Cboe Global Markets, Inc. Q2 FY2024 Earnings Call

Thank you for standing by. My name is J.L., and I will be your conference operator today. At this time, I would like to welcome everyone to the Cboe Global Markets' Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Ken Hill, Treasurer and Head of Investor Relations. You may begin.

Good morning, and thank you for joining us for our second quarter earnings conference call. On the call today, Fred Tomczyk, our CEO, and Dave Howson, our Global President, will discuss our performance for the quarter and provide an update on our strategic initiatives. Then, Jill Griebenow, our Chief Financial Officer, will provide an overview of our financial results for the quarter as well as discuss our 2024 financial outlook. Following their comments, we will open the call for Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating 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 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 SEC for a full discussion of these 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'd like to turn the call over to Fred.

Good morning, and thanks for joining us today. I'm pleased to report on strong second quarter results for Cboe Global Markets. During the quarter, we grew net revenue 10% year-over-year to a record $514 million and adjusted diluted earnings per share by a robust 21% to $2.15. These results were driven by a contribution from each part of our ecosystem with improved volumes in our Cash and Spot Markets, solid volumes across our Derivatives franchise, specifically our proprietary index option and futures products, continued expansion of our Data and Access Solutions business, and disciplined expense management. Our Cash and Spot Markets category performed very well in the second quarter, with revenue increasing 15% on a year-over-year basis. The contribution was broad-based with each of our global regions posting solid growth as compared to the second quarter of 2023. Our Derivatives business delivered another solid quarter as organic net revenue increased 11% year-over-year. We saw solid volumes across our suite of S&P 500 index option products, with second quarter ADV and the SPX contract increasing 9% year-over-year to 3 million contracts. We also saw a strong year-over-year growth in our volatility product suite during the second quarter as ADV increased 8% in VIX options and 30% in VIX futures. Given the secular and cyclical tailwinds in place, we believe we are well positioned as investors continue to utilize options in their portfolios and trading strategies. Our Data and Access Solutions business continued to deliver durable results, with organic net revenue increasing 5% year-over-year for the second quarter, and running at approximately 7% through the first six months. We are optimistic on our outlook for this business, as we look to further leverage our global network of ecosystem to drive growth. Overall, it was another solid quarter for both transaction and non-transaction revenues, wrapping up a strong first half of the year, which has seen us grow adjusted diluted earnings per share by 17%. We look forward to building on these strong results in the second half of 2024. From a strategic perspective, I remain focused on sharpening our strategic focus in areas where we see the most valuable growth opportunities for Cboe. Throughout the strategic review process, we have made some adjustments to our strategy, including dialing back on M&A activities, reallocating resources to align with our core strengths, including winding down our digital spot market and refocusing on digital asset derivatives, lowering our expense growth, stabilizing our margins, and changing our capital allocation strategy away from M&A activities to increase investments in organic growth initiatives and returning capital to our shareholders. The strategic review has provided us with the framework to hone our strategy and determine how to best leverage our core strengths, reallocate our resources internally, including investing in our global technology platform, and position the company for continued growth over the longer term, and returning capital to our shareholders through a combination of dividends and share repurchases. To that end, refocusing our view of the company as both an import and export business helps enable us to unlock even more of our global growth potential. Over the last few years, we have been focused on the export type of business, expanding into new geographies and deploying our exchange technology and data to create better trading experiences for our customers across the globe. We've also exported our US derivatives market model to Europe, leveraging our proven blueprint for success in the US to build out new markets and reach new customers. As we enter these markets and listen to our customers, we found opportunities to grow our import business. From my traveling and talking to our global client base over the last nine months, I've learned there is a huge appetite to invest in the US market, and our analysis confirms this trend. While our customers want to trade and invest in their local markets, they are also eager to gain access to the investment opportunities in the US market. They are excited about the innovation that Cboe has brought to their local markets and our investments in our technology, and they are optimistic about the investment opportunities that they continue to see in the US market. Representing nearly 45% of the $109 trillion global equity market cap, the US equity marketplace is by far the largest and one of the fastest-growing markets in the world. Foreign holdings of US equities reached nearly $14 trillion last year, growing at an approximately 10.5% CAGR over the last decade. And we expect this trend will endure as the growth of the retail investor globally continues and different markets implement legislative changes that are expected to create opportunities for Cboe. The S&P 500 Index is the dominant global equity benchmark with an estimated $16 trillion benchmarked and indexed to it, more than any country's individual market cap globally. Through our SPX options complex, the ability to facilitate risk management and the import of foreign investment back into the US market is a significant and growing opportunity. We continue to see significant opportunity in the Asia Pacific region specifically, where we see growing demand for our index options products, which serve as an efficient and accessible way to gain exposure to the US market. In the first half of this year, three global brokers, Futu Hong Kong, Weibo Thailand, and Samsung Futures added various Cboe products to their platforms, including SPX options, further expanding access to our product suite. We see this as a long-term secular trend, and we are eager to help facilitate access to the US markets. International participants are highly valuable to the US market, as diversity of opinion and goals helps to lead to a better trading ecosystem. Whether it be through global trading hours, new products, or education, we'll continue to help investors access the liquidity and efficiency of the US markets, while also providing trusted markets in local regions worldwide. We believe the secular trends that are reshaping trading and capital markets, including the globalization of markets, the rise of the retail investor, the increased use of options by market participants to manage risk efficiently, generate income, and take speculative positions, and the technology and data revolution create excellent opportunities for Cboe. The strategic review process has enabled us to examine long-term growth and value creation opportunities and reposition and redeploy resources to leverage our strength against those opportunities we see in the market. The strategic review should be viewed as a journey and not an event, and you will see us continue to refine our strategy over time. Finally, we remain well positioned due to our strong balance sheet, combined with our disciplined approach to the allocation of our capital. Our approach to capital allocation focuses on a balanced mix of reinvestment in core operations, including our technology platform, prudent expense management, strategic investments that drive sustainable growth, and returning capital to our shareholders. During the second quarter, we repurchased $90 million of shares, and we'll continue to be opportunistic with our share repurchase efforts. Overall, we remain committed to maintaining a strong and flexible balance sheet while investing in organic growth initiatives, our technology capabilities, operating efficiencies, and thereby driving durable revenue growth, optimized margins, and earnings growth for the firm. I'll now pass the call over to Dave to discuss the business line results in more detail.

