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Edited Transcript of CBOE earnings conference call or presentation 2-Aug-19 12:30pm GMT

Q2 2019 Cboe Global Markets Inc Earnings Call

CHICAGO Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Cboe Global Markets Inc earnings conference call or presentation Friday, August 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Norman Schell

Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer

* Christopher Andrew Isaacson

Cboe Global Markets, Inc. - Executive VP & COO

* Deborah L. Koopman

Cboe Global Markets, Inc. - VP of IR

* Edward T. Tilly

Cboe Global Markets, Inc. - Chairman, President & CEO

* John F. Deters

Cboe Global Markets, Inc. - Executive VP, Chief Strategy Officer & Head of Multi-Asset Solutions

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Conference Call Participants

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* Alexander Kramm

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Kenneth Brooks Worthington

JP Morgan Chase & Co, Research Division - MD

* Kyle Kenneth Voigt

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Richard Henry Repetto

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Sheriq Sumar

Goldman Sachs Group Inc., Research Division - Business Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Cboe Global Markets 2019 Second Quarter Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I'd now like to turn the call over to Debbie Koopman. Ms. Koopman, please go ahead.

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Deborah L. Koopman, Cboe Global Markets, Inc. - VP of IR [2]

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Thank you, Keith. Good morning, and thank you for joining us for our Second Quarter Earnings Conference Call. On the call today, Ed Tilly, our Chairman, President and CEO, will discuss the quarter and provide an update on our strategic initiatives. Then Brian Schell, our Executive Vice President and CFO, will provide an overview of our second quarter financial results and updated guidance for certain financial metrics. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our Chief Operating Officer, Chris Isaacson; and our Chief Strategy Officer, John Deters.

In addition, I'd like to point out that this presentation will include the use of several 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 statement. 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. Also note that references made to the planned migration of the Cboe Options Exchange is subject to regulatory review. During the course of this call this morning, we will be referencing non-GAAP measures as defined and reconciled in our earnings material.

Now I'd like to turn the call over to Ed Tilly.

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [3]

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Thank you, Debbie. Good morning, and thank you for joining us today. I'm pleased to report on financial results for the second quarter 2019 at Cboe Global Markets, which were primarily driven by higher trading volume and proprietary products compared to the second quarter of 2018, offset by flat to lower trading volumes, industry-wide U.S. Equities, European Equities and Global FX.

We remain focused throughout the quarter on executing our strategic initiatives to drive long-term growth and value to our customers and shareholders. I will highlight those efforts after touching on the trading and market volatility landscapes.

Despite an almost 6% selloff in May, the S&P 500 pared losses in June to end the quarter up a modest 4%. The June rally continued into July, touching new highs on July 26, representing a 20% gain year-to-date.

The fixed -- the VIX futures' near-record volume in May, the fifth-highest month in its 15-year history, was offset by a slow April and June as traders lacked conviction during the market's grind higher. In July, short-term consumer confidence remained cautiously optimistic, but we believe concerns over a global slowdown in growth and escalating U.S.-China trade tension had investors reevaluating risk. Rising long-term uncertainty led to a steepening in the VIX term structure in July and a renewed focus on hedging. Downside protection became a notable theme and while the VIX index hovered around year-to-date lows and VVIX near 5-year lows, many investors were looking to VIX calls and SPX puts as cheap portfolio protection.

Further demand from retail investors to hedge downside risk was seen in volatility-linked ETPs. Average AUM and volatility-linked ETPs increased 42% in the second quarter, averaging $3.7 billion versus $2.6 billion in the first quarter. A significant portion of this increase came from the continued growth of ETPs based in the APAC region. This contributed to a quarter-over-quarter increase in VIX futures open interest and VIX futures volume during global trading hours.

Expanding our global footprint continues to be a main focus, and I'm happy to report that in June, we received jurisdictional approval in Switzerland allowing Swiss trading privilege holders direct market access to CFE. Direct market access is an important step in increasing accessibility to our products in regions outside the U.S.

Turning to XSP, our Mini-SPX Options contract, which is 1/10 the size of SPX, the same size as SPY, continues to demonstrate the value of our SPX product suite. Q2 2019 ADV is up 119% from Q1 2019 and up 314% from Q2 2018. Demand continues to build from investors looking for the increased risk management granularity provided by a smaller notional contract. Both jurisdictional approval and the growth in XSP are a direct result of customer feedback as we continue to focus on the needs of our customers with the goal of providing solutions for all of their risk management needs.

Turning to the U.S. Equities market. I'm pleased to note that Adam Inzirillo, a longtime veteran of U.S. Equities trading is joining Cboe to head our U.S. Equities business, which, at present, is a very dynamic segment of our company. At our last earnings call, we described our plans to increase trading on Cboe EDGX Exchange with a few changes aimed at attracting additional order flow and with the introduction of execution priority to retail limit orders. I'm pleased to note that after the implementation of some recent fee changes, our U.S. Equities market share rose above 17% in July from 15.7% in the second quarter, and we are prepared to launch retail priority on EDGX pending regulatory approval and customer readiness.

Both changes are designed to benefit individual investors and make EDGX the go-to place for retail trading.

