Cboe Global Markets, Inc. Q3 FY2021 Earnings Call

Hello and welcome to the Cboe Global Markets Third Quarter 2021 Financial Results. Please note today’s event is being recorded. I would now like to turn the call over to your host today, Ken Hill. Mr. Hill, please go ahead.

Good morning and thank you for joining us for our third quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO, will discuss our performance for the quarter and provide an update on our strategic initiatives. Then Brian Schell, our Executive Vice President and CFO and Treasurer, will provide an overview of the financial results for the quarter as well as an update on our 2021 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer and John Deters, our Chief Strategy Officer. I would like to point out that this presentation will include the use of slides. We will be showing the slides and providing commentary on each. A downloadable copy of each slide is available on our Investor Relations portion of our website. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. During the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now, I would like to turn the call over to Ed.

Thank you, Ken. We are happy to have you on board as Debbie Koopman prepares for retirement next month. Good morning and thank you for joining us today. As we head into year end, I hope that you are doing well and remaining safe and healthy. I am pleased to report on solid financial results for the third quarter of 2021 at Cboe Global Markets. For the quarter, we reported revenue growth across each of our business segments, reflecting strong year-over-year increases in both transaction and recurring non-transaction revenues, with net revenue up 27% and adjusted EPS up 31%. Our solid third quarter results were driven by higher volumes in our index options and volatility products, increased demand for our suite of data and access solutions, and growth in trading volumes across nearly all our segments. In our proprietary products, ADV increased 29% in VIX futures, 32% in VIX options, and 39% in SPX options. We also continue to see strong growth in multi-listed options trading with ADV up 20% year-over-year in the third quarter. During the quarter, we also delivered on several strategic milestones to expand our global network, including the successful launch of our European derivatives platform as well as the closing of our acquisition of Chi-X Asia-Pacific. I will touch on both in a moment. But first, I want to discuss our plans to enter the digital asset market through the planned acquisition of ErisX, which we announced last week. ErisX will provide Cboe with spot trading, data, derivatives and clearing capabilities for digital assets through its regulated futures exchange and clearinghouse. The past two weeks have been a watershed moment for the digital asset industry, with the launch of trading in the first Bitcoin ETF in the U.S. equities market. As the appetite for ownership of digital assets continues to grow, we believe Cboe can play a guiding role in shaping the trajectory of this revolutionary market. Today, we are at a critical inflection point. We are seeing strong retail demand, institutional interest, market growth, and streaming of digital assets even with traditional financial firms. As a leading provider of global market infrastructure and tradable products, we can bring the knowledge, structure and transparency of our trusted markets to the digital asset space. The demand and excitement for digital assets is driven by the unique market structure and freedom it affords and we want to maintain that innovative spirit while providing the regulatory framework and structure that many market participants desire. We have secured support from a tremendous group of industry leaders who are aligned with our vision and want to shape and define this asset class now and for the future. These industry leaders bring different perspectives and expertise from retail brokers, crypto-leading firms, global liquidity providers and sell-side banks. They are expected to form a digital advisory committee tasked with advising us on the ongoing development of our digital asset business, CBOE Digital. These industry leaders include DRW, Fidelity Digital Assets, Galaxy Digital, Interactive Brokers, NYDIG, Paxos, Robinhood, Virtu Financial and Webull. Additionally, certain members of the digital advisory committee intend to acquire minority ownership interest in CBOE Digital. I am confident that together with ErisX CEO, Tom Chippas, his team and our incredible partner group, we can not only meet the growing demand for institutional and retail trading solutions, but also push the boundaries of digital asset innovation and unlock its next phase of growth. I am extremely pleased with the progress we made during the third quarter, executing on the four key incremental growth drivers I outlined at the beginning of this year: the opportunity to grow recurring non-transaction revenue; the launch of Cboe Europe derivatives; our expansion plans for BIDS Trading and extending access to our products and services across geographies and market participants. We saw positive momentum in our data and access solutions again this quarter, fueling a 21% increase in our recurring non-transaction revenue. This growth was driven by continued demand for access to our exchanges, proprietary market data and new subscribers to Cboe’s front-end platforms, including Silexx and Trade Alert. We continue to optimize the efficiency and delivery of our data and access solutions to market