Thanks, Fred. Starting with our Global Derivatives category, Q2 was a tale of two halves. Volatility spiked in April on the back of rising geopolitical tensions in the Middle East with the VIX index hitting a year-to-date high of $19, before falling precipitously in May and June, with June ranking as the least volatile month since November of 2019. Not surprisingly, index option volumes were particularly strong in April, with SPX recording its highest monthly ADV of 3.3 million contracts, driven by a notable increase in put volumes as hedging demand picked up. While activity normalized in May and June, overall second quarter SPX ADV was still up a solid 9% year-over-year for 3 million contracts. 0DTE options made up 48% of overall SPX activity in Q2, unchanged from the previous quarter. VIX option volumes, on the other hand, surged higher in Q2, up over 18% quarter-over-quarter to an ADV of 843,000 contracts, making it the third-largest quarter on record behind the first quarter of 2018, and ahead of even Q1 2020's COVID-driven spike. Investors have flocked to VIX options to help hedge against potential tail risks, whether it be geopolitical shocks or macroeconomic surprises with year-to-date ADV on track to exceed even last year's all-time high. On the back of this unprecedented interest in VIX options trading, we're excited to expand the access and utility of Cboe's VIX product suite with our planned October launch of options on VIX futures, subject to regulatory review. These will be options that physically settle into the underlying front month VIX future and they will trade on our futures exchange CFE. This is important for two reasons. First, it allows us to provide access to VIX options products to a wider set of market participants in the US and abroad that may not have access to our securities and options exchange. And second, it allows us to offer more tenants to meet customer demand. We're especially excited to expand our volatility toolkit ahead of this year's US election, which has historically been a meaningful volatility catalyst for markets and where demand for options to help manage risk is particularly strong. For example, the VIX index jumped over 10 points in the month leading up to both of the last two elections. In addition to introducing options on VIX futures, we also plan to launch Cboe S&P 500 variance futures in September, subject to regulatory review. Cboe's variance futures will provide an exchange-listed alternative to over-the-counter variance swaps and introduce yet another way to trade volatility around the US election as well as other key catalysts. Our commitment to continually innovate is often cited by customers as one of the key reasons they're eager to partner with us. As we continue to make investments in our products and our markets, our customers are responding by increasing their collaboration with us, whether it be making enhancements to better compete in SPX 0DTE options, setting up to trade in GTH ahead of the US election, or the international import of business as more retail brokers come online for options trading in different geographies. Strong client engagement and an exciting product pipeline makes us confident that we're well positioned to continue to grow our derivatives business for the rest of the year. Outside of the US specifically, we continue to make sustained progress exporting our US derivatives model to Europe, leveraging our blueprint in the US by deploying our exchange technology to create better trading experiences for customers in Europe through our European derivatives platform, CEDX. We saw the first equity options trade on CEDX in June with nearly 14,000 lots traded in 201 distinct options during the first month of trading. On the index side, spreads tightened on the back of our recently implemented liquidity provision program, helping improve the quality of our book for index options. From a participant perspective, during the second quarter, we announced two noteworthy developments with the addition of Interactive Brokers as a direct trading participant of CEDX and the clearing participant of the Cboe Clear Europe, in addition to IMC becoming a new direct trading participant in June. While we still have a great deal of work ahead, we are pleased with the milestones hit during the second quarter and look forward to building on that momentum in the quarters ahead. Taking a look at the Cash and Spot businesses across regions, second quarter results were very strong with year-over-year net revenue growth reaching a robust 15%. Each region saw year-over-year increases as Cboe leveraged its scaled infrastructure to monetize a healthy market backdrop. Looking at the various regions, in North America, US on-exchange net capture rates improved markedly as a result of pricing changes we made in the first half of the year, as well as a dramatic shift in customer mix given the meme stock activity. Moving forward, we expect to continue to look to strike the right balance between market share and capture to maximize the revenue outcome. In