Now turning to European Equities, where overall market volumes were lighter during the second quarter compared to the previous year's quarter. We believe the lower volatility globally, compounded with the shifting political and regulatory landscape in light of Brexit, left many market participants on the sidelines. Brexit preparations remain a top priority. In light of the ongoing political developments, we have shifted our strategy to ensure we are well prepared for any potential political and regulatory outcome. In May, we announced plans to launch our Dutch venue on October 1 with all European Economic Area stocks available for trading. Additionally, our U.K. venue will continue to trade U.K. as well as EEA stocks.

This week, we announced plans to launch CBOE Closing Cross, a new post-close trading service that will bring valuable competition to the post-close trading session in Europe. The new service is scheduled to launch on October 16 and will serve as a cost-effective one-step shop for customers to execute their post-trading activities across 18 European markets.

Much as our Cboe Market Close proposal was developed in response to customer demand for an alternative closing auction in the U.S. Equities market, European market participants have also long expressed a need for a trading alternative, given their increasing closing cost -- auction costs and volume. We are pleased that Cboe Closing Cross will bring much-needed choice and competition to this growing segment of the European market, and we are prepared to bring similar benefits to the U.S. Equities market through Cboe Market Close pending regulatory approval.

Turning now to technology. We are now nearing the planned completion of our migration of all Cboe exchanges to Bats technology on October 7, which will allow us to maximize our value proposition by providing a superior unified trading experience across all our equities, options and futures markets. The completion of the migration is expected to also provide our customers with a more efficient and user-friendly trading experience that includes greater bandwidth, significant latency reduction, enhanced risk controls and improved complex order handling.

Just as we have with every successful phase of the migration to date, we continue to work very closely with our customers on the integration of our C1 exchange and remain laser-focused on the execution of a seamless, technical and operational integration of this final platform migration. Completion of this major undertaking not only enhances our efficiency and value proposition, but will also enable us to focus the considerable talent of our technology team on new growth initiatives. One such initiative is the development of a state-of-the-art research and data platform that we believe will help fuel the long-term growth of our company.

We intend for the new platform to combine data derived from existing Cboe assets with new functionality created in-house to glean actionable trading insights for our customers across all of our business lines. This is a very exciting project for our team and one that leverages unique Cboe strengths, technology, research and development to provide tailored trading strategies for our customers and to inform the creation of new Cboe proprietary products. We view the platform as a natural area of innovation for us and we look forward to moving from concept to design and build phase upon the completion of the C1 migration.

In closing, I would like to thank our team for the progress made throughout the second quarter and laying the foundation for future growth. We continue to tackle market-defining initiatives as we rolled out unique equity trading services, made headway on the final migration of all of our markets onto a unifying state-of-the-art platform, expanded our global footprint and began design of a unique research and data platform, all of which we believe will create growth opportunities going forward.

With that, I will now turn it over to Brian.

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Ed, and good morning, everyone. Before I begin, I want to remind everyone that unless specifically noted, my comments relate to the second quarter of 2019 as compared to the second quarter of 2018 and are based on our non-GAAP adjusted results. Overall, our net revenue was relatively unchanged with net transaction fees down 1% and nontransaction revenue up 1%. Adjusted EBITDA grew 3%, with margin increasing 230 basis points to 68.4%. And finally, our adjusted diluted earnings per share increased 8% to $1.13.

The press release we issued this morning and our slide deck provide the key operating metrics on volume and revenue capture for each of our segments, as well as an overview of key revenue variances. I'd like to briefly highlight some of the key drivers influencing our performance in each business segment.

Our recurring revenue stream of proprietary market data and access and capacity fees combined, increased 6% in the quarter and 8% year-to-date compared to the same periods last year, in line with our expectation for mid- to high single digit growth in 2019. We continue to see opportunity across all of our asset classes and believe that our migration to Bats technology will provide additional revenue opportunities over the long term.

As it relates to proprietary market data, about 2/3 of the growth this quarter was a result of incremental subscriptions, and nearly 100% of the growth of our access and capacity fees was also attributable to incremental units.

Now I'd like to turn to our segments. In our options segment, the 3% or $4 million increase in net revenue was primarily driven by higher revenue in market data and access and capacity fees, with nontransaction fees up 10%. Net transaction fees and options were flat with index options up 2%, offset by a 9% decrease in multi-listed options. Index options average daily volume, or ADV, was up 6% for the quarter, offset somewhat by a 2% decline in revenue per contract, or RPC. The RPC decrease was primarily due to a mix shift with Mini-SPX options accounting for a higher percentage of volume. In our multi-listed options, ADV was up slightly, but RPC was down 8% reflecting higher volume-based rebates.

Turning to Futures. The 4% or $1 million increase in net revenue resulted from a 7% increase in RPC on relatively flat ADV. The higher RPC year-over-year primarily reflects the impact of new pricing implemented in the latter part of 2018, as well as lower volume-based rebates.

Turning to U.S. Equities. Net revenue was down 5% or nearly $4 million, primarily due to lower SIP market data revenue, offset somewhat by an increase in access capacity fees. The lack of growth in net transaction fees reflects flat industry ADV and lower market share, offset by higher net capture.

SIP market data revenue fell 14% in the quarter, while our proprietary market data revenue was up 1%. SIP revenue fell due to lower market share as well as a decline in audit recoveries versus last year's second quarter.

