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Operator
Conference Host
Good morning and welcome to the SIBO Global Markets 2019 Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please sit in your conference special and start pressing the star key, followed by zero, on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To try a question, please press star, then two. Please note, this event is being recorded. I now would like to turn the conference over to Debbie Koopman. Please go ahead, ma'am.
Debbie Koopman
Director of Investor Relations
Thank you, Keith. Good morning, and thank you for joining us for our third 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 Schell, our executive vice president and CFO, will provide an overview of our third quarter 2019 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, Keith Isaacson, and our Chief Strategy Officer, John Dieters. In addition, I'd 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'll 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 Tilley.
Ed Tilley
Chairman, President, and CEO
Thank you, Debbie. Good morning, and thank you for joining us today. I'm pleased to report on financial results for the third quarter 2019 at CBOE Global Markets. where we continue to focus on executing our strategic initiatives to drive long-term growth, including the migration of SIBO Options Exchange to our proprietary technology. That migration, which marked the final step on our company's multi-exchange technology integration, was completed on October 7th. The successful completion of the integration provides our customers with a single, world-class trading experience across our markets, enhancing our value proposition for customers and shareholders alike. This major step forward also enables us to redirect our technology efforts toward accelerating our organic growth as we pivot from integration to building new technologies, including the development of a state of the art research and data platform and enhancing the global distribution of our products. We're grateful to our customers for their loyalty and assistance. I thank them for working with us throughout this major effort. In return, we are committed to continually upgrading our technology to meet their evolving needs and to provide them with unparalleled service. With that, I will turn to our overview of the trading and volatility landscape with an update on strategic growth initiatives to increase trading in our proprietary products. Equity markets remained strong and volatile in the third quarter as ongoing global growth concerns continued. The Federal Reserve responded with rate cuts in July, September, and earlier this week, but in each instance remained noncommittal regarding further easing going forward. We believe this uncertainty, combined with a lack of concrete plans to resolve the U.S.-China trade war, continued to drive hedging activity. Index options and futures volume at ZBO climbed higher in the third quarter. Index options volume rose 13% year-over-year, led by a 23% increase in VIX options trading and a 6% increase in SPX options. SPX Flex open interest also hit a new all-time record high of more than 925,000 contracts. SIBO created flex options to provide investors with a customizable way to manage risk and a centrally cleared alternative to the OTC market. Options-based strategies used by mutual funds and ETFs continue to be a key growth driver. According to Morningstar data, assets under management tied to options-based strategies hit a record $22 billion at the end of August, an increase of 24% this year, and is on track for one of the biggest advances of the past decade. Looking ahead in index options trading, we responded to customer demand by adding Monday expiring options to XSP, our mini SBX contract, which provides our customers with a smaller notional contract able to address their more granular risk management needs. In addition, we listed October 20th and November 20th Friday SBX options expirations, providing greater precision around options positioning going into the 2020 presidential election. Open interest grew to over 30,000 contracts in just the first four weeks of trading. Turning now to 3Q19 VIX futures volume, which increased 19% year-over-year, primarily driven by robust volumes in August and continued growth in the Volatively Linked ETP complex. Volatively Linked ETP, AORM, reached $4.8 billion in early October, its highest level since January 2018. and continues to be driven by growth in both long and levered long funds. Long and levered long AUM represented over 90% of total AUM versus its previous high of just under 40% in January 2018. Education and client outreach is key to increasing trading in and expanding the customer base for all of our proprietary products. In September, we hosted our eighth annual European Risk Management Conference held this year in Munich. The event drew a near record number of participants from 16 countries to explore the latest in derivative strategy and risk management. Industry experts delivered over 20 different presentations with themes ranging from how changes in margin and capital requirements will affect portfolios to how institutional investors use option strategies to manage risk. Organic growth remains our primary focus. we continue to evolve our sales and coverage teams, including adding top industry talent to better address our clients' needs and deliver best-in-class risk management solutions. Now turning to European equities. As announced this morning, Mark Hemsley, President of SIBO Europe, is expected to retire at the end of February 2020 after 11 successful years at the company. Mark's many contributions include positioning SIBO Europe for future success by establishing a strong team of trading, technology, and capital markets experts. While Mark remains at SIBO for several more months, I would like to take this opportunity to offer my sincere thanks for his outstanding leadership, deep industry expertise, and valued counsel. Dave Howzen, currently COO of SIBO Europe, is expected to succeed Mark Since joining the company in 2013, Dave has worked closely with Mark to shape and drive our Europe strategy and has been the driving force behind many of our successful product launches and technology initiatives. Dave's appointment is part of a long-established succession plan, and he has the full support of the CBOE Global Markets Board and management team. In other SIBO Europe developments, we recently launched our Netherlands-based trade reporting facility and trading venue to provide customers with an EU venue to conduct equities trading and trade reporting activities for European economic area stocks. Our fully operational Dutch venue enables us to continue to service our pan-European customer base should future political and regulatory developments hamper cross-border equity trading, while also positioning us to further expand our business. While overall European equities volume remained light in the third quarter, closing auction volume continued to rise in Europe. In response, this past August, we launched SIBO Closing Cross, which we designed to bring needed competition to the post-closed trading session. The new service is intended to provide a cost-effective, one-stop solution for customers looking to execute their post-trade trading activities across 17 European markets. In closing, I'd like to thank our team for the progress made throughout the third quarter and laying the foundation for our company's ongoing growth. Their ability to successfully conclude a massive technology integration and upgrade on time and with little to no disruption to our customers is to be commended. Our unique and expansive product set now trades on one world-class platform. With this foundation in place, we are redoubling our efforts to mine the considerable opportunities we see for continued organic growth at SIBO Global Markets. We will leverage our technology, an efficiently focused sales force, and a new initiative to revamp our educational efforts to expand our customer reach, to set new standards and training resources, and with our customers to define the marketplace of tomorrow. With that, I will now turn it over to Brian.