Canada, we produced another 50 basis points of market share improvement as compared to the second quarter of 2023 and remain on track with our final technology integration, the migration of our Canadian market to Cboe technology in early 2025, subject to regulatory review. Moving over to Europe, while closing auction activity hit another record high, constituting an estimated 27% of on-exchange market share unavailable to Cboe in Q2, we retained our leading market position during continuous trading, accounting for 31% of intraday activity for the quarter. Periodic auctions also notched another market share record, and Cboe BIDS Europe retained the distinction of the largest platform of its type for the 27th month in a row in June. As we look to adjacent areas of the market for future growth, we remain on track for our fourth quarter launch of our Securities Financing Transactions Clearing services subject to regulatory review. And finally, turning to Asia Pacific, we saw continued strong momentum in Australia and Japan. In Australia, Cboe continued its market share gains with market share for the quarter finishing at 20.8%, up 2.4 percentage points from the second quarter of 2023. In Japan, market share continues to set records, reaching 5.5% for the second quarter, a 1.4 percentage point improvement versus the second quarter of 2023. In addition, volumes increased by a very strong 71% as compared to Q2 of 2023 levels. Cboe's positive momentum in Japan has continued into the third quarter with solid volumes and market share. The APAC region remains one we are incredibly excited about moving forward. Not only do we see the opportunity to more effectively monetize our ecosystem of transaction and non-transaction businesses in local markets like Australia and Japan, but as we grow, we look forward to fueling the import of derivatives activity into the US. We anticipate making measured investments to maximize our brand and sales efforts in developing regions. While we are in the very early stages of realizing this opportunity, the onboarding of three new brokers out of Asia Pacific earlier this year highlights the underlying demand for exposure to Cboe's US benchmark products. Turning to Data and Access Solutions, net revenues grew 5% as compared to the second quarter of 2023. The slower second quarter growth was a result of longer sales cycles and an outsized one-time payment in our index business hitting in the second quarter of 2023, creating a more difficult comparison against softer-than-expected collections in Q2 of 2024. And whilst the first half results are trending slightly below our guidance range of 7% to 10% for the year, we anticipate the slower trends will prove transitory, given initiatives we have in place to accelerate revenue expansion in the third and fourth quarters. Given the year-to-date results and our second half expectations, we anticipate hitting the low end of our 7% to 10% guidance range in 2024. Specifically on the Access Solutions side, we are excited about the momentum behind our dedicated cores offering, greatly enhancing our exchange access layer. Dedicated cores is a new offering launched this year to help market participants improve determinism, reduce latency and enhance their ability to effectively navigate markets. We are currently live on all four of our US equities markets with strong initial interest and have plans to roll out the technology in Europe in the fall. Dedicated cores is another example of leveraging Cboe's strong global technology infrastructure to provide scaled solutions to customers across our ecosystem. Looking internationally, approximately 40% of this quarter's growth came from outside of the US. We saw a notable uptick in Canada behind sales of our Cboe One data product, as well as solid momentum in Europe and Australia. As we think about expanding our global footprint, Cboe Global Cloud has been instrumental in extending our connectivity with clients. During the second quarter, nearly 80% of Cboe Global Cloud sales came from outside the Americas. Moving forward, we anticipate being able to shift greater resources to the development of D&A opportunities as we move from the integration efforts with our technology resources to revenue-enhancing capabilities in our Data and Access Solutions category, particularly as it relates to enhancements around US options in the quarters ahead. The breadth of our cash and derivatives markets provides us with the unrivaled position to harvest, aggregate and deliver custom datasets and services closer to customers, both current and prospective, and we look forward to investing behind those opportunities. Cboe's second quarter results highlight the power of the entire ecosystem with Cash and Spot Markets, Data and Access Solutions, and Derivatives all delivering durable results. And the third quarter is off to a great start. We look forward to leveraging the global footprint of our scaled infrastructure to enhance revenue generation across cash, data and derivatives. With that, I will turn the call over to Jill.