participants and are excited to launch CBOE Global Cloud, a new real-time cloud-based market data streaming service in collaboration with Amazon Web Services, on November 1. CBOE Global Cloud is expected to help further extend Cboe’s data to new users and geographies, an important step towards broadening investor access to our proprietary content and market data globally. Turning now to Europe where we successfully launched our European derivatives market on September 6, we are very pleased with the initial progress with trading and clearing running smoothly as we slowly build volume. Over the coming months, we plan to introduce additional products and onboard new participants. Bringing the first truly pan-European transparent and lit derivatives market to Europe is a remarkable achievement and we are enthusiastic about the opportunities ahead. Additionally, our European Equities business delivered strong results in the third quarter, with average daily notional value traded up 29%. Cboe LIS, powered by BIDS, continues to see positive momentum, and for the first time in its history, became the largest block trading platform in Europe for the month of August. BIDS has established itself as the premier block trading destination in the U.S. and Europe and we are excited about our plans to expand the BIDS network to Canada early next year and then to the Asia-Pacific region to serve an even broader base of customers. Turning to Asia-Pacific, we made good progress integrating the Chi-X team since we closed the acquisition at the beginning of July. We plan to migrate Chi-X to Cboe technology and are busy working through the integration plan and timeline. With our expanded footprint in the Asia-Pacific region, we see significant opportunity to further develop our ecosystem of market infrastructure and tradable products into one of the world’s largest derivatives and securities networks. Beginning November 21, we plan to take an important step towards broadening our network and access to our proprietary products through the launch of extended global trading hours for VIX and SPX options as part of our 24x5 initiative. The lengthened global trading hours complement our entry into Asia-Pacific and are designed to help meet growing investor demand for the ability to manage risk more efficiently and adjust SPX and VIX options positions around the clock. We are also pleased to announce that Webull, a leading retail broker platform with a growing global presence, began offering our proprietary products, VIX and SPX options, on their platform this month. We have continued to see strong demand for SPX options for both institutional and retail broker platforms and are eager to expand access to this product suite. Similar to last quarter, we saw solid growth in SPX options trading on retail broker platforms, with ADV on those platforms up 24% from the second quarter, hitting a new all-time high. Key to our global network expansion are strong partnerships. To that end, we were thrilled to expand our relationship with MSCI and extend the licensing agreement that allows Cboe to offer options trading on MSCI global indices through 2031. We have valued our strong relationship with MSCI for many years and look forward to further collaboration in the years ahead, particularly in the important area of ESG investing. As the retail market continues to grow, we remain committed to investing in education and product development to meet their unique needs. To that end, earlier this week, we announced plans to launch Nanos, a first-of-its-kind options contract designed to make trading more accessible for the retail trader. Increased retail participation has fueled record trading across the industry. Between the top four retail broker platforms, there are now more than 150 million retail brokerage accounts and many of these accounts are too small to take advantage of the potential benefits certain options contracts can offer. We plan to launch our first Nanos product on the S&P 500 Index in the first quarter of 2022. At a fraction of the size of the standard options contract, the one-multiplier cash-settled Nanos S&P 500 answers the growing demand for a simpler, more cost-effective way to gain broad exposure to the U.S. equity market. The S&P 500 option market is one of the most highly traded and liquid option markets across the globe. Through our Nanos S&P 500 product, we are broadening access to a greater universe of traders who can enjoy the potential benefits options provide, including hedging, asset allocation and income generation strategies. To complement the launch of Nanos, the CBOE Options Institute plans to offer a new options introductory curriculum tailored to retail traders. Through our longstanding commitment to education, we are continuously evolving our programs to offer more retail-centric content through the Options Institute and we look forward to welcoming a new generation of traders to options trading with the launch of Nanos. As we broaden our global footprint by entering new markets and launching new products and services, we further our goal of expanding access to a broader base of customers, both institutional and retail. By leveraging our technological expertise, customer relationships and capital markets capabilities, we plan to continue to unlock additional revenue opportunities across our businesses. We head into the final months of the year on a stronger footing than ever and we look forward to continuing to execute on our growth opportunities ahead. With that, I will turn it over to Brian.