Brian Schell
Executive Vice President and CFO
Thanks, Ed, and good morning, everyone. Before I begin, I want to remind everyone that, unless specifically noted, my comments relate to third quarter 2019 as compared to third quarter 2018 and are based on our non-GAAP adjusted results. Overall, our net revenue was up 9%, with net transaction fees up 7%, and non-transaction revenue up 11%. Adjusted EBITDA rose 15%, with margin-increasing 380 basis points to nearly 71%. And finally, our adjusted diluted earnings per share increased 22% to $1.29. 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. A consistent theme for SIBO this year has been the growth of our recurring revenue stream of proprietary market data and access and capacity fees. Combined, they increased 6% in the quarter and 7% year-to-date compared to the same periods last year, in line with our expectations for mid to high single-digit growth in 2019. We continue to see opportunity across all of our asset classes and believe that the completion of our technology migration will provide additional revenue opportunity over the long term. As it relates to proprietary market data, about 75% of this growth this quarter was a result of incremental subscriptions, and nearly 85% 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 10% or $13 million increase in net revenue was primarily driven by growth in net transaction fees and market data fees, with non-transaction fees up 10%. Index options average daily volume, or ADV, was up 13% for the quarter, and revenue per contract, or RPC, was up 2%, with the latter reflecting a change in mix within our SPX products. In multi-list options, a 15% increase in ADV was offset by an 18% decline in RPC, reflecting higher volume-based rebates as our market share moved up over 200 basis points year-over-year and 130 basis points compared to second quarter 2019. driven by increased member order flow. Turn to futures. The 28% or $8 million increase in net revenue primarily resulted from a 17% increase in ADV and a 2% increase in RPC. 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. Futures revenue also included $2.7 million from incremental equity received as a result of an agreement with American Financial Exchange related to the launch of AFX Futures on CFE. This income was included in other revenue and is not expected to be a recurring item. Turn to U.S. equities. Net revenue was up 6% or $4 million, primarily due to higher SIPP market data revenue as a result of audit recoveries of a similar amount. This increase was offset somewhat by a decrease in net transaction fees resulting from a 23% decline in net capture on flat matched ADV. The net capture decline reflects fee changes implemented in the second quarter aimed at capturing additional market share. Market share for the third quarter increased to 17.2% from 15.7% in the second quarter of 2019 and was down just slightly from last year's third quarter. Net revenue for European equities decreased 7% on a U.S. dollar basis, reflecting the unfavorable impact of foreign currency translation and lower market volumes. On a local currency basis, net revenue was down only 2%, reflecting a 13% decrease in transaction fees, offset somewhat by a 16% increase in non-transaction revenue. The growth of non-transaction revenue reflects increases in access to capacity fees and other revenue, which includes licensing and trade reporting revenue. 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. We attribute a portion of the lower volumes and market share to the ongoing uncertainty around the timing and final outcome of Brexit and Swiss equivalency. Net revenue for global FX decreased 4% this quarter, reflecting a 12% decline in market volumes, offset somewhat by a 7% increase in net capture, primarily reflecting the impact of fee changes made in 2018. In addition, market share of 14.9% was down 70 basis points year over year. Turning to expenses. Total adjusted operating expenses were about $97 million for the quarter, down 3% versus last year's third quarter. The key expense variance was in compensation and benefits, primarily resulting from a decrease in incentive and equity-based compensation. The decline in incentive-based compensation is aligned with our year-to-date financial performance versus targeted performance. 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 $390 to $395 million, down $15 to $18 million from our previous guidance range. With respect to our 2020 expense guidance, we still expect a range of $420 to $428 million, which takes into account, among other things, achieving our targeted incentive compensation in 2020, the absence of approximately $6 million in favorable expense adjustments in 2019, transitioning to our new corporate headquarters in 2020, and moving our trading floor in 2021, which creates some short-term duplicative expenses. The benefit of synergies expected to be realized in 2020 from the C1 technology migration and the continuation of investing to support our organic growth initiatives, which Ed referenced earlier. We plan to finalize our 2020 expense guidance on the next earnings call once we have completed our 2020 business plan. including any potential negative P&L impact from the amount of software development expensed versus capitalized. With the final technology migration complete, we are reaffirming our run rate synergy target with a high degree of confidence. Chris Isaacson and his team concluded the technology migration in line with the updated plan established in May of 2018. We expect to exit 2019 with $80 million of run rate synergies and exit 2020 with $85 million. Note that the remaining $5 million of run rate synergies in 2020 will be reflected in a reduction in cost of revenues versus operating expenses. Turning to income taxes, our affected tax rate on adjusted earnings for the quarter was 24.1% below our prior guidance and lower than last year's third quarter rate of 26.4%. The tax rate decrease was primarily due to benefits related to tax reform and recognized upon the completion of our 2018 U.S. federal income tax return. We are adjusting our full year 2019 tax rate on adjusted earnings guidance to be in a range of 25.5% to 27.5% down from 27% to 29%. We are also adjusting our guidance for capital spending to $35 to $40 million, down from $50 to $55 million due to a shift in timing for leasehold improvements associated with our Chicago headquarters relocation. We now expect those dollars to move into 2020. Furthermore, we are reaffirming our guidance range for depreciation amortization of $35 to $40 million for 2019. Before I review our capital allocation activities, we discussed the potential sale of our headquarters building in our last earnings call. I'd like to note that the cash proceeds from the sale, the potential sale, is expected to be less than $30 million and are not likely to be received until sometime in 2021. Turning to capital allocation, we remain committed to a disciplined and consistent capital allocation strategy that includes reinvesting in our business, complementing our organic growth potential acquisitions, and providing steady distributions to our shareholders through increased dividends, and opportunistic share repurchases in order to maximize shareholder value. During the third quarter, we returned over $40 million to shareholders through dividends and $52 million through share repurchases. Furthermore, earlier this week, our board increased our share repurchase authorization by $250 million, including this new authorization and share repurchases of over $55 million in October, we had approximately $313 million of share repurchase authorization available at October 30, 2019. During the quarter, we also used $50 million reduced debt under our term loan agreement. Our debt now stands at $875 million, and we have $250 million in availability under our revolver if a short-term funding need arises. At quarter end, our leverage ratio stands at 1.1 times, down from 1.2 times at the end of the second quarter, and we ended the quarter with adjusted cash of $151 million. In summary, SIBO is executing on 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, leveraging our freed-up technology resources to focus on organic growth initiatives, disciplined expense management to leverage the scale of our business, 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 by returning capital shareholders through dividends and opportunistic share repurchases. With that, I will turn it over to Debbie for instructions on the Q&A portion of the call.