Thanks, Dave. As Fred and Dave highlighted, Cboe posted a strong second quarter with adjusted diluted earnings per share up 21% on a year-over-year basis to $2.15, equaling our previous quarterly record. While the second quarter results are notable for a number of reasons, I believe the most powerful message they illustrate is our focus on driving margin stabilization as a result of durable revenue growth against diligent expense management as well as the robust capital return results on display throughout the first half of 2024. I will provide some high-level takeaways from this quarter's operating results before going through an assessment of the segment results. Our second quarter net revenue increased 10% versus the second quarter of 2023 to finish at a record $514 million. The growth was driven by strength in our Cash and Spot Markets and Derivatives categories as well as solid results from our Data and Access Solutions business. Specifically, Cash and Spot Markets organic net revenues grew 15% versus the second quarter of 2023, with all geographies producing solid year-over-year growth. Derivatives markets produced 11% year-over-year net revenue growth in the second quarter, as our proprietary product franchise continued to provide increasing utility to the market. Data and Access Solutions net revenues increased 5% on an organic basis during the quarter. Despite the second quarter slowdown, we are confident in our ability to hit the lower end of our 7% to 10% targeted net revenue growth range for 2024. Adjusted operating expenses increased a modest 2% to $197 million for the quarter, with the year-over-year growth driven by higher compensation-related expenses given the strong year-to-date revenue results as well as professional fees and outside services, offset by favorable results in travel and promotional expenses. And adjusted EBITDA of $341 million grew a healthy 16% versus the second quarter of 2023. Importantly, as a result of our strategic focus on revenue generation and diligent expense management, we continued to make meaningful progress in stabilizing our adjusted EBITDA margins during the quarter. Our second quarter adjusted EBITDA margin expanded by 3.5 percentage points on a year-over-year basis to 66.3%. Turning to the key drivers by segment. Our press release and the appendix of our slide deck include information detailing the key metrics for our business segment, so I'll provide some highlights for each. Net revenue in the Options segment grew 8%, led by higher index options transaction fees. Total options ADV was up 1%, driven by a 9% increase in index options volume, and revenue per contract moved 9% higher, as index options represented a higher percentage of total options volume. North American Equities net revenue increased 8% on a year-over-year basis to a record level in the second quarter, reflecting higher net transaction clearing fees and access and capacity fees. Increased net transaction and clearing fees were driven by stronger US exchange and off-exchange net capture rates, as well as higher volumes than market share in Canadian equities. On the non-transaction side, access and capacity fees increased 6% as compared to the second quarter of 2023. The Europe and APAC segment produced a 15% year-over-year increase in net revenue, resulting from strong growth across both transaction and non-transaction revenues. Transaction revenue in Australia and Japan benefited from continued market share gains as well as greater volumes versus the second quarter of 2023. The Futures segment reported 19% net revenue growth for the quarter with the higher net transaction and clearing fees reflecting a 28% increase in ADV. On the non-transaction side, market data revenues were up 10%. And finally, the FX segment delivered a quarter of record net revenue with an 11% year-over-year increase driven by higher net transaction and clearing fees. Market share was 20.2% for the quarter as compared to 19.5% in the second quarter of 2023. Turning now to Cboe's Data and Access Solutions business, net revenues were up 5% on an organic basis in the second quarter. Net revenue growth continued to be driven by sales outside the US with approximately 40% coming from international growth, the largest increase coming in Canada related to our Cboe One product. The strong second quarter international sales growth helped more than double overall sales annual contract value as compared to first quarter levels and highlights the many ways we can monetize our ecosystem of exchange networks across the globe. And while new sales may only provide a partial benefit in the quarter they occur, we believe the sales trends are a strong leading indicator of potential future revenue growth for the business. We continue to believe D&A is well positioned and anticipate an acceleration in trends in the third and fourth quarters, helping us deliver on the lower end of D&A revenue growth guidance of 7% to 10%. More specifically, we expect to see continued strength from demand for access across our global markets, particularly as we increase our presence in new geographies and leverage the distribution capabilities of Cboe Global Cloud, the expansion of dedicated cores, greatly enhancing our exchange access layer, and increased capabilities around our US options data and access solutions as we reallocate technology resources from integration efforts to organic revenue-generating enhancements. Turning to expenses, total adjusted operating expenses were approximately $197 million for the quarter, up a modest 2% compared to the second quarter of last year. The increase was a result of higher compensation and benefits as well as an increase in professional fees and outside services, partially offset by a decline in travel and promotional expenses. Looking forward, we are reaffirming our full-year 2024 adjusted expense guidance of $795 million to $805 million. Our guidance factors in stronger-than-expected revenue trends we have seen to start the year in support of revenue expectations for the second half of 2024, putting some upward pressure on our short-term incentive bonus accrual, but is balanced by our strong expense discipline, leaving our overall guidance unchanged for the year. Importantly, the guidance provides opportunity for continued investment in the businesses. We anticipate that the continued reallocation of resources from integration efforts to areas like the D&A enhancements I just covered or derivative technology upgrades and marketing spend will provide attractive returns in the quarters ahead. Outside of our adjusted expense results, we recorded a number of one-time accounting adjustments I want to briefly touch on. Following the digital business realignment we announced in April, Cboe recorded an $81 million charge representing the non-cash impairment of intangible assets related to the Cboe Digital spot market wind down. In addition, we reported a $60 million impairment as a result of a routine review of the carrying value of Cboe's other minority investments. These charges are considered one-time and are excluded from our second quarter adjusted operating expenses. As we look ahead, our 2024 guidance reflects our strong first half results, solid July activity, and a supportive outlook for the second half of the year. Looking at our full guidance more broadly, while we anticipate hitting our D&A organic net revenue guidance range of 7% to 10% for the year, we are guiding to the lower end of the range given the softer second quarter results. We anticipate a steady increase in D&A revenue growth throughout the back half of 2024, given incremental demand for our dedicated cores offering, as well as continued geographic growth in our D&A business. Our expectation for non-operating income is unchanged, and we continue to anticipate positive marks on our investments to help our earnings and investments line and some dividend income to flow through our other income line. As we look ahead, we've had a strong start to the third quarter with trailing activity and high levels of engagement from our customers. Our balance sheet remains solid with cash generation that allows us to focus on strategic investments in organic growth initiatives.