Net revenue for European Equities decreased 4% on a U.S. dollar basis, primarily reflecting the unfavorable impact of foreign currency translation. On a local currency basis, net revenue was up 1%, reflecting a 6% decrease in transaction fees, offset by a 14% increase in nontransaction revenue. The growth in nontransaction revenue reflects increases in access capacity fees and other revenue, which includes licensing and trade reporting revenue. The decline in net transaction fees was due to lower market volumes and market share, offset somewhat by favorable net capture. The higher capture resulted from continued strong periodic auction and LIS volume.

Net revenue for Global FX decreased 10% this quarter, reflecting a 15% decline in volumes, offset somewhat by a higher net capture, which was up 4%, primarily reflecting the impact of fee changes made in 2018. In addition, we grew market share to 15.2%, up 30 basis points year-over-year.

Before I move to adjusted operating expense, I'd like to point out 2 acquisition-related expenses incurred in the second quarter, which are included in non-GAAP adjustments. First, we classified our Chicago headquarters location as property held for sale and based on our valuation analysis, recorded an impairment charge of $6.1 million. The marketing of our headquarters building and planned relocation is a result of a reduction of Cboe's employee workspace requirements in Chicago post the Bats acquisition and is projected to be completed in the second or third quarter of 2020.

Second, based on an anticipated restructuring of Cboe Vest, we recorded an impairment charge of $10.5 million. We are in a process of negotiating a sale of the majority of our shares in Vest, which will result in Cboe's ownership changing from 60% to approximately 25%. Please note that there are no assurances that potential transactions will ultimately occur.

Turning to expenses. Total adjusted operating expenses were just over $103 million for the quarter, down 3% versus last year's second quarter. The key expense variance was in compensation and benefits primarily resulting from a decrease of over $6 million in incentive and equity-based compensation and about a $2 million decrease in wages and payroll taxes, offset somewhat by an increase of about $4 million in deferred compensation claim expense. Decline in incentive-based compensation is aligned with our year-to-date financial performance. The deferred compensation expense is directly offset by deferred compensation income reported in other income, so there is no impact to net earnings. This expense or income is based on the change in valuation of our deferred compensation plans.

As a result of the year-to-date decrease, primarily in compensation and benefits relative to our original expectations, we are adjusting our full year 2019 expense guidance to be in the range of $405 million to $413 million, down $10 million from our previous guidance range. With respect to our 2020 expense guidance, we still expect a range of $420 million to $428 million, which takes into account the benefit of the synergies expected to be realized in 2020 from the C1 migration later this year and a continuation of investing to support the growth of our business. We plan to continue to invest in enhancing our customer-facing business development team to drive greater engagement in our proprietary products as well as development of an enhanced research and data platform, which Ed referenced previously.

We are maintaining our run rate expense synergy targets, as we expect to exit 2019 with $80 million of run rate synergies and exit 2020 with $85 million.

Turning to income taxes. Our effective tax rate on adjusted earnings for the quarter was 27.7%, below our prior guidance of being at the higher end of the annual guidance range of 27% to 29% and lower than last year's second quarter rate of over 29%. The tax rate decrease was primarily due to excess tax benefits related to equity awards.

We are reaffirming our full year tax rate on adjusted earnings guidance to be at a range of 27% to 29%, but we now expect the rate to be at the lower end of the 2019 guidance range. We are also reaffirming our guidance for depreciation and amortization and capital spending. For capital spending, we now expect it to be at the lower end of our guidance range of $50 million to $55 million, reflecting a shift in the timing of expenditures associated with our pending headquarters relocation.

Turning to capital allocation. We remain committed to a disciplined and balanced capital allocation strategy that includes reinvesting in our business, complementing our organic growth with potential acquisitions and providing steady distributions to our shareholders through dividends and opportunistic share repurchases in order to maximize shareholder value.

During the second quarter, we returned nearly $35 million to shareholders through dividends. And earlier this week, our Board increased our third quarter dividend by 16% to $0.36 per share from $0.31 per share. In addition, we utilized cash on hand to repay the $300 million senior notes, which matured on June 28, 2019. Our debt now stands at $925 million, and we have $250 million available -- in availability under our revolver if the need arises.

At quarter-end, our leverage ratio stands at 1.2x, down from 1.5x at the end of the first quarter. We ended this quarter with adjusted cash of nearly $136 million. Our remaining share repurchase authorization and the third quarter dividend increase reinforced our continued commitment to returning capital to shareholders and to increasing shareholder value. We remain committed to maintaining an investment-grade balance sheet and strong financial position that enables us to continue to make prudent investments in our business to drive long-term profitable growth.

In summary, Cboe is executing on its strategic initiatives and setting the stage for both short-term and long-term performance with our continued focus on defining markets globally, growing our proprietary index products, growing our recurring revenue streams, disciplined expense management to leverage the scale of our business, completing our integration plan and delivering on our synergy targets, maintaining balance sheet flexibility and a capital allocation plan that allows us to invest in the growth of our business while returning capital to shareholders through an increased quarterly dividend and potential share repurchases.

With that, I'll return it over to Debbie for instructions on the Q&A portion of the call.

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Deborah L. Koopman, Cboe Global Markets, Inc. - VP of IR [5]

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Thanks, Brian. At this point, we'd be happy to take your questions. (Operator Instructions) Keith, we're ready for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Rick Repetto with Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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First, I want to congratulate you on adding Fred Tomczyk to the Board. He's got a lot of experience in the retail industry and a great -- a good leader.