Debbie Koopman
Director of Investor Relations
At this point, I'd be happy to take your 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. Keith?
Operator
Conference Host
Yes, thank you. And again, to ask a question, just press star then one on your touch-tone phone. If you would like to withdraw your question, please press star then two. This time we will pause momentarily to assemble the roster. And the first question comes from Rich Rapetto with Sandler O'Neill.
Rich Rapetto
Sandler O'Neill
Yeah, good morning, Ed. Good morning, Brian. First, I want to give a shout-out to Mark. I know he's been a big contributor to the European success over a decade now, so we're going to miss him.
Ed Tilley
Chairman, President, and CEO
Thanks for that, Rich. Thank you.
Rich Rapetto
Sandler O'Neill
Next, I guess, Brian, on the expense guidance, you certainly outperformed this quarter. You lowered guidance for the year. When we run through the numbers and take a look at what the guidance for next year, the 420 to 428, compare it to the midpoint of, you know, this year. I mean, it still looks like an 8% increase at the midpoint. I mean, that's – and I would expect you'd still get some, what do you call it, carryover synergies. So could you walk us through how you're looking at, you know, where the expense increases, at least initially right now, that you got in those numbers?
Brian Schell
Executive Vice President and CFO
Rich, just to clarify, are you talking about for 2020? Yes. Yes. So as you look through the, if you think about the math of how we're kind of getting to, you know, that kind of that consistent kind of, range that we put out there for 2020. When we walk back through it, I kind of gave you a list of items that you need to factor in your calculus for 2020 is, and I'll walk through them just briefly again, is when you look at some of the items that we had a favorable impact of, you know, with a senior leadership departure, there were some, you know, some accounting adjustments there. I think we quantified that to six, $7 million previously. When I personally like to add back what I'm hoping to target to make on incentive compensation for the entire organization, that's another, you know, I'll quantify that, call it $10 to $15 million. That would just re-add right back onto the expense base rolling forward. When you look at the impact of And we've laid out a table, and thanks to Debbie Koopman of working with the finance team and helping the analysts and the investment community understand, laying that table out today, fully understand the timing and how those expense synergies hit our income statement, is we're looking for all around here roughly $20 million of benefit coming into 2020 that we didn't get the run rate benefit of in 2019. That's largely offset. If you look at our historical core growth expense rate growth of roughly, it's been ranging over 4% to 6% over time. And if you take even at the low end of that, roughly the 4% on a base of roughly $400 million, that largely offsets the incremental synergies we expect to realize. So that puts us in the low 410 to 415 range. of expenses into 2020. And then as you've heard us talk about with the incremental investments that we're focusing on and what we want to do as far as continuing to plow our efforts back into the organic growth of the business, that's going to require additional operating expense. We've talked about some of the duplicate short-term expenses of some of the occupancy that we have. And a little bit of the wild card there is, and this is a really high class problem to have with the wonderful world-class technology team that we have is that the efficiency of which they develop technology and how we look at our software capitalization process, we do follow GAAP. We absolutely follow GAAP. But the spend that they have is such a smaller footprint and the speed of which they develop and implement, it doesn't allow for a large accumulation of dollars on any one project such that it triggers our software capitalization development threshold so that it enters the balance sheet and therefore it's just immediately expensed. So while on a cash flow basis... It's much, much more efficient over time. It doesn't show up, and it shows up as a short-term gap expense issue as if we're spending more money, where in reality, the benefit to the organization is actually better from a cash flow standpoint. And it just doesn't show up. in a P&L basis until, say, five, six, seven years down the road when the amortization of what has been capitalized eventually runs off. So it's a wonderful problem to have, and we'll highlight it for everyone and try and model that out. But I shake my head and look at Chris. You're killing me. But anyway, it's a wonderful problem to have, again, with the efficiency. And so that very quickly, as you add those four, five, six items back into the run rate from 2019, we very easily get back to that range.
Rich Rapetto
Sandler O'Neill
Okay, thanks for running through that, and I won't make any smart guy comments about Alan Dean Conservatives in there.
Ed Tilley
Chairman, President, and CEO
You just did, Rich. I'm sure he's listening.
Rich Rapetto
Sandler O'Neill
I'm sure he is. He's proud right now.
Ed Tilley
Chairman, President, and CEO
Wow.
Operator
Conference Host
Thank you. And the next question comes from Ken Worthington with J.P. Morgan.
Ken Worthington
J.P. Morgan
Hi, good morning. With the new technology launch for C1, what changes have you seen in trading metrics thus far? And are the changes to trading functionality or protocol that are now being implemented or contemplated for SPX or VIX as a result of the migration? And then you mentioned the opportunity for new data access and other products as a result of the migration. So can you update us on your thoughts or even timing here?