Thanks, Ed and good morning, everyone. Let me remind everyone that, unless specifically noted, my comments relate to 3Q 2021 as compared to 3Q 2020 and are based on our non-GAAP adjusted results. As Ed just indicated, the third quarter was incredibly strong for Cboe with robust results from both a transaction and non-transaction basis. Overall, adjusted earnings increased 31% versus the third quarter of 2020 and improved off solid second quarter 2021 metrics. As we move forward, we look for the cash, derivatives and data portions of our business to work in unison to enhance revenue opportunities and shareholder value. Now, a quick look at the third quarter. Our net revenue increased 27%, setting a new quarterly record. Net transaction fees were up 39% and recurring non-transaction revenue was up 21%. Adjusted operating expenses increased 29%. Adjusted EBITDA of $240 million was up 25%. And finally, our adjusted diluted earnings per share was $1.45, up 31% compared to last year’s quarterly results. Turning to the key drivers by segment, our press release and the appendix of our slide deck includes information detailing the key metrics for each of our business segments. So I will just provide summary thoughts. While we saw year-over-year growth in all of our segments, our Options segment produced above-average growth for the quarter of 30% driven by higher trading volumes and revenue per contract in both our proprietary and multi-listed options. Total options ADV was up 23% as we saw double-digit increases in both index and multi-listed options. Revenue per contract also moved higher by 16% given positive mix shift to index products and a strong increase in our multi-listed options RPC, up 23% and we continue to benefit from double-digit growth in recurring non-transaction revenue, particularly access and capacity fees. North American equities revenue increased 13% year-over-year as acquisition-related net transaction and clearing fees were further helped by strong proprietary market data fees and access capacity fees. This was offset somewhat by a 1% year-over-year decline in U.S. equity ADV and a 1% year-over-year decline in market share for the quarter. While market share trends have been impacted by aggressive pricing trends from some competitors, we remain focused on optimizing long-term profit in the business through the many initiatives we have introduced or plan to introduce to the market. For the quarter, MATCHNow and BIDS contributed $8.5 million in net revenue. Lastly, recurring non-transaction revenue increased by more than $5 million or 17%, with organic growth of 14%. Third quarter revenue increased in futures by 24% on the back of a 30% increase in ADV and a 6% increase in capture. Looking forward, we were pleased to see the SEC recently approved filings to list and trade shares of two new volatility shares products in inverse and long VIX futures ETFs. These new listings are likely to increase the VIX trading ecosystem as the AUM builds on those products. The revenue increase in Europe and APAC primarily reflects the addition of Chi-X Asia-Pacific in July 2021, an $8.2 million contribution as well as growth in European equities and clearing. Underlying trends remained strong in the third quarter as industry average daily notional value traded, market share on Cboe European Equities and net capture all moved higher on a year-over-year basis. And finally, revenues in the FX segment increased 8% as compared to the third quarter of 2020 as trading volumes and net capture moved higher. During the quarter, global FX market share hit an all-time high of 17%. Cboe’s recurring non-transaction revenue growth remained elevated in the third quarter, with year-over-year organic growth reaching 14%. Again, this strong growth was largely a product of additional subscriptions and units as opposed to price increases. More specifically, we saw both physical and logical port usage remained robust in our equities and options businesses driven by increased demand for trading capacity and on the market data side, the equities