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [3]

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Thanks, Rich.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [4]

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Anyway. So my question, I guess, so that one will be broad. On the new research and data platform, it seems like you're going to dedicate some resources there, and of course, you've heard the LSE Refinitiv deal. I guess the question is, are you able to compete on the -- on from a market data standpoint with a larger platform that sort of aggregates market data across a number of content providers? And how important is sort of the market data initiative? I guess is this going to be where we see more focus on it from exchanges going forward? This is just the beginning of a trend that's already been going on for several years?

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Christopher Andrew Isaacson, Cboe Global Markets, Inc. - Executive VP & COO [5]

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Yes. Rich, this is Chris. We just -- the new data and analytics platform that we're going to be focused on post the C1 migration, it's just the recognition that we have been very focused on the trading platform for the last 2.5 years. And now we will have the time and resources to invest in research and data platform, but primarily be focused on helping us launch new products and better understand our current markets and our current customers in a much more data-driven way than we do today.

As you know, we've made investments both in raw data, the market -- real-time market data and new products we brought out across our exchanges as well as derived data with offerings like Livevol. But this is us going to really invest more into a data platform to make that data available first internally to all the business units to make better data-driven decisions and then ultimately, enhance our derived data offerings for those across the street -- for those -- of our customers, both existing as well as new customers that we may not touch directly today.

So this is still in the early phases. As Ed mentioned in his comments, this is really in the concept phase and now we'll get into design and build post-C1. But we're quite excited about it.

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [6]

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Rich, think of, as you've asked us and you've asked Debbie to help you understand the size and the potential of the market out there, knowing our customer and any more transparency we can have into their strategy's use case penetration globally, that's really what we're after. So it's a little different effort for us. We have such a unique product set, and we've always told you and tried to describe to all of you how these contracts are used interchangeably when one contract is used over the other. All of that transparency helps us pinpoint the direction of our sales effort going forward. So it's all the things and the metrics that you've been looking for over the years. We're going to get better at that. And that is what we're out to accomplish with our new effort.

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John F. Deters, Cboe Global Markets, Inc. - Executive VP, Chief Strategy Officer & Head of Multi-Asset Solutions [7]

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Rich, this is John. I'll follow up on Chris and Ed's comments just with a strategic perspective. You mentioned the LSE deal. A great deal, bold deal. A lot of diverse data there. That will make sense, given the footprint, LSE's existing footprint in data services. We're a different kind of company. We're interested in data, but we're interested in data that relates directly to our markets either as inputs or outputs so that it has relevance to our existing customer base. And that will continue to be our focus. We're market operators and the data that we provide to the marketplace relates to those markets.

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Operator [8]

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And the next question comes from Alex Kramm with UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [9]

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I would love for you guys to flesh out your Closing Cross announcement in Europe a little bit more. I have to admit, I'm not as familiar with the lay of the land over there. So obviously, what are the incumbents doing in terms of pricing and economics they're getting, what exactly are you planning here?

And then, what's the lay of the land in terms of brokers already offering something like this over there, which in the U.S. exists. I don't think it's as big in Europe. I think there's another exchange that has an offering already out there. So I know it's a long question, but I think you know what I'm getting at. Just give us -- what are you thinking about your -- how are you going to undercut pricing, et cetera?

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Christopher Andrew Isaacson, Cboe Global Markets, Inc. - Executive VP & COO [10]

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Alex, this is Chris. I'll take this one as well. So we're quite excited about this. I mean this is really a parallel effort we've been going on in the U.S. with our Cboe Market Close. But Cboe Closing Cross in Europe is, we think, a very good opportunity for us, given the, as we shared in the slides, the percentage of volumes going off of the close in Europe in the high-teens. They're actually 20% now.

So there likely are offerings already off exchange, and we're not sure exactly all of the offerings. And there are some from competitors. But we think we're quite excited about this one, what we're doing, because it's very simple. It involves an at-limit order type. Firms enter the prices at which they want to execute and all the details of how that will operate, we announced yesterday.

And this really just as a recognition of our customers coming to us in typical fashion which we operate. They view this as a problem as prices around executions at the close are going up. The domestic or home exchanges are charging more for that monopoly event. And so we think we can compete in this area with a very elegant and simple solution that we launched on August 16.

There will likely be other competitive solutions. That's okay. We embrace competition here, but we think the elegance of our solution as well as our incredible network of trading 18 markets in Europe as well as the massive amount of customer connections will make the uptake of this pretty strong from the start.

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [11]

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But our motivation, really simply, as we've said in the prepared remarks, the Cboe market close in the U.S., this is really where CCC was born. It was customer demand to have an alternative. Plain and simple. So when the SEC -- hopefully, when the SEC ultimately approves our U.S. version, we'll be off -- in all of our venues offering an alternative to the existing. So looking forward to it.

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John F. Deters, Cboe Global Markets, Inc. - Executive VP, Chief Strategy Officer & Head of Multi-Asset Solutions [12]

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So one more point on Europe as well. I think it's important to understand, brokers are restricted by MiFID II from crossing on their own books. And so this is an offering that is being requested by our customers and we think it will have pretty immediate relevance.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [13]

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And then no -- sorry, no color yet on kind of like fees or how much relative to the core markets the fees are going to be or how much your revenue captures maybe are going to be different in the auctions versus your -- during the market time?

