris' point, we saw a lot of opportunity not only to weave together the capabilities to create a comprehensive product offerings, but also cross selling.
There 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 can.
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 see both fios.
Market alerts products with trade alert that are just powerful we don't think there really matched by anyone else in the business. When it comes to equity derivatives. No. One thing I'd mention is really interesting that we've seen and it was a thesis we had here is that.
You grow.
The IC product set and then if it grows your legacy capabilities as well so we've seen.
Caught a 16% uptick in the utilization in terms of the user numbers of our legacy life all platform as a result of putting these pieces together.
Okay, great color guys. Thank you.
Thank you and the next question comes from Jeremy Campbell of Barclays.
Hey, thanks.
Ed you guys got a lot of irons in the fire have been very active around deal flow developing new products, creating new data and analytics and expanding geographies.
Yeah, right and Chris all covered quite a bit of ground here with some great color in the prepared remarks and earlier culinary, 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 topline 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 us equities. So if we look globally at where our reach is and always a little bit better lucky than smart a time.
So 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 are introduced to the first an earliest movers and and if you have derivatives to back it up that's.
That's where it gets really exciting and then we look in the us.
We've missed that the new retail came in and came in at a very very big way, let a rally led new subscriptions new subscribers.
I'll, let chronic platforms every.
Both right rise with the new retail from.
From a derivative is 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 you have to Cboes 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 and Pan European equities, the ability to launch derivatives and one clearing house, you will CCP with 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 us in derivatives into Europe. So I think thats, what you'll you'll hear us really focused on over the next months and all of that is a headwind to Vince.
Situtions being on the sidelines. 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 macros that we can't affect but it all comes together an ecosystem that is incredibly powerful and we're very excited about the prospects in the months to come.
Great. Thank you.
Thank you and next question comes from Chris Harris of Wells Fargo.
Thanks.
A question on M&A.
M&A.
In a number of the exchange deals we've seen over the years and market share of the acquired assets 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 match now in bids.
Well, let me start with bids and.
Part of the independents.
In the U.S., we refer to that really from a regulatory perspective, but not being a dis intermediating 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 would match now little different answer picking up the breadth of zibo and being part of the North American.
View on equities, a really broadens the reach.
Or match now, 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.
Plus bats, combined history. So we've done this a few times with the purchase of tracks 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 in the most recently last last year, finishing the fats integration.
And all the while maintaining growing market share in multi list. So I think that we will.
We have a track record here if you have to stay close to your customers. It starts with the customer.
Can't just simply replace the platform you.
You need to.
And to make sure you're delivering value to them and bringing them along.
When they see the value of that platform. So now we need to use that same playbook.
Entities also.
Yes. This.
This is John I'd, just add that.
With bids in particular, we really do and this is 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 aerie.
Areas of clear secular growth and when you talk about.
Workflow enabled cut.
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.
Im specifically on match now.
That's a business that is in a more competitive area.
We are aware of that we were aware of it.
We acquired the asset market share is down a little bit this year because of.
New rules that Iraq implemented up in Canada for small size trades, we were aware of that a long term growth prospects of that business. However, really are more centered on larger scale trades and connectivity with.
Forms like bids so.
We see some real real strong opportunity for growth and market share.
And that platform over time.
Thank you and the next question comes from Kyle Voigt with KBW.
Hi, good morning.
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 are willing to defend with pricing and can you just talk about how important is to spend some minimum level of market share in other words, if you dip below that level because it doesn't start to reduce client demand for data.
Okay activity other products.
Yes. So you can see we were aggressive in changing price.
Timber and we've continued to adjust.
As we move forward.
Market share does matter to us obviously, there's your Sip revenue those 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 were number two in equities.
This month of October so yes.
Yes, there is a critical mass of market share as we want to maintain and grow and.
We are going to be aggressive, but as I said.
And the opening kind of question I answered the question was referring.
We're going to optimize that read out in the long term.
Thank you and the next question comes online with Oppenheimer.
Good morning, and thank you for taking my questions could.
Could you please give us an update on the trading floor a situation, what's the progress of adding more capabilities and getting the approval to allow us to trade a complex audit sweet. Thank you.
Chris you want to start with.
What we've just done on expansion.