Keith Isaacson
Chief Operating Officer
Yeah, good morning, Ken. Thanks for the question. I'm extremely pleased to report on the successful migration and what we've seen thus far. As Ed mentioned, we're now on a common world-class platform across our equity options and futures exchanges. And what we've seen in the first four weeks, today's the end of the fourth week post-migration. What we've seen thus far is a more deterministic platform. As Brian mentioned, we're actually now already on weekly software releases, so we've found a new normal normal operations, which allows us to better respond to our customers in a more agile way. There's better capacity, better risk controls, and improved complex order handling. As a major part of this integration, we also made some pretty material enhancements to the VIX settlement process to improve liquidity. You were asking about SPX and VIX. I'm very pleased to report on October 16th, we had our first monthly VIX settlement. As a result of those changes, we traded almost 128,000 contracts right at the mid-market. Those changes included providing better certainty for conversions of a traded settlement. We have a lot better visibility and access into the auction because we're providing more granular market data to market participants. We improved the clarity of the rules around settlement, and we are enforcing them. systematically. This all led to increased participation by members, resulting in about a 40% tighter spread around the auction. As a global leader in volatility, we'll continue to engage with customers to see how we can continue to improve this process. We're extremely pleased about the overall migration, what we're seeing thus far, as well as that first VIX settlement. You asked also about 2020 in the data platform. The data platform is really one of the key initiatives we're very excited about for 2020. I'd say we have really five goals with that platform. One, to enable better data-driven decision-making for us and our customers. Two, to provide actionable insight within and across all of our markets. We want to standardize and monetize our historical data in a And finally, better define and measure our increased sales and distribution efforts that Ed and Brian both talked about across our customer segments and geographies, but especially in our prop products. So that data platform, we're just getting started. You know, we just finished migration, so we're in the design phase right now. But we think this data platform is going to give us better visibility into product usage, highlight capital inefficiencies that we can help solve, and give us better cross-market analytics. And this is really us doubling down on previous investments we've made, smaller investments, if you think about investments that SIBO made with LiveVol for enhanced derived data, and even a previous effort in our FX market. around liquidity management that has driven growth in that business line. We're extremely excited about this for 2020.
Ed Tilley
Chairman, President, and CEO
Chris, I think you left out the Silex and Flex integration. We called out Flex and the growth of open interest. So maybe if you can touch on that a bit, too, because it does add color to enhancements for SPX and the product offering in a much bigger way. So maybe just a couple words on that.
Keith Isaacson
Chief Operating Officer
Yeah, as part of the integration, Ken, we obviously bought Silex about two years ago. in 2017, and we immediately saw the opportunity there to have Silex as the front end to be used to enter Flex orders. And we showed you the Flex growth this year that's been tremendous. And with the migration, Silex is now the front end for all Flex for our customers. And on the first day, on the first week, we traded more than 100,000 contracts through the Silex platform on Flex. We expect that we'll continue to add more features and functionality for Flex. There's already a laundry list that folks have brought forward, and we're excited to work through that list as we enter 2020.
Ed Tilley
Chairman, President, and CEO
And then I'd like to punch one more of the points you made, and I can't stress enough how capital efficiencies in recognizing potential offsets among our product sets that make or break the adoption of a new product And certainly we expect with capital efficiencies and identifying those margin offsets should increase existing customers being able to engage with new ways of our existing products and in much bigger ways. So a lot of information coming as a result of the completion of this platform. But it is a 2020 effort, and it's what we want to deliver to the marketplace. Okay, great. Thank you very much.
Operator
Conference Host
Thank you. And the next question comes from Michael Carrier with Bank of America, Maryland.
Michael Carrier
Bank of America
Good morning, and thanks for taking the question. Hey, Brian, just two clarifications just on the guidance in 20. So you mentioned, you know, the $10 to $15 million in incentive comp. I guess just, you know, not wanting you to predict volumes, but just what environment or maybe metrics, you know, do you need to meet or hit that level? Just given that, you know, obviously 2019 was tougher for the whole industry and it seems like incentive comp, you know, is on the low side. So just want to make sure, you know, that's tied into like a similar kind of revenue environment for your expectations. And then just on your tax guide, you mentioned the lower, you know, for 19. Does that flow into 20 or too early, you know, to tell? But any guidance there would be helpful. Thanks.
Brian Schell
Executive Vice President and CFO
Thanks. Good questions for clarification for 20. And so on the 2020, I would just say that the, and again, this is all contingent upon a 2020 business plan and what, you know, what we, you know, work with our board as far as where we are and what are those targets and as we set our compensation and what our target should be. That is not final. And obviously the extent that we can disclose things that we will and we can in our proxy, things of that nature. But But broadly, I would just say that it will be a better environment, growth. We are largely focused on growth, and that incentive comp is there to make sure it's in alignment with growth. So I can't really provide you the clarity on what those numbers are, other than I can assure you that as unsophisticated as this sounds, we are paid to grow this business and add shareholder value, and so there's an expectation that the numbers that we deliver are better than where they were previously. So I don't mean to be flip, but I just don't have a specific metric to give you on that number as far as those metrics go.
Ed Tilley
Chairman, President, and CEO
Let me take it a little higher, though, Brian, and kind of answer the question a little bit, repeating what we said last quarter. And, well, we've identified the demand from our customer base for more knowledge and product use case. that investment in our team has already started. And so the restructure and redefine a global client services team is really built and has been built over the last six months to better align the sales and coverage with our customers' needs. That's where it starts. So if we align and we're going to tell our board that there's an organic growth story for 2020, and we have the team on the field ready to go, that's how the incentive comp and that's how the structure changes, and that's what we're going to be presenting to our board in the December cycle for a business plan for 2020. But it is an organic growth story that's already started with the people.