top of book and depth of book products continue to perform well. We are increasing our organic outlook by 1 to 2 percentage points to approximately 14%. Our total recurring non-transaction revenue growth is now expected to reach approximately 18% for 2021, up 2 to 3 percentage points versus our prior expectation. Overall, we are very pleased with the continued traction in this business as it’s an important element of Cboe’s ecosystem of products and services. Turning to expenses, total adjusted operating expenses were approximately $140 million for the quarter, up 29% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 17% or $19 million for the quarter. Most of the expense variance related to the acquisitions was compensation and benefits. Moving to our expense guidance, we are tightening and raising our expense guidance range for the full year to $536 million to $541 million from $531 million to $539 million. The $4 million increase in the midpoint reflects higher incentive compensation costs, reflecting the strong year-to-date operating results we have posted as well as our plans for increased hiring during the fourth quarter and a slight uptick in our depreciation and amortization forecast. As a firm, we believe in a pay-for-performance culture and not only has our year-to-date financial performance been strong, we have made significant progress against our longer term growth priorities, especially towards increasing access to Cboe products and services, as Ed noted previously. As you recall from our February earnings meeting, we laid out a path for revenue growth that would be preceded by higher-than-normal expense growth that would slightly compress margins in the short-term to enable longer term growth. We remain focused on investing in key initiatives with attractive returns and we look forward to meeting the current and future market demand by prudently investing organically and inorganically to meet those needs, even if it requires upfront spend. Now, turning to a summary of full year guidance on the next slide, we are raising our guidance for depreciation and amortization to $38 million to $42 million from $34 million to $38 million due to the earlier timing of various products. Our CapEx guidance range moves $8 million lower to $47 million to $52 million and we are reaffirming the higher end of our guided tax range of 27.5% to 29.5% for the full year under the current tax laws. Our interest expense for the third quarter of 2021 was $11.7 million. We expect our fourth quarter interest expense to hold steady in the $11.5 million to $12 million range. In addition to the investment priorities we outlined earlier in the call, we remain committed to returning excess cash to shareholders through dividends and share repurchases. From a capital return perspective, our strong cash flow generation enabled us to raise our quarterly dividend for the 11th straight year, growing 14% on a year-over-year basis. In total, we returned $52 million to shareholders through dividends in the third quarter. Our leverage ratio decreased slightly versus the prior quarter to 1.4x at September 30, as our debt levels remained steady on a sequential basis. Overall, our balance sheet remains unencumbered as we look to put incremental capital to use in value-enhancing ways for shareholders. Our adjusted cash and financial investments balance is elevated, reflecting the planned use of cash to fund a portion of the planned transactions we recently announced as well as a slightly higher requirement for regulatory capital purposes. In summary, Cboe delivered a very strong third quarter, and we’re even more enthusiastic about the number of high-quality growth initiatives we are bringing into our ecosystem, solutions that expand access to global markets for our customers, grow our geographic footprint and breadth of asset classes and diversify our revenue base. We look for these planned additions to fuel continued growth across the Cboe ecosystem. Now I’d like to turn it back over to Ed for some closing comments before we open it up to Q&A.

