Cboe Global Markets, Inc.

Hello. Welcome to the CBOE Global Markets 2020 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. And now we'd like to talk to our rich Debbie Coopman. Ms. Coopman, please go ahead.

Thank you. Good morning, and thank you for joining us for our second quarter earnings conference call. On the call today, Ed Tilley, our chairman, president, and CEO will discuss the quarter and provide an update on our strategic initiatives. Then Brian Shale, our executive vice president and CFO, will provide an overview of our financial results and provide updated 2020 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 Dieters. In addition, 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 the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise after this conference call. During the course of 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 Ed.

Thank you, Debbie. Good morning, and thank you for joining us this morning. Before I begin, I would like to extend my sincere best wishes for the ongoing health and well-being of each of you and your loved ones as we continue to navigate these challenging times. I'm pleased to report solid financial results for the second quarter of 2020 at SIBO Global Market, clearly highlighting the strength of the diversification of our revenues. Our strong results were driven by record trading volumes in U.S. cash equities and multi-listed options, fueled by growth in retail trading activity and by continued growth in market data revenues. You'll note I did not mention our proprietary products. I will cover those in a moment. But I want to pause here to quote a 2016 press release entitled, SIBO Holdings agrees to acquire BATS Global Markets to strengthen the company's global position in innovative tradable products and services and achieve meaningful cost and operational efficiencies. We went on to say in that release that the BATS transaction will significantly expand CBOE Holdings' product line across asset classes, broaden its geographic reach with BATS' strong pan-European equities and global FX positions, and diversify its business mix with significant non-transactional revenue. And that CBOE expects to utilize BATS' leading proprietary trading technology by migrating trading in all of the combined company's markets, onto a single proven platform." This brief trip down memory lane will frame today's remarks because no quarter more emphatically illustrates the fruits of a strategy that began four years ago than the second quarter of 2020, both in terms of our near-term financial results and in enhancing our long-term franchise value. Our proprietary products are key to that strategy, but we have built upon them and created new revenue streams to grow in tandem with them. Our growth strategy has not changed since the close of our transformational deal. Expand our product line across asset classes, broaden our geographic reach, diversify our business mix with recurring revenue, and leverage our technology advantage. Let's take a look at the quarter through the lens of those growth drivers. The BATS acquisition enabled us to strengthen our product set with new asset classes for SIBO, including US and European equities and global FX, and to expand our market for multi-listed options. Our expanded product line left us well positioned to offset unique challenges to trading in our proprietary products in a truly unprecedented environment with record activity in US cash equities and equity options. Furthermore, These products provided the foundation to invest in scaling our proprietary market data to drive recurring revenue streams, extend our presence further across the value chain into equities clearing, and broaden the reach of our core services into a new adjacent geography, examples of investments made just this year to date. As discussed on previous calls, We've continued to methodically strengthen equities trading at SIBO through the implementation of new trading mechanisms and market enhancements, and by leveraging the ability to cross-sell and competitively price our expanded offering. We saw those efforts pay off in the second quarter when U.S. equities trading at SIBO increased 82% over the previous year for an all-time quarterly average daily volume high of 2 billion shares traded. Continued uptake in our retail priority program help drive the record results. You'll recall we created Retail Priority to help improve execution quality and trading outcomes for individual investors and firms that facilitate their orders. Retail Priority orders have increased each month since their launch on SIBO EdgeX in November of 2019 and represented 12% of shares executed on SIBO EdgeX in the last two months. In another example of our focus on equity product innovation, We recently filed a proposal with the SEC to launch periodic auctions on our BYX exchange, similar to our SIBO Europe offering. SIBO Europe Periodic Auctions, a lit order book that runs auctions throughout the day, is designed to enable investors to quickly find liquidity and trade large quantities of stock with low market impact. It has proved popular among market participants after launching in 2015 and remains the leading European periodic auction, accounting for around 2% of daily order book trading in European equities. We believe the U.S. market will also value executing trades in a venue designed to provide minimal market impact. Turning now to record trading and equity options. As you know, multi-listed options trading became highly competitive over the past decade in a market that became increasingly crowded with new entrants. We remained committed to being a leader in the space through the operating leverage inherent in our business model, as equity options trading represented both incremental volume and revenue, complementing our proprietary product line. With that backdrop, it was something of a revelation when we were kicking the tires at BATS and saw the enviable profitability they achieved in equity options by leveraging the efficiencies of their superior technology. The addition of EdgeX and VZX options to SIBO and C2 meant we could not only compete with a broader array of market models, but that we could offer all four markets on the same advanced technology, further expanding our profit margin. This operating leverage provides differentiated investment capacity and the flexibility to further capitalize on the opportunities inherent in each of our strategic growth drivers. In addition to expanding our product line by asset class, we continue to expand and leverage our global footprint. As you know, we closed our acquisition of EuroCCP on July 1st, which enhances our European equities offering and enables us to extend our business into trading and clearing European derivatives. We plan to launch SIBO Europe derivatives in the first half of 2021 with futures and options on six key European equity indices. The development of derivatives products and markets is a sweet spot for us. and we see a significant