John Dieters
Chief Strategy Officer
Michael, this is John. And just while we're on that topic, also there's an intentional tie-in here with what Chris was talking about in terms of our data platform build-out in 2020, which is that we need to be able to understand very precisely where to target our global client services team's efforts. And then once they've targeted those efforts in a particular area, area to benchmark our performance. How are we doing? How are we doing reaching those clients and educating them? So all of this is really a kind of a holistic effort to accelerate our organic growth into 2020.
Michael Carrier
Bank of America
And then do the tax rate if you have that.
Brian Schell
Executive Vice President and CFO
Sure. And then to follow up on the tax rate, if you look at our tax rate and what's driving the lower numbers, the lower effective tax rate, and I think if you look in context for where we were in 2018, where we've guided for 2019, and then just a peek at 2020, And think about that. The lower numbers of what you've seen have largely been driven by discrete items that aren't necessarily as predictable, clearly, year over year. And if you look at 2018, for example, we had close to four percentage points of discrete items that that kind of lowered our rate. And if you back that out, that was roughly 29% in effective tax rate. If you look at the midpoint of 2019 and where we are, and you look at the discrete items of where we are and we back those out, we get close to that 28%, 29% level as far as where that kind of run rate goes. 2020 will largely be indicative of the level of discrete items that we have, but I would say it anchors around closer to that 28%, 29% range of what we've seen in 2018 and 2019. I know some of the other exchanges have talked about the foreign-derived intangible income benefit that they've received, and they've recognized that benefit with some clarity around the 2018 tax return as they've updated their returns and received some final technical guidance. We do not have as large of a benefit from that, just given the relative composition of our revenue base. There is some. It's marginal, and it's just not the same order of magnitude as the other exchanges. So we don't expect that same continuation, similar to what others have reported, going into the 2020 rate. All right.
Michael Carrier
Bank of America
Thanks for all the color.
Operator
Conference Host
Thank you. And the next question comes from Chris Allen with CompassPoint.
Chris Allen
CompassPoint
Morning, everyone. I just want to follow up on Ken's question earlier about the C1, the impact of the migration. I was wondering if you could give us any color in terms of what the impact's been, maybe from a depth of book perspective, impact on spreads in the market. Just looking for something to kind of quantify market quality impact. And also, can you give us an update in terms of the key products that continue to trade on the floor where they currently stand in terms of percentage of floor-based trading? whether you've seen any impact from the initial migration. Thanks.
Keith Isaacson
Chief Operating Officer
Yeah, thanks, Chris. I'll take that question. So, yeah, I'd say it's a little early to draw any firm conclusions, given we're just four weeks in. But I want to offer thanks to our customers. On the day after migration, all the customers that traded on Friday traded on Monday. So liquidity metrics, I don't have any hard and firm market quality metrics to give you. All I can say is that the break between – floor and electronic trading is roughly the same, maybe a percentage or two higher or lower, depending upon the day. We continue to see market share and volumes that are basically identical to what they were. For instance, if you look at October the 11th, the Friday after migration, so five days in, our market share and our volume were basically identical to what they were. on October the 4th, which was pretty amazing from my perspective, thanks to our customers' engagement and a great effort by the SIBO associates. So, a little early to say on exactly how market quality metrics are going to be going forward. We can probably provide a lot more color on the next call. On that, I did provide some market quality metrics around the VIX settlement. As I said, 40% tighter spreads leading into that critical settlement. So, Well, we've seen that as far as positive, but too early to have any firm conclusions.
Michael Carrier
Bank of America
Thanks, Chris.
Operator
Conference Host
Thank you. Thank you. And the next question comes from Alex Cram with UBS.
Alex Cram
UBS
Hey, good morning, everyone. Just wanted to shift gears to the equities business for a second. I think you gave a decent amount of color on kind of like the quarter-over-quarter pricing decline, the net capture decline. But I just wanted you to flush it out maybe a little bit more. And the reason why I ask is, I mean, obviously, the third quarter was a good volume quarter. Your volume swapped 11% quarter over quarter. But if you look at it in terms of revenues for the whole segment, even including the pickup and market data revenues, if you back out the audit fees, I mean, I think you made $3 million less quarter over quarter. So just wondering what you're doing exactly there because the math doesn't seem to make sense.
Brian Schell
Executive Vice President and CFO
No, Alex, that's a fair point. And we knew that going in that this is a, versus managing it, I'll call it quarter over quarter or either consecutive or year over year, is that we announced, we were very clear that we were not happy with the market share where we were, call it the second quarter of the prior year, and we made those pricing changes. And it was a series of pricing changes on the various exchange medallions and where we wanted to reestablish a higher number than where we were sitting. And we looked at that as a long-term play, is that we know that shorter-term – we could potentially have a slip in the overall net revenue number with some of the pricing changes we're making, but we believe that the long-term value of that business requires a level of market share that's closer to where we are today and such that it continues to promote the value of our market data, the value of our access capacity fees. So you have to look at it in combination over a longer-term trend versus a quarter-quarter overchange. is the way I'd encourage, it's certainly the way we look at it, so we'd encourage people to hopefully take that same point of view when they're looking at the value overall of what we're doing to manage that business.
Keith Isaacson
Chief Operating Officer
And Alex, Brian covered it well, but even today, this was all in preparation for, we launched retail priority today on the EdgeX book. The market share gain has primarily come on EdgeX where We're trying to invite retail back to that market now with this new feature that's not really based on lower net capture or buying the market shares based on functionality and priority. We're quite pleased with the progress we made in the third quarter exactly as we intended to do. As Brian said, this is a long-term investment in a business that we're committed to and we'll continue to compete for that market share and tune capture as we go along.
Alex Cram
UBS
Makes sense. It is competitive. Thank you.
Operator
Conference Host
Thank you. And the next question comes from Brian Bedell with Deutsche Bank.