In closing, we are pleased to report another strong quarter delivering 21% growth in earnings per share year-over-year. That caps a strong first half with 8% net revenue growth and 17% earnings per share growth year-over-year, as we have continued with strong revenue growth, brought down our expense growth and stabilized our EBITDA margins. We allocated our resources to invest in technology and organic growth initiatives and allocated our capital away from M&A towards strengthening our balance sheet and returning capital to our shareholders. For the first half of 2024, we have returned 65% of our adjusted earnings to our shareholders through a combination of dividends and share repurchases. Our balance sheet is strong, and we're well positioned to continue to return capital to shareholders and take advantage of opportunities as they arise.

At this point, we'd be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue, and if time permits, we'll take a second question.

Thank you. The floor is now open for questions. Your first question comes from the line of Dan Fannon of Jefferies. Your line is open.

Thanks. Good morning. I guess to start on the Data and Access Solutions, understanding that you think it's going to accelerate in the back half of the year, but still hoping you could elaborate on why we're coming at the lower end of the range here for the year. And what I think was mentioned as kind of transitory in some of the trends, if you could just elaborate on what's driving some of the more moderate growth here in the first half of the year and then again, why you think that will change prospectively?

Absolutely. Good morning, Dan. Thanks for the question. As we look at the first half of the year, so far, we're coming up around about 7% growth year-to-date. And the reasoning for the Q2 softer results there is a lot down to timing. Timing plays a big factor in the Data and Access Solutions business in general. We saw a different timing to some of the enterprise sales and we're seeing some longer sales cycles for some of our product services and offerings. We also saw a difference in timing, some of the cash collection timings during the quarter. And then, of course, as we mentioned on the call, there was a large backfill in Q2 of 2023, which calls for harder comparisons. And then, the other factor this year has been a little bit of the larger customer consolidation that we saw take place having a small impact on the revenues there. And so, timing throughout, as we look forward, will also play its part. And the confidence we have in hitting that lower portion of the 7% to 10% guide comes from three or four key areas. And that's new sales, it's new products, it's pricing and it's the new technology efforts that we've really been able to focus on this year as a result of finishing off those technology migrations in Asia Pacific throughout the last year. So, the full force almost of the technology team really coming back to focus on our core, focus on what Cboe is best at. So, I'll go through those sections and I'll also pass on to Chris to talk a little bit more about that technology investment that we see, giving us some durability throughout this year and into next year. So, those new sales, we doubled the amount of ACV sales in Q2 versus Q1, and we'll see the benefit of those sales coming through throughout the rest of the year. And we were really pleased to see the continuation of sales of Data and Access Solutions internationally with 40% of that growth coming from outside of the US. And when you think about the macro uncertainty for the rest of the year, we certainly see more demand for access and capacity and for data as we go throughout time here. New products, some packaging and bundling there of our new index channels and services that we see going forward. Of course, we were pleased to see the sale of our Cboe One data up there in Canada. Pricing changes will also play their part. As you know, we aim to have high-value cost-effective data feed, but we will perform price and price comparisons and review where we think we're undervalued. And then, when we come to technology, those system enhancements we've been able to book through for the equities markets that access layer improvements really important for this year and rolling out into Europe and the rest of the world into 2025. And that new technology effort really allowing us to produce new data insights, insights into the activity on our platforms, which provide value for customers that they're willing to pay for.

Great. Dan, I want to elaborate a bit more on our technology improvements. We have been making significant investments in cutting-edge technology that are just beginning to yield results. As Dave mentioned, we are now placing a stronger emphasis on organic initiatives since the migrations are mostly completed, apart from Canada, which will be finalized in the first quarter of next year. These technological advancements are enhancing our access to data and insights. In US equities, we have just finished establishing dedicated cores across all four equity markets as of July 1st, so we will see the full benefits in the second half of the year. Additionally, in options, we plan to introduce enhancements in access data and a new access architecture for one of our markets in the latter half of the year, and then we aim to extend this to other markets in the following quarters. We are also improving market data; in fact, we launched an enhanced version at the end of July, along with new services that will offer greater insights for our customers regarding their trading activities and how they can optimize their behavior. As we are now fully in the election season, uncertainties from both elections and geopolitical situations are expected to persist. The demand for access and capacity is likely to increase, and we will continue to invest to ensure we provide our customers with better access as that demand rises.