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Christopher Andrew Isaacson, Cboe Global Markets, Inc. - Executive VP & COO [14]

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Yes. This is Chris. So we said in the announcement that we plan that for it be free of charge till the end of the year, and then we'll reevaluate from there. We think we expect some uptake, but we want to make sure we facilitate that with the right pricing to start.

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Operator [15]

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And the next question comes from Ken Worthington with JPMorgan.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [16]

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You've been highlighting your pursuit of a big deal for at least the last 6 months and you've given us updates on whether it's live or not. So I guess part one is, do you still have a live deal? And more broadly, may be given LSE Refinitiv, how are you thinking about the need of size and scale? So exchange consolidation continues, they're getting bigger. They're getting more efficient. They're broadening their footprints. How important is size and scale today versus a couple of years ago? And where does M&A stand as a Cboe priority today versus where M&A maybe stood a few years ago?

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [17]

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So let me kind of -- I don't want to correct you, but I don't think we've guided on large deals. I think what we've been referring to is we are always looking at things and ways to touch our customers earlier in their trade process or later in their trade process. And tuck-in or bolt-on deals are always important to us, that's a build versus buy.

Broadly speaking, when we talked about M&A over the last quarters, it was responding to questions as has Cboe's view on M&A changed? And we said, well, in light of the completion of a systems migration and full integration of Bats, our Board, our balance sheet are in a different position to be still same outlook, very choosy in looking at any global deal, not needing to engage like perhaps all of our other competitors.

Our growth, still best potential is our organic growth story, our penetration in the U.S. market and existing products and the globalization of these incredible benchmarks and breadth for any exposure to the U.S. So that remains our #1 focus.

We do look at larger-scale M&A, but it was with a much more on a -- presume anybody else has not a disciplined approach, but we just don't need to engage in large-scale M&A. So we're really, really choosy.

But John, specific to Refinitiv, you gave a couple opening comments on that. And then, we'll come back to scale and answer that question.

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John F. Deters, Cboe Global Markets, Inc. - Executive VP, Chief Strategy Officer & Head of Multi-Asset Solutions [18]

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Yes. Ken, thanks for the question. So this is John. I think in terms of scale with respect to our business, you've seen the quarter, the expense discipline, the performance with a very clearly defined business plan and a very tightly controlled organization expense-wise. I don't think a scale really is necessary in that context. It's -- I hear it referred to often as an enabler of the next big deal. And that just becomes really a kind of self-perpetuating cycle where you get scale so you can do the next big deal. And potentially, lose focus on really what it is you do well at your core.

The compensation and benefits line that Brian talked about and how that may vary with our performance, you can't have that kind of performance-based culture and alignment unless you have a very, very clear vision of what your business is about. And so that's incredibly important to us and it'll continue to be important us. Again, the LSE deal, from our perspective, makes a lot of sense for them. We're happy to see them continue to strengthen their business because we're partners with them on many levels. CurveGlobal, FTSE Russell, even in Europe where we utilize their clearing facilities, but we've got a different approach.

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Operator [19]

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And the next question comes from Michael Carrier of Bank of America Merrill Lynch.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [20]

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Maybe just given the Vest impairment in multiple, like passing current investments and growth initiatives that you guys have in place, can you maybe just provide like an update on some of the key like investments and initiatives? Maybe which are seeing good traction? Which are maybe playing out less than expected and just how you track some of those new initiatives and investments over time?

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [21]

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Do you want to start with Vest?

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [22]

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Well, you probably didn't with Vest, but I -- directly related, I mean some of these that we've kind of highlighted, Vest was a little bit of a -- the effort that we talked about, and I'll let John talk about this more, was, say, a little bit more of a stand outside and fully integrated Cboe.

The couple that we've -- the smaller ones that we've done more recent with respect to Silexx and with Livevol, we're seeing the fruits of that actually showing up in, I've mentioned it now for the last couple of calls, you see the increases in our market data. You're seeing some of the increases are, although bulk of these are more of the capacity and access fees with Silexx and some of the things we're doing there and everything else. But that is integrated in our business.

So there isn't really a separate, call it, segment that I'm tracking that separately. And so it's literally embedded, integrated within the operating segments. Such that it would be hard for me if you pressed me and say, well, tell me exactly what was the financials on Livevol only or on Silexx only. So those are 2 instances where it's literally embedded and we're very pleased with the ROI on those to the extent that we could measure because they have been fully integrated. And we're seeing that incremental revenue showing up in our financials right now.

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Christopher Andrew Isaacson, Cboe Global Markets, Inc. - Executive VP & COO [23]

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And Michael, further to Brian's point, we're quite excited, for instance, about Silexx purchased in late 2017. As we're going through this massive integration process and finishing it up with Bats technology, we're also integrating Livevol and Silexx. And Silexx will be the avenue through which people will trade FLEX options. FLEX options have seen a very nice uptick in the first half of this year. And that will go along with the platform migration in October. So we're fully integrating these smaller acquisitions as we integrate the larger ones for 1 cohesive strategy of organic growth.

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John F. Deters, Cboe Global Markets, Inc. - Executive VP, Chief Strategy Officer & Head of Multi-Asset Solutions [24]

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And this is John. I'll follow up one more point on Vest, just to sort of put that in perspective. So that investment really was meant to catalyze the development of a new segment in the fund industry within options -- with options-based strategies. We saw this trend was just emerging, and we wanted to apply our product development expertise to catalyze the growth of that business.