Brian Bedell
Deutsche Bank
Great. Thanks. Good morning, guys. Maybe just to go back on the expenses for 2020 and to think about it in a different lens, in an adjusted operating margin lens. So, you know, solid margin this quarter. As we think about 2020 and that expense outlook, you know, is it possible to improve on this margin, or do you view this third quarter as a high point? And then just different components of that, maybe if you can comment on to what extent you think trading volume, you know, could improve as the result of the, you know, the better liquidity and functionality of the new system. And then, Brian, you just wanted to talk about the duplicate expenses from the headquarters transition that's in the 2020 number.
Brian Schell
Executive Vice President and CFO
Okay, I think there were three or four questions there, and we'll try and break those down.
Brian Bedell
Deutsche Bank
He's pretty good at that.
Brian Schell
Executive Vice President and CFO
I mean, he gets them in.
Brian Schell
Executive Vice President and CFO
That's the Rapeto trick right there. So I'm going to try and maybe duplicate the – or excuse me, duplicate. I'll try to group the expense questions together, hopefully get those, and then I think we'll move the trading volume slash improvement to liquidity as the last item we'll try to address. And I'm sure the team's looking at me, and they probably don't want me to. But anyway, so let's talk about the improved margin. So the margin that we have is that we have a margin threshold, and we don't manage the business by I have to have X percent of EBITDA margin. Again – They are a short-term measure of how effective you were in maybe a particular quarter over a period of time. And so we're looking at that. I think it's better to look at margins over, at least on an annual basis, versus any one quarter. We had some... If you look, for example, we had some other income that hit this quarter that aren't kind of always part of the core run rate of what we're doing. There were certainly activities that we did to earn that income. And if you back out some of those items, the EBITDA margin was probably closer to that. It probably declined by 150 basis points roughly of that 68.5% to 69% versus closer to the 71% that were reported. measure I do like to look at is as you look at performance is what is the margin on the incremental revenues over different periods and in this particular quarter and you see this a lot or certainly we've seen this when you introduce synergies and you're becoming more efficient a lot of times the margin on an incremental revenue is in excess of a hundred percent which we did in this quarter and that is you know you know reflective of the activities that we're doing the cost discipline and and a bunch of different circumstances. But again, that's nice to claim in any one quarter when it goes up like this. And again, that is not something that is inconsistent or said a better way. It is something we would expect to see in an environment where we're seeing synergy starting to show up in an organization over the long term. So are we targeting a excess of 70% margin in the future, that would be great to achieve, but that's not something we're driving. When we go into growth mode and we put in investment mode, there may be some quarters where that margin may be slightly lower, but as with all scale businesses, when you see that incremental tick up in volume in any one period of time, you better see a very efficient margin on that incremental revenue, which I think we've been able to continue to demonstrate over time. On the duplicate of expenses, we'll provide a little bit more guidance to that as we roll in on the next earnings call as far as the overall order of magnitude and how that impacts the run rate. But again, that's just something that we want to provide some clarity on as far as that reconciliation coming out of 19 into 20. And again, that's a short-term impact of more of a 2020 as we carry some of the costs of both locations really preparing ourselves for a much more efficient 21 and 22, which is actually one of the primary reasons of moving the headquarters location and the trading floor, is that this is a long-term benefit that we will achieve that won't show up on the expense side in 2020.
Ed Tilley
Chairman, President, and CEO
Before I turn it over to Chris for another comment, I think on the system, the system enhancements and the migration to one common platform, I think it's important for us to look at, you know, volume doesn't originate with a technology upgrade. It really allows our customers to express their best market and to express how it is they'd like to be represented in the marketplace no better, I think, than this technology integration. So I think we'll get the best of their desires and their expression of risk going forward. More importantly, I think, if you refer back to our prepared remarks is the street, the world is looking for us to provide with them the ability to hedge what is going to be certainly at this point looking forward in uncertain 2020. The listing and the open interest in October and November SPX series, that's a first. First, the demand to list, and second, the adoption of a new cycle and series around a presidential election. in answering that need, that's more telling to us and how we look at a potentially volatile 2020. I'd also say there's a pickup in interest around the primary, which we've never seen. So we're going into 2020 ready, and I want Chris actually to be able to punch the readiness from a systems perspective. But most importantly, the team on the street, as I said, we've got the team who's going to be out in front of our customers. explaining to them the opportunities, the products, use cases in what is already setting up to be uncertainty. But, Chris, really, I don't want to minimize, though, the importance of having this upgrade and having it completed.
Keith Isaacson
Chief Operating Officer
Yeah, I mean, as Ed mentioned, it's all about customers being able to manage their risk and represent their best interests, and the technology should facilitate that. We believe it will facilitate that better over the long term. With the massive migration as this was for us and our customers, Honestly, they're still adjusting. These are the first few weeks. The new system feels a lot different to them than the old system, and so they're still tuning on their side. And I honestly expect that through probably the next month or two as they get the feel for it. But ultimately, I mentioned the enhanced risk controls, better complex order handling. We believe the functionality of the technology is going to facilitate more trading over the long term. And I mentioned already, with those better risk controls, better safety, also new features and functionality, such as with Flex, to help facilitate those new products that are really catching on.
Brian Bedell
Deutsche Bank
That's great, Kyler. Thank you so much.
Operator
Conference Host
Thank you. And the next question comes from Kyle Vogt with KBW.
Kyle Vogt
KBW
Hi. Good morning. Maybe just, sorry to do this, but just one more on expenses. Just the long-term organic expense growth rate that you mentioned, that 4% to 6% historically, and that's also kind of shaping that 2020 guidance. If I look at your peers globally, most of them are growing expenses in a 4% organic expense growth range. Just wondering if you could provide more color as to whether or not that 4% to 6% long-term growth rate is the right range going forward. How often that's under review by the management team. And then also, if you think it is, where is the incremental expense spend going versus your global peers? Is it product development or a certain segment that requires more investment?