Yeah, thanks for taking the question. So, I just had one on the international opportunity for index options. Could you help us size that opportunity overseas relative to the US? How do you anticipate the mix between institutions and retail to sort of evolve over there? And then just broadly, when we think about the competitive landscape in index options, Fred mentioned that $16 trillion in AUM that's benchmark to the index. How much of a competitive advantage is that for you when you think about other players that might try to replicate the success you've had in the US and overseas? Thanks.

Thank you for those questions. When considering international expansion, it's crucial to reflect on the trends we highlighted in our prepared remarks, particularly the increase in assets linked to the US capital markets with the S&P 500 Index options. This volatility discussion underscores Cboe's role as a leader in managing equity volatility risk for global participants, which attracts both institutional and retail clients. With three new retail brokers joining us this year, we anticipate strong growth potential in this area. Operating on a global scale allows us to engage with customers worldwide about their needs and market access. We believe there is significant opportunity ahead. Currently, the percentage of SPX trading occurring within global trading houses is about 2% to 3%. But it's essential to recognize that as we support these customers, they tend to trade heavily during regular market hours when the majority of activity occurs. The global equity volatility complex serves as a competitive advantage for us. Our product development pipeline is expanding, and we are excited about the introduction of VIX futures, variance futures, and VIX options on futures later this year. The latter is noteworthy because it enables customers who cannot participate in the US security-based options market to gain access to volatility as an asset class, which is appealing to institutional investors worldwide. As we enhance our product offerings, we find them increasingly attractive to institutional players while maintaining interest among retail investors. Our strategy will focus on strengthening our presence in the region through marketing and branding, ensuring our data is easily accessible to international clients. This is reflected in the fact that 40% of our data and access sales occur outside the United States.

Good morning, everyone. I’d like to discuss the revenue capture rate for the index options franchise. It seems that the proprietary products have been increasing sequentially over the past three quarters, though we did see a slight dip in the second quarter. Can you share the factors influencing this trend? Additionally, how do you anticipate this evolving in the future? Will it expand again, or do you expect fluctuations based on product mix?

The shift in product mix is driving the changes in the revenue capture rate. We haven't altered pricing, so it really hinges on the variety of products being utilized. This ties back to the effectiveness of our volatility toolkit at Cboe, which includes SPX options and VIX options, alongside VIX futures that offer significant utility. For instance, we observed a trend toward small caps this quarter, with the RUT achieving several record days, and there is a different capture for RUT compared to SPX. The mix shift reflects how our customers use VIX and SPX options differently over time. We don't see anything specific indicating changes in the future outlook.

Yes, hey. Just wanted to come back to the international expansions you talked about. First of all, a little bit surprising that there's still stones to be turned over, but maybe you can be a little bit more specific. Is it from both a customer perspective? Is it more retail than institutional that's untapped? And then maybe from a regional perspective, where you see the biggest opportunities to expand sales and marketing? And since I mentioned sales and marketing, obviously, there's a cost to that. So, as you expand and focus more internationally, should we expect you ramping up spending or can that be absorbed by your cost base?

Great. I'll potentially go in reverse. Alex, the spend as we look at sales and marketing growth there is really, I would call, incremental on top of that existing global footprint. You did of course see general expenses increase in the last few years, which we've really been focused on bringing down and focusing on margin. That expense allowed us to put in place the footprint that we now gain the benefit of that scaled infrastructure, really important for us to be able to leapfrog off as we think about increased sales and marketing here. So, the sales will be in terms of headcount, not 100 people, but really being able to cover that vast area. We say Asia Pacific, but it's a region of countries. And when we think about countries, in Asia Pacific, of course, we start from where we already are, which is Australia and Japan, but also opportunities we see in South Korea, in Taiwan and elsewhere, Singapore in the region to really have hubs of really focused activity. The three onboards this year were in the retail brokerage space, and we do see increases in institutional access as we go through. As we've spoken on previous calls, we can't always see the origin of the orderer and the end user, but in our conversations around the world with customers, we do look to help break down access barriers, and those access barriers include a pathway to a securities options market in the US and it includes jurisdictional regulatory approvals for us to be able to market in country. And those are the things that we really focus on a country-by-country basis. So, which is why just to reinforce the point from before, having a VIX options on futures capability that we will eventually roll out on a 24/5 basis becomes very interesting to that institutional client base around the world.

Hey, good morning, everyone. So, Robinhood is the second largest options trading platform in the US and one of the biggest crypto platforms, too, with their 24 million accounts. They plan to launch index options to their clients in 4Q. And I know you're also seeking additional regulatory approval for both crypto ETFs and crypto index options with the Russell via the FTSE brand. Could crypto ETF options and index options be part of the initial launch at Robinhood later this year, which could have an even bigger impact on your volumes, or should we think about this more as a Phase 2?

The short answer is to consider this more as a Phase 2. There are several regulatory, structural, and infrastructure-related challenges that we need to address, but we are eager to collaborate with our customers and regulators to bring ETF options for crypto ETFs to the market. We are excited to offer five ETF listings for Ethereum that we recently launched, along with the six Bitcoin ETFs already available on our platform. The Robinhood launch at the end of this year will primarily focus on index options and cash-settled index options, which we believe will provide a valuable new product lineup for the 24 million funded accounts, especially given Robinhood's emphasis on active retail traders.