Yes, so actually in September we expanded the trading floor, we obviously reopened it.
The latter half of June and then we expand in September so were nearly back to a 100% capacity, what we had pre covert sort of modified format socially distance safety first.
Please with that ready for the obviously election volatility we expect next week and we remain.
Committed we're working with the FCC on a virtual train four solution, we have a a filing out there I hope to get approved soon that would allow us to to go purely virtual if Andy hopefully low likelihood that we would have to close before again.
Due to covert outbreak or other reasons so.
That's really from a business continuity perspective.
And we're quite excited about that also in the long term opportunity and as we optimize it.
That's great. Thank you.
Thank you and the next question comes from Chris Allen with Compass point.
Hi, Good morning, guys. Just wanted to ask another quick one on bids understand the opportunity to expand the other asset classes or regions, but I believe bids are 100% of revenues is driven by the us.
So I'm just wondering like what it brings to the table from US 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. theres actually that with the partnership coming from Europe.
There is a substantial portion that's also.
From there I think the.
I guess, 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 that Chris sure Yes.
Yes, and I was wondering just what it brings to the table in the in the U.S. and.
Brian It's at 100% going up your slide deck is at $42 million in North America equity, So apologies I got them all but it's okay. So.
But just to clarify it from a from a reporting segment standpoint, it's going to it's going to stay there, but from from where it sort of working with the European operations, that's where it is so.
Sorry about that that gets the minor clarification, that's going to stay in that North American Equitys 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.
Claire.
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 platform small subscale platforms.
And we believe bids is really it's the largest we believe it's the winter there we believe it will continue to be.
One of the drivers behind that it's not not just the great operations that Tim and his team has established but also the.
The special relationships with the broker community through the sponsored access model, which will continue in place.
Actively the brokers.
Operate as our distributed Salesforce.
For that business and its it rewards all parties.
The network. So we feel good about it positioning in the U.S. and its ability to expand there as we work.
Or to expand the global penetration.
But he says.
Thank you and the next question is a follow up rich repetto with Piper Sadler.
Yes, Hi, guys again, hi on the very first question I thought I understood the answer, but I got a couple of emails or I guess it wasn't clear, but Chris how are we talking in October.
Yes, we are we expecting a rebound in our peace and equity RPC.
Yeah, rich and as I said, we don't we're not going to guide to RPC exact RPC, but we're we're optimizing.
Capture but ultimately optimizing net revenue.
So were adjusting price every almost every month as we want to remain competitive and grow share but optimize.
Net revenue overall.
I'm going to answer, specifically, which which direction, it's going but were.
We're pleased with the market share growth and we'll we'll optimize capture net revenue.
Got it Okay and I got one other follow up since we're in the follow up here.
And on slide nine you talked about the volatility.
September October being you know whatever double.
Double that are much higher than pro.
Prior collection periods I guess.
I guess the question I think you addressed this a little bit but does this tell you I think most expect this will be more volatile, but does this tell us anything about.
The woods about you know the situation, where we had we've got sort of a.
Yeah, I'll make you know.
Our views is there any change to the longer term outlook I guess on the VIX futures the index option to proprietary products.
Based on the volatility picture right now yes.
Yes, great question. So yes. The point we made was this is as uncertain as marked by the gap between the first two 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 months and that are over the term structure.
The backwardation that you're very familiar with is as unusual as that is the entire curve is high and very very high over time. So.
The election in and of itself is the short term, causing this 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 co bid. It's it's continued effect on the globe.
And that is going to go to top of mind right. After we able to ministration in the U.S. So.
The effect then for US is when new institutions, who have been on the sidelines.
And looking how to Reengage in this market how did they do that.
That uncertainty looks like it's going to persist persist for some time.
But some normalcy after the election leads the least allows you to start preparing for years ahead.
Reengaging in different ways. So that was really the point of the the call out on the election and the unusually high spike between.
In it but.
The election effect, if I can rephrase that.
Yeah.
Thank you and as I wasn't last question I would like to turn the photo management for any closing comments.
Thanks, Steve and definitely our call. This morning, we appreciate your interest in feeble.
Well be available for any follow up today. Thank you. Thank you. The conference has now concluded. Thank you for attending today's presentation, you got a centralized.
Yeah.