opportunity to expand the market for European equities derivatives through the introduction of a transparent, efficient, lit pan-European market. Our entire team is excited to bring our derivatives expertise to the European marketplace. We also announced our plans in Q2 to acquire MatchNow, Canada's largest alternative trading system, which will enable us to broaden our North American equities business and expand our geographic reach. MatchNow offers a profitable, innovative equities platform in a key capital market and a strategic pathway to build a more comprehensive equities platform in Canada. As I discussed earlier, this step into Canada demonstrates our commitment to profitable global expansion, thereby strengthening our combined offering, contributing to incremental scale, and allowing us to reach important new participants. We expect to close the deal this quarter. Another promise we made to the marketplace through our acquisition of BATS was to optimize and diversify our business mix with recurring revenue through trading tools and market data services that help attract repeat users to our markets. We've worked to steadily increase the market data revenues afforded us by the BATS deal while successfully building out SIBO information solutions, our comprehensive suite of data solutions, analytics, and indices. so much so that non-transactional related services were a key driver of our second quarter revenue growth. Understanding risk has never been more important, and the groundwork we laid over the past few years enabled us to effectively respond to the heightened demand for historical data sets and sophisticated analytics. And we continue to expand our toolbox. Last quarter, we discussed our recent acquisitions of Hanwick and FT Options, which, similar to our previous Silas Silex investment, highlight our commitment to investing in tools to grow the utility of our product suite and markets. In June, we acquired TradeAlert, a real-time alerts and order flow analysis service provider, which allows us to deliver real-time trade data, market information, and Siebel content directly to customers. Importantly, our integration of TradeAlert along with Hanwick and FT Options now allows us to interact with the client throughout the life cycle of a transaction. pre-trade, at-trade, post-trade, with insights, alpha opportunities, portfolio optimizations, and seamless workflows. Each of these investments complements and strengthens our comprehensive suite of data and analytic solutions, and we've made great strides on their integration and optimization. We have enhanced LIVAL and SILAX with Hanwick Volatility and Greek Data and have seen increased demand for TradeAlert, especially since our acquisition. We're also incorporating Hanwick data within our growing indices offering and plan to use Hanwick to drive real-time data and Silex beginning this quarter. Turning now to our proprietary products. As noted, we grew our quarterly revenues and earnings despite an unprecedented environment that offered institutions limited opportunity to trade volatility or broad-based indexes. The COVID-19 pandemic continues to severely impact the global marketplace. The failure thus far to contain the virus in the U.S., recent increases in unemployment, and historic declines in GDP, among other key events, continue to drive elevated levels of market uncertainty. The average daily closing price of the VIX index in 2Q 2020 was 34.5, a higher quarterly value than any quarter over the past five years and levels not observed since the 2008 financial crisis. We are finding that the increased levels of uncertainty that drove institutional investors to de-risk and resulted in record volumes in the first quarter are now keeping institutional investors on the sidelines, waiting for more clarity around the longer-term impacts of the COVID-19 virus. This resulted in lower second quarter volumes for most of our proprietary products compared to the first quarter numbers. As we've said before, when these participants have clear views on where the market is headed, we expect, once again, to see elevated volumes. We continue to see uptake, however, in our SIBO IBOX iShares high-yield corporate bond index futures, where we've seen gradual but steady market adoption since their launch in 2018. In response to investor demand, we recently announced our planned launch of mini-VIX futures on August 10th, subject to regulatory review. The smaller VIX Futures contract is designed to provide additional flexibility in volatility risk management and greater precision when allocating among smaller managed accounts. IBOX and many VIX Futures exemplify our ability to continue to expand our proprietary product offering. In other proprietary product news, SIBO further strengthened its strategic relationship with FTSE Russell by extending its 2015 Exclusive Licensing Agreement through 2030. We are excited to continue to work side by side with FTSE Russell in providing exclusive access to a suite of Russell-derived products. The extension of our agreement further solidifies CBOE's vantage point as the home for every major index provider. Turning now to the trading floor. On June 15th, we successfully and safely reopened the C1 trading floor and resumed hybrid trading. The return to CBOE's best-in-class hybrid trading once again provides investors unparalleled access to liquidity across the wide range of CBO products. Our ability to quickly transition to an all electronic trading environment, then to reconfigure our floor for a safe and orderly reopening is a credit to the ongoing collaboration with our trading floor community. I would like to thank them for their efforts and willingness to work with us through these two historic firsts. I would also like to thank the entire CBO team for a great quarter. despite a backdrop of global pandemic that continued to proliferate alongside a historic uprising against racial injustice. The spotlight on racial inequity, past and present, has prompted us as a team to listen, reflect, and define how SIBO can play a greater role in the solution by supporting organizations that fight for social justice and by redoubling our efforts internally to strengthen our culture of diversity and inclusivity. Our continued ability to generate positive financial results, reward shareholders, create new products and services, close highly strategic deals, and integrate new teams and services, all with an environment that we could never have imagined, is a testimony to the expertise, discipline, and competitive spirit of the CBOE team. Our disciplined approach and technology advantage have enabled us to expand and enhance our products and services which include additional streaks of complementary recurring revenue, reinforce our leading industry operating efficiency, and provide the flexibility to invest organically and inorganically in new growth factors to sustain underlying momentum in the business. Thank you. And with that, I will turn it over to Brian.