Hi, good morning, and thanks for taking the questions. I was wondering if you could unpack what's happening in July a little bit. Clearly, we've seen the VIX start to rise. Can you talk a little bit about the customer mix? I know for some time there's been a narrative around increasing adoption and consumption of data by new trading firms. So, to what degree are you seeing a pickup from any new customer sets in July? What does the mix look like? Thank you.

Thanks very much for the question. Yeah, we certainly saw pickups into July with a number of records across the volatility toolkit coming through there. The makeup is really in the usage of the products. There's no specific client shift that we've seen in July in its own right, but what is worth saying is that the engagement from our existing customers and the inbounds from new customers is what really gives us excitement for the rest of the year. A couple of examples there, we see with that two years' worth of data that you mentioned, an increase in the number of QIS desks looking to put out products and strategies there. We see a continuation of liquidity providers using 0DTE SBX options to hedge their positions, which is a really interesting development we've mentioned at times in the past. And then, you think about the new liquidity providers, major liquidity providers that are coming to us from other asset classes, whether it be futures or equities, really looking to get involved in the complex there. And then, with the makeup with retail brokerages coming through, really exciting. And then towards the end of this year, as we just discussed, the addition of Robinhood as a customer is particularly exciting.

And Ben, I just might add a couple of points there. It's on VIX options we're seeing, we're on record for a record pace for the entire year as people see the utility of using our entire volatility suite. And then, the rotation into small caps a bit. We just saw a record in July, I think our second best month ever, best since 2018 in RUT options. So, we see some customer behavior there as they rotate and adjust to market conditions.

And I just think we're seeing increased volatility in July, whether it's what's going on the political side in the U.S. with the election coming up, or whether it's geopolitical or the rotation from AI and into other asset sectors to small cap sector. So, there's a lot going on in the market right now, and that's helping in July.

Hi, good morning. Thank you for taking my question. Just want to follow up the last question about maybe talk about the VIX futures and options. ADV, were quite strong in the second quarter, especially in April. I just want to get a better sense about the driver of this trend. And then you talked about kind of these volatility continuing in July. I'm just wondering how you think about the mix between SPX and VIX going into the election in November. Thanks.

Thanks, Owen. Yeah, this really is the story of the volatility toolkit. We're seeing investors gravitate towards that toolkit to be able to manage risk, both the upside as well as the downside. VIX options, particularly we've been talking about this for a little while, is that the lower VIX, the historically low VIX in general that we've seen for most parts of this year, when we see that volatility spike, such as we did yesterday, it's going over $19, or in during April we saw it pop to $19 around those volatility events that occurred, we see customers then monetizing or rolling those VIX call options or those VIX call spreads they got on place. And then we see the resetting and rolling of those as we go through time, looking to prepare for those tail risks that may well occur, particularly when you think about the macro environment. We've got geopolitical risks, we've got elections, which are historically a really big catalyst of volatility, and those daily economic data, whether it be CPIs, central bank rate decisions, or earnings calls. So, when we think about VIX options and VIX futures, when you see a spike in VIX, we see really large VIX futures days. Yesterday, we saw over 400,000 VIX futures contracts trade, the volatility popped over to $19.5 yesterday. SBX options always continue to play their part, whether it's at the shorter end of the curve, or managing that longer-term exposure in and through and beyond the elections there. So, the utility of each product, using conjunction as well as in isolation, is really what we see developing over time. And then, our job is to continue to innovate products around that. And so, when you think about the differences between implied and realized volatility, variance step forward, variance futures, on-exchange, transparent, capitally efficient for a trading strategy, which has recently become very hard to achieve OTC because of the unclear margin rules. So, bringing that on exchange, an exciting development there, along with those VIX options on futures, all before the US election. So, really interesting setup for the rest of the year.

Hi, good morning. Thanks for taking the question. Maybe just a question on capital allocation. So, even with the $150 million or so capital return in the quarter, you still built up cash on the balance sheet now with about $600 million cash and net leverage continues to come down. So first, just in terms of building up some cash over the past year, I guess, is that being driven at all by wanting to retain some M&A flexibility or something else driving that? And secondly, even though M&A has been de-emphasized, I'm assuming that there could still be some M&A that would be attractive. I guess, can you comment on M&A hurdles and if you're seeing anything interesting in the market from an M&A perspective?

I'm not going to discuss our current opportunities. However, I believe that having cash on hand and maintaining flexibility is beneficial for seizing potential opportunities, as the future is unpredictable. I want to clarify that I never said we would refrain from M&A; rather, it will be approached more selectively and with greater significance. Our experience over the past three years has shown that smaller M&A deals can create considerable work, particularly in our technology sector, which is crucial to our operations. Therefore, any M&A we pursue moving forward will be more focused and aligned with our strategic goals.