Brian Schell
Executive Vice President and CFO
I mean, that's a great question, and I think, you know, that devolves over time is that I don't think I have necessarily any incremental insight into, call it that, longer-term nature of it. I think that what we do focus on is I just go back to our strategy of what, and I don't think that's a strategy all of a sudden that changes in 21 or 22, and I think it's been a consistent theme of this organization is driving our investment, driving our efforts into the growth of the proprietary product suite of what we do today, and whether that's going to come in the form of technology, whether that's going to come in the form of, and whether that's through a incremental hardware spend. But we have such an efficient hardware footprint right now that that typically has not been a big expense driver as far as that growth rate goes. If I look at the impact of our technology refresh from that hardware standpoint, again, that's not necessarily a big driver that's going to continue to contribute to a higher 4% to 6% growth rate in the long term. So I would say it's more around the activities that we have versus being able to identify that's going to show up in compensation costs, it's going to show up in facilities, or it's going to show up in X, Y, and Z. It's more of I think what we look at it is what are the activities, initiatives, and projects around growing that core growth rate versus looking at specific line items. Here's where I would expect to see.
Ed Tilley
Chairman, President, and CEO
I think there's also a penetration aspect to the expense, Brian, and Kyle, you touched on it a bit. We're distributing this unique product set way more broadly. This is not a mature product. We want that face time. We want that interaction, and we're willing to go out there, as Brian points out, and spend the money and the time to grow this product. We are not at the end of a life cycle in SBX, VIX Futures, or VIX Options. And I think it's a big difference when you compare us to our competitors and what it is they look to a long-term organic growth. It's a little bit puzzling to us. Organic growth for us is truly that. We are growing this product set.
Brian Schell
Executive Vice President and CFO
Yeah, again, I think the point there is that you have to have that longer-term perspective. So is that if there is something that we believe has a real strong growth potential that we need to pursue, you could potentially see that expense number kick up in any one particular year. But, you know, we have to hold ourselves accountable and make sure that has the appropriate return on that investment.
John Dieters
Chief Strategy Officer
And, by the way, I think that growth profile, organic growth profile in our I think our performance goes beyond strictly the proprietary products. The way we look at data and growth in data when we target mid to high single digits, that requires some investment. And we do that because that data, typically the data we sell, supports incremental trading in our venues and our proprietary products. So it's this beneficial cycle. If we were looking at The whole complex in a low to mid single digits growth trajectory, that just implies very, very different expense growth profile.
Kyle Vogt
KBW
That's really helpful. Thank you so much.
Operator
Conference Host
Thank you. And the next question comes from Alex Boston with Goldman Sachs.
Alex Boston
Goldman Sachs
Hey, good morning, everyone. I was hoping to get your perspective on trends we've seen in October. Quite a challenging month for the industry as a whole, but when I look at the proprietary products at SIBO, VIX Futures, VIX Options, SBX Options, things seem to be underperforming, whether the cash markets or sort of other derivative buckets. So looking to get a little more color, sort of what's going on underneath the hood, whether the migration has caused any sort of temporary slowdown, because if we look at, you know, kind of external metrics, whether it's like ETPA-UM or VIX term structure, it doesn't feel particularly different than what we've seen in the past, but the volumes look a lot weaker. So kind of trying to get a sense of what's going on. Thanks. Thanks.
Ed Tilley
Chairman, President, and CEO
Alex, I can't believe we made it this far into the call without a macro market observation from us. It's what we live every day. We absolutely love it. So happy to do that. And I think you're right. So let's take the last week, Monday and Tuesday of this week, and compare those proprietary products, the ones you outlined, and we stack them together. Compare them to Wednesday and yesterday, and we see the effect on our volumes in just a small change or small adjustment in the market. So to your point, you know, a million and a half to a million six in that product stack compared to yesterday, two and a half to 2.6 million contracts. It's a massive change in a short period of time, and it's just a small change. changing the perception of the market, and it's whether or not this upward trend that we've observed over the last months will continue or not, and what happens on a small and slight correction. liken this to the observations that we had in probably the second quarter call when we were looking back on the January and February volumes. This is the same. If you missed the rally at the end of last year, started around Christmas Eve and continued through February, you played catch-up in the entire month of January. And there was very, very little interest in hedging. You were chasing the upside. And how we measure that and what our observations are is we look at the interest in buying upside calls as opposed to hedging and the engagement in our VIX complex and SBX out-of-the-money puts. So, three weeks ago, you know, call buying was at a one-year low. Everyone was focused on downside. And since then, call volume demand has surged to a one-year high. So, that's that catch-up. We look at the trends in the marketplace and we understand how our customers are engaging, And while no model can predict the future, we do see patterns in the past, and we look how our customers are engaging going forward. So I go back to the observation in the demand and in and around the anticipated uncertainty for 2020, and I'm very, very comfortable after watching yesterday and the day before that there is customers ready to engage back into hedging when you're done chasing. And so that's the color over the last two weeks or so. And more to come, and in real time, as often as we can update you, we'll be happy to do that, but that's what we do.
Alex Boston
Goldman Sachs
But the migration itself didn't really have much to do with it.
Ed Tilley
Chairman, President, and CEO
I would say it had nothing to do with volumes. You just see the engagement. It's instant when there's a need to come back and hedge. And, again, if it's global risk, dollar-denominated, you come to SIBO, period.
Operator
Conference Host
Got it. Thanks. Thank you. And the next question comes from Chris Harris with Wells Fargo.
Chris Harris
Wells Fargo
Thank you. Can you guys give us your thoughts on the outlook for RPC kind of across the complex? And then related to that, with the migration of C1, might we see better stability in multi-list RPCs?