Thanks, Brian. Before we move to Q&A, I want to provide a further update on our ESG initiatives during the quarter. Earlier this month, Cboe was proud to be named a founding member of the derivatives partner exchanges network of the United Nations Sustainable Stock Exchanges initiative. We look forward to sharing ideas and engaging this network on an important dialogue on how derivative exchanges can support greater sustainability in addition to advancing partnerships with index leaders in this important space. As you can see, we have been extremely busy, and I thank the entire Cboe team for their hard work delivering outstanding results. We look forward to hosting our Investor Day on November 16, where we will dive further into our business, providing more color on these initiatives and how they are helping drive our strategy. We hope you can join us; details for accessing the event are on our IR website. Finally, I’d once again like to thank Debbie Koopman for her service and wish her all the best as she heads into retirement next month. She will be with us through Investor Day, so it’s not quite farewell yet. But this is her finale for quarterly earnings. She will be dearly missed by me and the entire Cboe team. I’ll now pass it back to Ken for instructions on the Q&A portion of the call.

Thanks, Ed. At this point, we would be happy to take questions. The operator will provide instructions for how to ask a question.

Yes. Thank you. The first question comes from Rich Repetto with Piper Sandler.

Good morning, Ed. Good morning, Brian and team. Ed, we take your acquisition seriously — very seriously now, so the ErisX position and you talked about it in the prepared remarks. But I wanted to get: what does ErisX do today — I know they are trading right now. I know they trade some over-the-counter products. When do you actually expect them to trade any digital assets? Do you need regulatory clarity to do that? And did it prevent you from buying back shares in the quarter?

So let’s take the first part first on shares, Brian, and the view of just the buyback on shares.

Yes. Rich, just as a pipeline as we look at things, we are being more conservative than not as we look at kind of overall leverage, deployment of cash. So it was — like I said — it’s always a balance quarter-over-quarter of do you sit on a little bit more cash in anticipation of a transaction closing in the pipeline. So that was more of a reflection of that than anything else.

Thanks, Brian.

Alright. So let me — Rich, let me take a half a step back on ErisX because I think it’s important to recognize that we didn’t just wake up a couple of months ago and think, 'crypto, look what’s happening, we need to get into this space.' When we launched, if you recall, the first futures contract in 2017 and even before that, we had applications at the SEC for ETNs and ETPs. So we’ve had our eye on this space. We thought the ecosystem in this space would have evolved a bit quicker. So we’ve always had an eye on getting back into the space. Over the last couple of calls, I’ve been mentioning that. Importantly, also, we were early investors in ErisX in 2018 when Don Wilson and Tom Chippas saw the opportunity to build out a regulated fair market in spot, derivatives, clearing and margining. So long answer to your question, framed that way, we’ve constantly and since the launch of those futures, consciously been looking for an opportunity that gets us back into the market. But John, I think importantly, address the rollout, what ErisX is trading today and what we have in front of us between now and close.

Yes. Thanks, Ed. Good morning, Rich. This is John. So the mention that you just gave of OTC products, Rich, I think that relates to a separate business. It’s a little confusing. It’s also called Eris but that business offers swap futures. They are traded on a competing exchange. We’re talking about here ErisX, which is purely a crypto platform. The businesses are completely separate. And what ErisX offers, as Ed mentioned, is really a start-to-finish integrated platform for crypto trading, spot, clearing and derivatives. And the platform is live today. So there are significant users on the platform depending on the day. Some days, it can be one of the top three or four in the market. The partners that we’re bringing to the table here, and you see us mentioned in the press release, these partners forming our digital advisory committee — many of those partners are live today on the platform. So we believe, as we look at the evolution of the space, the partners we’re bringing to the table and the readiness of the platform, that our timing really is pretty much spot on because the technology platform is built and the regulatory approvals are in place. One thing that we’re really looking forward to as we move towards close and towards evolving the business is the expansion of the derivatives franchise. So again, the regulatory approvals for that platform were all in place. The technology is in place. But what we intend to do is work with the CFTC in gaining approval for margin futures and then other derivatives products, which we think can be game-changing for the industry. There really is nothing like settling into the physical coin in an integrated spot clearing and futures and derivatives platform. So we look forward to that build. But really, that’s the only piece that is yet to come. The rest is live and poised for growth today.

Got it. Very, very helpful and we will see you at Analyst Day, Deb.

Thanks, Rich.

Thank you. The next question comes from Dan Fannon with Jefferies.

Thanks. Good morning. I wanted to ask about the European derivative opportunity. You talked about some of the product launches and more in the pipeline. Are you incenting volume with pricing or how should we think about the pricing strategy? And what are the milestones for success in the coming months and quarters for that business?

Yes. Before I turn it over to Brian for the incentive program, I think it’s very important the way we look at success starts with operations. Chris, your observations in the days since September 6 — actually, we could not be happier with not only the execution on our platform but clearing.