We've done that. The products have been defined and now we're on to a phase where really distribution is the critical next step. We're not equipped to do that. We obviously have a different business model. Others are -- and so we'll look to rationalize the partners who are in the business.

That's a very different type of approach than what Brian and Chris talked about with Silexx and Livevol, where those acquisitions were -- they're full acquisitions. Completely integrated, thoroughly complementary with the rest of our business and it enables our proprietary product suite and trading capabilities.

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Operator [25]

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And the next question comes from Kyle Voigt with KBW.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [26]

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Maybe just on the Mini-SPX contract. Maybe it's just completely unrelated, but it looks like the growth in XSP really coincided with CME's S&P Micro futures launch. Do you think there's some benefit that you're seeing from that product launch? And if so, if you can just kind of further describe the kind of relationship between the futures and options products?

And then maybe just a little bit on the fee capture that you're seeing from that XSP in the risk-adjusted fee capture?

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [27]

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Sure. That's a great question. And we've always -- we appreciate any visibility, any more exposure of any S&P 500 products. We love to take our share when we talk about Futures at CME.

So yes, there's been an incredible amount of attention on their Micro. And while we've had XSP out in the marketplace for years, really if you can just imagine us continuing to pound the table on the utility and use cases for the S&P 500 and primarily it's been SPX.

But what it has left short and what left wanting are investors who love the benefits of cash-settled options, European exercise. And for many, the ability to take advantage of a 60-40 long versus short-term tax rate, this is the answer. So if you're looking at the SPX with that huge notional value of that contract, think 1/10 and these contracts and the trades that we've been seeing go up in XSP would be odd-lots in SPX.

So imagine strategies where 1,340 X-line and 580 Y-line, you can't do that in SPX. You'd be in fractions of contracts. This is extremely user-friendly when that granularity and notional value is needed. So coinciding with the visibility of a Micro, fantastic. All of the benefits of our SPX and the small notional contract, that's what we're out there sharing with our investors.

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Christopher Andrew Isaacson, Cboe Global Markets, Inc. - Executive VP & COO [28]

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And so on the RPC, the guidance I'll kind of give you and it's all we've done is help to make your job to figure out what the RPC is going to be on a quarterly basis going forward a little bit more challenging.

Previously, we obviously dealt with, as we looked at the RPC for the index options, obviously it's going to be influenced by the mix of the SPX and the VIX options contracts and that's always going to be a -- going to impact the overall average when you see our quarterly number. What we throw in with our Mini contract here while Ed mentioned the 1/10 of size, the pricing of that is actually -- it's not proportional. It's actually greater than 1/10 if you just kind of did a pro-rata adjustment, it's greater than that.

So even if they were, we don't believe that's the case. Ed talked about the incremental usage of it to be able to -- for the increased utilization. It's not really cannibalization. And even if it were, if you get hung up on that, earnings got hung up on that, the incremental pricing is actually more favorable on a total-transaction basis, broadly speaking. But it will have a -- it will look on a pure RPC basis, slightly lower just because of the size.

So that's kind of the context to think about it. Again, so it's going to influence the overall kind of averages. But again, because we haven't really dug in too much of providing explicit guidance on a contract-by-contract basis, other than kind of what we've listed as far as our overall filing fees.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [29]

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Maybe around $0.10 a contract or higher?

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Deborah L. Koopman, Cboe Global Markets, Inc. - VP of IR [30]

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Good try, Kyle.

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [31]

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That's a good question.

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [32]

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Kyle, that's good. Kyle, use the -- our displayed fee schedule is out there, multiply it by 10. And while there's going to be blends, difference in customer in the mix, you kind of understand our mix and how that bounces around. But that's the way to kind of look at it.

We're very transparent as we are in everything that we do. Fee schedule is out there, you understand the blend and the mix. It's going to change, there's ebb and a flow but it will give you some help in to seeing what we're doing in XSP.

But think, this is just a great appeal for those looking for smaller notional contracts. Strategies will probably not be unique to XSP. They're really just, think S&P 500 exposure in bite-sized contracts.

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Operator [33]

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And the next question comes from Chris Harris with Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [34]

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So you guys are affirming the expense guide for 2020. I guess at the midpoint that's implying nearly 4% growth. That seems -- it seems a little high given the synergies you still are expecting coming through that year. So maybe you can talk a little bit about why the expense growth is expected to be so high and maybe what kind of revenue assumptions are you building around that expectation?

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [35]

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Sure. And I think I'll start with kind of what's driving the -- where we expect to land, call it, in 2019. And whilst the results of kind of the -- the expenses that we're seeing there, we're not really -- it's not like we're putting our employees under the hammer and then say, oh my gosh, you have to do X, Y and Z. And you can't travel, you can't do this. It's really driven by, as we've continued to highlight, the -- as we tie our incentive comp to our top line results.

So to put that into context, so in a growth year and we've seen that relative to '18, that incentive comp is less than what it was last year. So you're seeing a, I'll call it a lower run rate of 2019, given kind of where we originally said. So we're coming off a lower base.