Brian Schell
Executive Vice President and CFO
So I would look at, let's start with U.S. equities. You know, we've already talked about, you heard earlier comments about the competitive nature of that. And we don't see that competitive environment changing in any way. Chris Isaacson highlighted our continued focus on continuing to bring functionality and competitiveness, and we talked about the retail priority and things that we are doing to continue to enhance our position. and what we do and the benefits we provide to our customers, not just through a pricing change. But we don't expect that pricing environment to necessarily change or be radically different from the U.S. equity standpoint. From the U.S. options, talking from the multi-list standpoint, that is also obviously an equally competitive environment. We've seen some of the benefits of, I would say, the various technology of what we're doing to – to where we are with respect to the SIBO migration platform. And, you know, particularly when we see the multi-list, we've actually seen an improvement on there. But when we look at the factors influencing the RPC for, you know, if we look back at the third quarter, we have seen increased concentration of the larger participants and the mixed changes. and market share on VZX, EdgeX, and C2. And we've seen a little bit of a shift in mix also. When we saw the slight decline in the multi-list, you see the higher volume with the market maker rebate tiers, resulting in increased volume-based rebates. So we've seen that happen, and that's not a bad thing. That's a good thing as far as – and very hard to predict as far as where that goes. So have we potentially bottomed out? You know, I think that we probably hit that bottom a while ago with respect to that, whether it's a five or six cent net capture, but it's obviously offset by incremental volumes in market share that we see within the multi-list. With respect to FX, that's also a very competitive environment, and we will see some ebbs and flows quarter over quarter. Again, we've seen some growth in that business due to what we've done uniquely as far as our curated liquidity, the different products that we're bringing. We've talked about full amount and what that's done and the different pricing around that. that's been a very nice growth story traditionally as well, even though we may see some macro ebbs and flows that may depress some of the volumes. We continue to see reasonable efforts there from that standpoint.
Keith Isaacson
Chief Operating Officer
And I just add on European equities, as we've introduced new trading mechanisms like periodic auctions and SIBO LIS, the larger the trade size, the less frequent the trades, the higher the capture is on that. And that's helped us even to as people are waiting for what's going to happen with Brexit, the RPC has gone up in the European equities business. So as we think about capture, yes, we're definitely very, very competitive in those multi-list or competitive markets, but we're also looking at introducing new trading mechanisms that potentially can offer higher capture because they're providing more value in those trading situations to our customers.
Brian Schell
Executive Vice President and CFO
And then to wrap up on the proprietary part, As Ed mentioned earlier, as far as where we believe where we are as far as our growth cycle, again, this is not a ratchet up the price because we need incremental revenue and show that growth. This is a unit story. This is a volume story. This is a secular story of how do we move that organic needle, and it's not through RPC as far as a revenue standpoint. So that's not a lever that we anticipate being a big driver for us going forward showing up in the revenue line item. There may be adjustments due to some volume rebates and things that we've mentioned that would show up. There might be some mixed shifts that might show up, but largely it's not something that we're specifically planning on driving incremental revenues through price adjustments at the RPC line item.
Operator
Conference Host
Thank you. And the next question comes from Owen Lau with Alpenheimer & Company.
Owen Lau
Alpenheimer & Company
Good morning, and thank you for taking my question. Just following up Chris's comments related to ethics and retail priority program, given the backdrop of a zero trading commission, what has your conversation with the online brokers and other brokerage firms been like over the past month? So in terms of allocating resources, do you think rebate would be more important than execution quality going forward in terms of getting the trade? And then finally, how are you going to position SIBO to capture any additional opportunity, if there's any? Thank you.
Keith Isaacson
Chief Operating Officer
Yeah, Alan, thanks for the question. Very astute questioning there. So I think retail brokers are very, very focused on execution quality, and that's the reason that we're bringing out retail priority today is They want a faster time to execution for their retail limit orders. The marketable limit orders are already going to wholesalers, but the retail limit orders can come back to the exchanges with the enhanced priority, which will improve their time to execution. The zero commissions and how it will impact – those retail brokers and their order routing, I think they're going to continue to be very, very focused on execution quality. In fact, in 2020, there's additional disclosure regime coming out around a rule called Rule 606 that will demand more disclosure about routing practices, which I think is a positive development. And there may be more scrutiny or focus on payment for order flow, but This is why we are excited about retail priority. We think it's a win for retail brokers. It's a win for retail customers, that they'll get a better trading outcome. And we also look forward to bringing, potentially in 2020, some new order type or functionality for institutional orders as well.
John Dieters
Chief Strategy Officer
Oh, and I just – this is John. I'd add, it's great points by Chris, I think. A high level, the way we think about this trend playing out, it's sort of a natural progression. Step zero is quite an absolute number, so it takes people by surprise. But if you wind the clock back 10, 15 years, this has been going on. And we were sort of, we meaning exchanges broadly, we were some of the first exchanges to feel the impact of competitive pressures. And our execution fees on equities have come down quite dramatically to a point where that's not really the crux of economic conversation with the retail brokers. More to Chris's point, it's around execution quality. Because if you're getting compensated through basically monetizing the bid-ask spread, you have to make absolutely sure that your customers aren't in some way being disadvantaged. So you have to have the right algorithms in place. You have to have the right data to back up that analysis. And that's where we really help out the retail brokers. They're great, great friends of ours overall. They're democratizing finance. That should grow the pie, and that's what we like to see over time.
Owen Lau
Alpenheimer & Company
Thank you very much. That's very helpful.
Operator
Conference Host
Thank you. And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.
Debbie Koopman
Director of Investor Relations
Thanks. That completes our call this morning. We appreciate your time and continued interest in CBOE Global Markets.
Operator
Conference Host
Have a good day. Thank you. The conference has now concluded. Thank you for attending today's presentation. May now disconnect your lines.
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