Yes. Good morning. Thanks, Dan, for the question. So we’re very pleased with launching this on time on September 6 under the leadership of Dave Howson and Ed, and Cecil in Europe. Our exchange worked just as designed, and the clearing system performed as we expected. We acquired EuroCCP about a year ago, and they have added clearing capabilities to their portfolio as we built the derivatives exchange. So operationally, things are going just as we planned. We’ve communicated that we had modest expectations this year as we build the base. Brian can talk about incentives we have in place for market making and liquidity.

Yes. Thanks, Chris. To frame that, you have to look at the entire ecosystem of who is involved in what makes a product successful. Relative to the clearing members, obviously we’re bringing the infrastructure of the exchange and clearing. But if you think about the clearing members, the market makers, the customers that are going to be trading and putting the right incentives in place, what we’ve done is try to remove those frictional elements to facilitate liquidity and volume. So there are stipends in place. There is tiering in place with respect to those elements, again to incent those participants. We will see that continue to build as we add more clearing members and more market makers to both the futures and the options side. We will put out some targets at our Investor Day as to where we think this business can go in a three- to five-year time frame. Right now, the key success here was the operational element of getting people on the platform and getting it traded. The products are successful from that standpoint. We’re achieving the on-screen transparency and liquidity of what we set out to do with the expectation of growing that over time.

Thank you.

Thank you. The next question comes from Ken Worthington with JPMorgan.

Hi, thanks for taking my question. I wanted to follow-up on Rich’s comments on ErisX. You indicated that ErisX might be a top platform periodically. How big have they been over the last six months? What sort of volume have they done? What tokens are offered? And Cboe was early in building crypto futures in December 2017. You guys had the right call. But it seems like CME somehow won that market. Give us a little context on what happened there. And then lastly, Cboe launched Bitcoin futures at a peak price and then seemed to change its approach 15 months later at a trough. Is this flip-flopping going to make it harder for you to be successful in building a futures platform at Eris given that venue commitment is important in longer-dated products?

There is a lot there. You’re right. We were first to the market. As I said, we really anticipated a little quicker action on approval in the ETN and ETF space. We do appreciate incenting market makers to post quotes and to trade. But with no end in sight to the regulatory uncertainty, we decided to step back. So I wish we were smart enough to know that the price of Bitcoin was at its top; I probably would have made a trade there instead of pivoting and waiting for regulation and design to be more obvious for us. With the ecosystem as we find it today, it’s primed and ready for an exchange like ErisX. Significantly, you didn’t mention the partners that we are entering this with — super important. They do see the opportunity to offer their customers access and an experience that they are used to in other asset classes. This is very important. This is not a disintermediated market; we think we should be offering access through intermediaries. Those partners that we listed, we are not getting in between them and their customer experience. So if they want to pivot from their exposure in options to, on the same platform, be able to trade crypto in a safe, regulated environment, that’s the experience we’re offering. I don’t think we’re chasing anything here, Ken. It’s an interesting observation. But John, back to the coins that are on the platform today.

Yes, Ken. So there are five coins on the platform today and the platform is highly extensible. Additional coins and altcoins are under review. It’s worth noting that the ErisX platform is relatively new compared to some other venues, given the time frame since launch is relatively short, and we believe it has all the underpinnings to support substantial growth. It’s important to recognize that our involvement in the space and the industry itself is an evolution. Ed described our initial foray into it as product version 1.0, cash-settled and a simpler construct. We quickly learned from those experiences that the industry was demanding physical settlement and a robust clearing platform that dealt with the underlying spot in conjunction with the derivatives product. When we took our original product down, it was with the intent to build something much more comprehensive to meet the demands of market participants. That is the process of getting back into it with the right platform. We were attracted to ErisX because of the comprehensive offering from spot through clearing and derivatives. As we evaluated a deal with Eris, we sampled the market and found obvious demand for participation from market participants to be part of this initiative and to be on the cap table aligned with value creation. We met that demand with the structure announced last week. The evolution here is rapid because the digital asset space is evolving so quickly. I don’t think we could have nearly met the market demand with our prior product, and this platform does it for us.