Hi, this is Stephanie filling in for Mike. Maybe just one on Cboe Global Cloud. How meaningful is the contribution uptake today? How do you see that progressing over the next few years? And maybe you can just elaborate on some of your initiatives and steps you're taking to expand the Cboe Global Cloud? Thanks.

Thanks, Stephanie. Cboe Global Cloud has been a really interesting addition for us over the last couple of years. With nearly 80% of customers and revenue coming from outside the US, it's really part of that theme of putting data closer to our customers. In fact, putting data closer to more potential customers, and it forms a key part of our global expansion plans, as well as the diversification of revenue streams. The ability for us to have a one-stop shop for historical data, for packaged and bundled data insights, as well as data feed is really tremendously powerful. We don't break out the contribution of Cboe Global Cloud from the rest, but in terms of a strategic priority for us, it's certainly well up there. And I'll pass on to Chris to give some more.

Yes, Stephanie, as Dave mentioned, it's crucial for us to make our data and access more available to customers so they can utilize our products, data, and insights. We're very dedicated to this effort and believe we're still in the initial stages. Most of the growth of Cboe Global Cloud has occurred outside the US, and in response to Alex's earlier question, our global presence is still developing. As a relatively new global company that has only expanded in the past two to three years, we view this as part of an ongoing trend. We believe that as we provide our data closer to customers, they will be able to import their trading traffic into the US after gaining a better understanding of our data. You can expect us to keep investing in Cboe Global Cloud and bring our data and products closer to those customers.

Hey, good morning. Thanks for taking the question as well. I wanted to follow up on the expansion of the VIX product lineup you mentioned earlier in the prepared remarks. So, you talked a little bit about options in VIX future. So maybe some early feedback you're getting from the trading community on what the uptake there could be? I guess how you're thinking about just kind of expansion of that product set relative to VIX regular options and whether there could be any cannibalization or you truly see this kind of opening up the broader market? Thanks.

Thanks, Alex. So, the VIX options on futures build capability to have that convexity for a broader set of customers, as we say, customers that cannot today access US security-based options. It's that new customer base that we're excited about. And with any new customer base, that's going to take time to seed and build. So, we're excited about the product, we're excited about when we expand that to 24/5. And also, the key point here is that we can extend the tenants to a shorter-dated tenant with this product as well. So, think about that general desire and the secular trend towards the shorter end of the curve, we can begin to access that with this product. So, those two are the key drivers for our level of excitement around this product is the new customer range internationally and within the US that can't access US security-based options and the ability to go to the shorter end of the curve. So, that's a really interesting pathway for us.

Hi, good morning. To follow up on Patrick's question earlier in the call, as you think about the continued investment in European index options, I think the thesis has been that index options are a much smaller part of market cap than seen in the US. So maybe, first, remind us, when did Cboe launch local index options in Europe? What sort of ADV are you seeing right now there? And the strategy, I think, has been a build it and they will come. What is your conviction level that this vision really is the correct one?

Thanks very much, Ken. It's worth saying, as we have from the start, that this is really Cboe taking a long view, a long view to the ability to grow the markets in Europe and bring the utility of options, that secular growth that we've seen in the US, we see that being really of great utility to the European economy, European retail investor, and the European institutions if we can bring that US-style market structure. So, exporting our capabilities and our know-how to bring that market structure of a US on-exchange and on-screen market in a capital-efficient manner to customers. The milestones we've hit since we've launched are really also worth pointing out. We think we're at the point of having a minimum viable product now, and that's really marked by the milestone of rolling out single-stock options. That then complements the index futures and options that we've had, and then the milestones this year, which are really interesting, showing that global major customers are aligned with that view. That includes Interactive Brokers, who came on board this quarter, as well as IMC, another anchor tenant liquidity provider. We talked about on the call the liquidity provision program; we've seen the market quality improve in futures and in index options. And then also, when we think about the ADV there, we did about 850 contracts a day in June coming into July, that's holding steady. Our goal forward is to focus on education with the Options Institute. And I guess the last point I would make on this is that this is all built on top of a scaled infrastructure in Europe. And so, it's an incremental investment; it's not making us sweat too much, so we can have patience as we build on that scaled infrastructure, and those key anchor tenants coming on board, sharing that vision with us really gives us the confidence to continue the course.

And unfortunately, we've run out of time for questions. I will now turn the conference back over to the management team for closing remarks.

Well, thanks for joining us today, everyone. As we've said, we've had a strong quarter, we've had a strong first half, we've got lots of initiatives on the go here that we feel good about, and with the environment that we're entering here over the balance of the year, we've had a good start to the third quarter with July's trading results. As we look through the US election, geopolitical events, and rotations between different parts of the market as events unfold, even as much as today, we feel pretty good about the rest of the year. The balance sheet is strong. We've got a good cash position, good EBITDA margins, so we feel very good about where we are. And we're in a good position to take advantage of opportunities we see in the market. We'll talk to you next quarter.

This concludes today's conference call. You may now disconnect.