And so as you think about, let's say, cash burn, how in the world are you going to actually ramp that up from where you expect to land 2019 up to 2020 is -- so if you look at the context, yes, we're going to have -- Debbie put together a pretty detailed schedule of the synergy expectations, laying them out for 2019 and then for 2020, given the C1 migration and the synergy impact is really primarily going to happen in 2020.

So if you currently call that roughly $20 million. And you'd say, well, I'm going to normalize some of my incentive comp back to my revenue expectations for 2020, which I'm not going to give you explicitly, but let's just say we're obviously striving for growth. So if we say that $20 million benefit is going to then -- going to accrue in 2020, we are going to normalize back that incentive comp and that's going to offset a large piece of that $20 million as well as incremental investments that we fully expect to make that's going to show up on the OpEx line. And again, this might be a little bit of variability as we finalize the technology investments and the software development that we go through, how my much of that is going to capitalized versus how much it's going to flow through. So we obviously are continuously trying to balance that and get a handle on that.

And then we just have kind of a, call it, normalized OpEx. And if we roll that all together with, call it, a historical OpEx range of growth, of course in that 4% to 6% range, you very easily and very quickly get back to that midpoint range of the 2020 guidance of the $420 million to $428 million.

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Operator [36]

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And the next question comes from Alex Blostein with Goldman Sachs.

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Sheriq Sumar, Goldman Sachs Group Inc., Research Division - Business Analyst [37]

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This is Sheriq filling in for Alex. On the Chicago headquarters, can you help us understand the expense impact of this move to the new location in 2020? And what are your plans for using the proceeds from the sale?

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [38]

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So the -- so on the OpEx side of it, right now, the immediate impact is, it's not going to material. Obviously, there'll be a little bit of a -- you'll see a little bit of a shrinkage in the depreciation. As we highlighted, there will be a light, slightly smaller number. But kind of factor that into our overall guidance as that's something we thought would happen during the year.

So you won't see anything material in 2019. So think about 2020. As we transition into a potentially new location, the operating expenses should be slightly better to neutral in 2020.

Over time, as we actually expect this to be even more positive because there's a significant amount of deferred maintenance that we know will ultimately need to occur in the existing building that we're in, just given the age, given where we are. So it's somewhat of a cost avoidance next year down the line, I'll call it 2, 3, 4, 5 years. But the efficiency of the new space that we'll be going into with the lease rates and everything that we're kind of trying to finalize, we expect to be somewhat neutral.

So we do have -- do not expect to see an increase and actually over time, we actually expect to see a decrease. Again, not material in facilities, there's nothing else probably more flat and really through the minimization of a lot of deferred maintenance that we know this building will need and such, we've taken this approach.

Again, that's just from a pure P&L standpoint. I will tell you though that some of the spaces that we're looking at from a culturally, efficiency and everything that we're looking for, I think it's actually going to be quite exciting for our overall associate base as far as new space here in downtown Chicago area.

So for that point, we're very excited for our employees, for our clients and for our shareholders overall for that transition to happen and ultimately, we'll be very excited when we can make that announcement more public about specifically what we're doing.

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Sheriq Sumar, Goldman Sachs Group Inc., Research Division - Business Analyst [39]

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And any plan for the proceeds from the sale?

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [40]

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Thank you. So it's going to be relatively immaterial for the proceeds, but we were just -- we'll roll them in. It's not going to be something that you'll necessarily notice. That's like, oh my gosh, what are you going to do with the big chunk of cash. There will be cash, obviously, but we would just roll it into our, I would give you the same -- and I know you don't want me to launch into a '70s rock song ballad about the capital allocation of that -- of how we look at that. But we would basically just, again, roll that into our normal use of funds and it's all fungible as far as where we'll apply that capital allocation broadly.

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Operator [41]

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And the next question comes from Brian Bedell with Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [42]

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Maybe if you could dive into the retail strategy in U.S. Equities. Obviously, you've got Fred Tomczyk on the Board and a new hire in U.S. Equities. And then maybe tie that into your expectations for the MarketOnClose proposal. Whether you think the SEC may be closer to approving that, given that you're launching it in Europe? And kind of any sense of to what extent you think you can increase market share in U.S. Equities as a result of these efforts?

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [43]

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So let me start with market close. We -- each quarter, we're in front of you, we're hopeful that this is the quarter that we're going to share with you that the SEC is reaffirming the approval. We received cash about a year ago.

So we're still hopeful and from -- Chris Isaacson and the operational team is ready to go. And our customers, as I spend time with them, that is one of the first questions is, when do I get to use Cboe's Market Close? So the demand is still there. The readiness is there. It is amazing when we look at the approval process on our 3C approach in Europe versus the extended approval process here in the U.S. But nonetheless, we're still optimistic and ready.

So as far as the share, Chris will get into some detail. But remember, on the last call, we said there is a balance always between our capture and our share, and we set out to affect that balance in a positive way on share. We've executed on that plan of late. But Chris, I think you can give some more color.

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Christopher Andrew Isaacson, Cboe Global Markets, Inc. - Executive VP & COO [44]

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Yes. Just as we said on last call, we had -- our capture was higher than we expected while our market share was lower than we expected on the last call. And so we said we're going to reinvest some of that capture raised market share and Bryan Harkins and his team have done exactly that. Market share, as you saw on the slides is, for July, it was little over 17%.