Great. Thanks, you gave me a lot to consider there. Appreciate it.

Thank you. The next question comes from Brian Bedell with Deutsche Bank.

Great. Thanks. Good morning, folks. Maybe continuing on ErisX, to characterize it broadly, is the longer-term aim here to become like a competitor to Coinbase, or is it more to stay in the regulated exchange space with listed types of contracts, either spot or futures? And can you talk about the investment required in the 2022 outlook? Should we consider this a drag on earnings initially before it really gets going? You said two to three years for EBITDA profitability; can you expand on that?

I’ll kick off, Brian. The ambition is to offer a regulatorily compliant product set from spot through clearing and derivatives. That includes a CFTC-regulated platform, both clearinghouse and futures market. On the spot side, the industry is seeking a clearer framework. With the partners on our digital advisory committee, we intend to work with regulators collaboratively to help define what that means product by product and token by token. We think that clarity can unleash the next wave of growth. Liquidity in the market today is impressive, but growth is so rapid that platforms and OTC trading could exceed capacity. We’re creating a regulated liquidity catch basin for the industry, bringing the right partners together to establish that kind of platform.

I will go next. The platform is built, so it is not so much a CapEx investment as it is incremental OpEx. There will be some OpEx drag as we scale. We will provide further guidance as we get closer to close. As noted in our announcement, the digital advisory committee and partners taking equity positions could move some of the numbers. It would be premature to give definitive run rates now. So yes, there will be a slight drag on operating expenses as we continue to build and achieve scale. More details will come as we get closer.

These are great questions and they show how excited we are about ErisX and the level of interest in the space. In one step, we get spot, data, derivatives and clearing, which is consistent with our strategy across asset classes. There has been a lot of innovation in digital assets but also a trust, transparency and data gap. With ErisX and the partners we’re bringing, we can fill that gap and expand the platform’s vision. Competition will exist, but we are not just building a spot market; we are building a derivatives market that will allow for physically settled futures, margin futures, and more. We will embrace partners rather than disintermediate them, enabling them to offer their customers access to digital assets through a regulated platform. Tom and his team have the regulatory approvals and money transfer licenses in 50-plus states, as well as CFTC approval for a futures exchange and a designated clearing organization. They have a strong foundation to build upon.

That’s great color and I really appreciate all the detail.

Thank you. The next question comes from Alex Blostein with Goldman Sachs.

Hi guys, good morning. I was hoping you could expand a little around your plans for Cboe Global Cloud in early November. What’s the ultimate vision? How do you think it expands the addressable market and consumption of your data across different participants? And since we are talking about recurring data streams, the guidance for the fourth quarter seems to imply a bit of a decline versus third quarter run rate; can you expand on that as well?

I’ll start with Cboe Global Cloud, which we are very excited to go live with next week. This furthers our theme of providing better and more ubiquitous access to our data and products globally. We will start with U.S. equities, futures and indices data under the leadership of Cathy Clay in our data and access solutions group. This is the first step; we have data sets soon to be added across 22 countries in equities plus futures, options and indices data. We will keep adding data sets. We are starting with AWS as a strategic global partner. The goal is to reach customers who may not have a cross-connect in a data center today but have an Internet connection to a global cloud provider like AWS. We view this as both new customer acquisition and getting customers access to data sets they don’t currently have.

To put a fine point on it, the broader strategy is to capture increasing demand for data analytics by increasing access and geography, leveraging our global presence and adding new delivery methods like cloud streaming. Regarding the fourth quarter growth rate, we continue to see growth, but the rate may not appear as high because last year’s fourth quarter started to pick up momentum. So you are comparing to a slightly higher base last year, which can make the growth rate appear lower even though the underlying trajectory remains strong.

Thanks.

Thank you. The next question comes from Owen Lau with Oppenheimer.

Good morning and thank you for taking my question. Could you talk about any synergy between the extended trading hours of SPX and VIX options and Chi-X? Will you list some proprietary products on exchanges in Asia to increase distribution? How should investors think about the incremental opportunity as Cboe becomes more global?