And we're eagerly awaiting the approval of retail priority on EDGX as well, getting ready to -- for approval and the customer readiness hope to launch that very soon, which we hope will grow our market share even further as we don't just add economic incentives, but actually execution priority incentives for retail customers to put their order flow there.

Another thing we're doing overall to hopefully improve market share in our equities market has a new lead market maker program that we rolled out actually just yesterday to try to attract more ETP listings, especially large transfers. We're very excited about that.

And so it's a full-court press. It's a very competitive business in U.S. Equities, which we're fully committed to. And we're going to try a lot of things as we are always balancing net capture as well as market share, but we like the trajectory we're on.

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [45]

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And thanks for recognizing the addition of Adam and Fred. So that's -- the way we approach this talent does go all the way up to the Board. We have an incredibly engaged Board. And you are right. Adding Fred Tomczyk and having the Board have the perspective of a dynamic leader who's very familiar with the retail space will be helpful as we lay out our plans going forward. Thank you.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [46]

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And it sounds like with your initiative, you're able to potentially grow that share with less of a revenue capture decline. And if you can -- I know there's always a balance but is it fair to think that you might be able to achieve that?

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [47]

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It's always a balance, Brian, but we -- our goal is to obviously grow revenues over the long term -- on net revenues over the long term. Some of that has to do with providing better functionality that will increase execution quality for our customers.

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Operator [48]

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And next we have a follow-up from Alex Kramm with UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [49]

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Just want to rattle off a couple of follow-up if that's okay. One, regular fees has been running a lot higher this year and as though I don't know if you've talked about this but can you just -- is this a good run rate, I think $9.4 million or something and why is this higher? And then, since you just talked about the equities market share gain, I'll try as well on that one, on the revenue capture. I mean any sort of help you can provide from what you're seeing so far in July? You obviously left that bar chart very empty on that slide.

And I have another follow-up, but go ahead on those 2 first.

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [50]

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Give us them all, Alex, because we're out of bounds anyway. So what's the third?

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [51]

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No. First, it's not a quick one. I just wanted to, since you obviously launched new sales effort on the co-options business or proprietary product business with some key hires a few months ago, just wondering, if there could -- if you have any update in terms of something that you're seeing already moving in a -- as a direction or even how you would be measuring success of some of those key hires, making an impact, I guess, with new client gains, et cetera.

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [52]

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Cool. I will take the last. Why don't we start with regulatory fees and equity rev capture as much as we can?

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Brian Norman Schell, Cboe Global Markets, Inc. - Executive VP, CFO & Treasurer [53]

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Sure. So again, I assume that you're looking on it at kind of a net basis versus -- and then obviously taking up Section 31, which obviously is influenced by the rate the SEC sets. So on the regulatory fee, I think if you look at it year-over-year, yes, it's an increase, but that sometimes is influenced by fines. Sometimes it's influenced by a number of things that obviously is not anything you can run rate project. But if you look at it sequentially versus the first quarter, it's actually down.

So I didn't -- don't look at that anything more than noise which is one of the reasons why we didn't highlight it. And again, the -- on the option side, it may have been a little bit higher as we continue to -- some of the expenses that we are working through, somewhat related to the migration as well on our reg side with the OR fees. There are slightly higher expenses as we ramp up with some of the expenses as we deliver some of that, which correspondingly will be expected to send the decline going forward, which you'd see as declining expense also on our own income statement that the clients would get the benefit of us well. So I wouldn't read too much into that as far as the run rate goes, given the variability to it.

On the revenue capture and equities, we intentionally didn't include that for July only because the data was incomplete, and we just hadn't finalized that and we hadn't gone through our QA just to make sure it was there. So we just didn't want to put out a number too prematurely. It wasn't -- we weren't really trying to hide it. We just -- we have a cycle and a cadence of releasing that. So we just didn't issue that so we will be issuing that guide through our normal process. So...

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Edward T. Tilly, Cboe Global Markets, Inc. - Chairman, President & CEO [54]

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So then if you think about the global client services team in a way what we've outlined for you on the last call, it really is taking -- someone looking at the market. Imagine yesterday, right, it was a 60-point move in the S&P 500. You've got a confused or a scrunchy-faced user investor looking at that move in the market and saying, how do I derisk the situation that I find myself in? We need a sales team who is completely armed and looking at our user team across the globe and different segments and customer use case.

That's what we're gearing up for. We're about, I would say, 40% of the way on the new hire and appreciating those that have -- of our client services team that have brought us to where we are today, who've done an incredible job getting us to today. But tomorrow, the sophistication of the use cases, the change in the market is so fast, so violent, and we are the go-to exchange when those market events happen.

Yesterday is a perfect example. We had 30 days leading up to an announcement that everyone knew. We had low, almost 5-year lows in VVIX. The increase in large block calls in VIX, those were all on the uptake. We need a team out there that can articulate a wise and the history of what happens when we see large moves.

So that's the goal. So about 40% there on the hires, and we can't wait to keep you up-to-date.

And then of course, the new data and analytics platform, really getting to know those customers better is the goal for everything we're building for the organic growth story. We can't wait to tell you more.

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Operator [55]

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And as there are no more questions, I would like to turn the floor to management for any closing comments.

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Deborah L. Koopman, Cboe Global Markets, Inc. - VP of IR [56]

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Thank you. This completes our call this morning. We appreciate your time and continued interest in Cboe Global Markets. Thank you.

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Operator [57]

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