Let me start. We are excited to extend access to VIX and SPX options to global trading hours, subject to regulatory approvals. This answers a demand issue. As the world becomes more connected, the ability to adjust positions around the clock is important. We trade the country’s benchmark here and need to be accessible 24 hours a day. Our presence in the APAC region through the Chi-X acquisition gives us boots on the ground to tell the story and the access completes the demand we see more globally.

Great question. We are excited about our entry into Asia with Chi-X Asia. Integration planning is going very well. We plan to bring BIDS to the region, starting in Australia in the second half of 2022, and in the first half of 2022 we plan to migrate Cboe technology in Australia. Thereafter, we will work on Japan. Now that we have a bona fide presence in that region we can sell a full suite of our products, including SPX and VIX options and our growing set of data.

Boots on the ground is a key element as we extend the global network. We enable our global client base to access consistent, reliable exchange infrastructure. BIDS coming to those geographies is on the timeline alongside platform migration. The broader data opportunity remains central: international expansion expands analytics demand, and these efforts feed into each other across cash, derivatives and crypto.

Got it. Thank you very much.

Thank you. The next question comes from Kyle Voigt with KBW.

Hi, good morning. A question on retail: uptake on some retail-oriented index product launches has been mixed. Can you expand on Nanos and whether the smaller contract size will unlock more retail growth? From a fee standpoint, is it fair to think the fee rate could be higher than SPX or XSP relative to the notional contract size?

Great question. We have been talking about product creation for retail. Nanos are designed to be simple, accessible and designed for all. Essentially, we are creating a one-tenth version of the S&P 500 options contract so a retail investor doesn’t have to multiply the displayed option price by 100. With Nanos the price shown is the actual price for the exposure. We aim for simplicity: fewer expirations and fewer series to reduce confusion. We are finalizing what we will offer day one, but think of four expiration cycles, short-dated options, and a smaller set of strikes — simple constructs to make options more accessible for the smaller retail account.

On pricing, it will be notionally adjusted and we will work with participants to facilitate liquidity and affordability. Historically, smaller contract sizes can trade at a premium on a notional basis versus larger contracts. So on a notional value-adjusted basis, pricing could be slightly higher. Final pricing is TBD and we will provide more details as we move toward launch.

Most important is education. Cboe has a long history in options education and the Options Institute will offer retail-centric programs to help new traders understand risk and potential benefits. We want to bring a new generation of retail traders into options with proper education.

To follow up, we are creating these products and the educational programs in partnership with important retail partners as part of our strategy to make these products accessible and usable by a broad set of retail customers.

That’s great. Thanks for all the color.

Thank you. The next question comes from Michael Cyprys from Morgan Stanley.

Hi. Good morning. Continuing the retail theme, on Webull it looks like your proprietary products began trading on their platform this month. What has the early feedback been? Can you talk about initiatives to drive broader engagement on Webull and how penetrated you are in getting your products on retail platforms?

When we look at retail, the established brokers have had access to our proprietary products and usage has grown. Webull, as a newer retail platform, had not offered access to our proprietary products or cash-settled indices broadly, so Webull was greenfield for us. We’re excited that Webull is offering SPX and VIX options. Another important element is one-lot trading. Many retail accounts are too small for standard contract sizes. Nanos will help unlock that demand. We have a good runway and will watch uptake both for direct access to products like SPX and for Nano once launched.

Traditional brokers have provided great access to our products for some time, but the new retail platforms are just starting to offer them. Webull offering SPX and VIX gives us room to grow. Many retail platforms are adding multi-asset capabilities and possibly digital assets; we want to provide ultimate retail investor access to our products through these intermediaries.

Great. Thank you.

Thank you. That concludes the question-and-answer session. I would like to return the floor to management for any closing comments.

That completes our call for this morning. We appreciate your time and continued interest in the company. If you have any further questions, feel free to reach out. Thank you.

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