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CBOE Holdings Inc (NASDAQ:CBOE)

Q1 2014 Results Conference Call

May 06, 2014 / 8:30 A.M. E.T.

Executives

Debbie Koopman – VP, IR

Ed Tilly – CEO

Alan Dean – EVP, CFO

Ed Provost – President, COO

Analysts

Richard Repetto – Sandler O'Neill & Partners

Mike Carrier – Bank of America Merrill Lynch

Chris Allen – Evercore Partners

Alexander Blostein – Goldman Sachs

Alex Kramm – UBS

Ken Worthington – JPMorgan Chase & Co.

Niamh Alexander – Keefe, Bruyette & Woods

Christian Bolu – Credit Suisse

Kenneth Hill – Barclays

Jillian Miller – BMO Capital

Gaston Ceron – Morningstar Equity

Chris Harris – Wells Fargo Securities

Operator

Good day ladies and gentlemen, and welcome to the CBOE Holdings first quarter 2014 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded. I would now like to turn the conference over to Debbie Koopman, Vice President, Investor Relations. Please begin.

Debbie Koopman

Thank you. Good morning. And thank you for joining us for our first quarter 2014 earnings conference call. On the call today, Ed Tilly, our CEO, will provide an update on our strategic initiatives for 2014, and Alan Dean, our Executive Vice President and Chief Financial Officer, will review our first quarter 2014 financial results. Following their comments we will open the call to Q&A. Also joining us for Q&A is our President and Chief Operating Officer, Ed Provost. In addition, I would 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.

As a preliminary note, you should be aware that this presentation contains forward-looking statements which represent our current judgment on what the future may hold, and what we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks, and uncertainties. Actual results and outcomes 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 effect 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. Now I'd like to turn the call over to Ed Tilly.

Ed Tilly

Thank you Debbie. Good morning, and thank you for joining us today. Before discussing CBOE's progress in the first quarter, I will take a moment for a few words about high frequency trading, as it relates to, or more to the point, how it does not relate to the options market. We operate in a highly regulated transparent market with matching algorithms and fees that are clearly designed to benefit retail customers. It's important to note that the option market is in many key ways fundamentally different than the equities market. One result of these differences is that the option market does not cater to high frequency trading practices described in the Lewis book.

For example, dark pools do not exist in the options market. The make or taker transaction pricing model is not the dominate fee structure in the options market, and even less so at CBOE. In customer orders primarily trading as quotes that are supplied by dedicated liquidity providers. At CBOE, our size-based matching algorithm, primarily rewards larger sized bids and offers, not the fastest bids and offers. Additionally CBOE does not house it's primary data center in a CBOE-owned building for which we can derive significant revenue via co-location. Further, our rule book makes clear that CBOE employs very traditional options order types, and does not offer particularly exotic or complicated orders in our marketplace. While no one can say for certain how the current analysis of HFT might shape market structure, it remains our view that the potential market impact to CBOE will not be material. We also believe there could potentially be some positive benefits that accrue to CBOE, if reforms lead to increased trading in lit markets.

With that I'll move on to our first quarter results. Double-digit volume increases across each of our product categories in the first quarter of 2014, resulted in record revenue and earnings for CBOE Holdings. Average daily volume for options and futures combined was 5.6 million contracts per day in the first quarter, up 15% over the previous quarter, and 29% over the first quarter of 2013. Options volume averaged 5.4 million contracts daily, up 14% over the previous quarter, and 29% over 2013. Indexed options trading led by strong trading in our SPX complex, and record volume in VIX options increased 17%, both quarter-over-quarter and year-over-year.

Moving on now to our strategic initiatives for 2014, which fall into three main categories. Leveraging and developing proprietary products, optimizing revenue and commodotized products, and broadening our customer base, while maintaining the highest standards in market regulation. As outlined in our last call, we plan to grow SPX trading in 2014 through intensified educational and marketing initiatives aimed at the following user groups. Users of SPY options and SPY weeklys who lack awareness of the benefits of SPX relative to SPY, institutional investors, such as OTC users, pension funds, asset managers, and insurance companies, who are just beginning to trade listed SPX, and overseas investors, who can use SPX and SPX Weeklys to hedge global economic risk, or to efficiently take a position in the US market. I am pleased to report that average daily volume in the first quarter for our SPX product line was nearly 878,000 contracts, up 8% over the previous year, and 7% over the previous quarter. SPX Weeklys continue to post double-digit gains as average daily volume reached a new high of 277,000 contracts, up 59% year-over-year, and 33% over the previous quarter. Weeklys trading has brought a growing base of retail and semi-pro customers to our SPX Marketplace, and we see significant opportunity to further develop this new user base.

Turning now to trading in VIX options and futures, which posted all-time volume records in the first quarter. VIX options volume averaged 774,000 contracts per day, up 35% over the previous quarter, and 22% over the first quarter of 2013. Average daily volume in VIX futures was nearly 203,000 contracts, an increase of 32% from the previous quarter, and 33% from last year. We seem to field a question or two in every call regarding our view of the growth trajectory for VIX trading, so I'll take a few moments here to provide some color. The broad sustained waves of growth in VIX trading are consistent with what we have seen in early stages of a groundbreaking product line, one that not only changes what people trade, but where and how they trade it.

CBOE has developed three such product lines. Equity options, index options, and now VIX futures and options. It has been our experience that early growth in a game changing product line is measured not in years, but in decades. In previous calls, we've highlighted new VIX users, and today I'll take a bit of a deeper dive. It's helpful to think in terms of vega when sizing the growing volatility market. Vega refers to how the price of an option can move in response to a 1% change in its implied volatility. Trading in VIX contracts now averages between $200 million and $250 million in vega daily. This is roughly 10 times the vega traded through OTC vol swaps, and about 1.5 to 2 times the daily vega traded on the listed SPX options. Anyone who trades in options or manages a portfolio has volatility exposure. VIX futures and options clearly have become the preferred means for managing that volatility, but we are still in the early stages of growing that marketplace.

Many customers are just beginning to determine how pure volatility trading fits into their various investment frameworks. And as more investors enter this market, they continue to find compelling new trading opportunities that further expand the marketplace. So for instance, there's a growing recognition among asset managers that SPX and VIX derivatives are complimentary risk management tools, that can be used to construct very nuanced and precise portfolio hedges. SPX options provide directional exposure,, while VIX futures and options provide a more dynamic hedge in fast changing markets. The whole notion of harvesting risk premium has taken on a new meaning as sophisticated traders trade VIX and SPX derivatives as interchangeable components of their alpha-generating strategies.

Volatility arbitrage though not new, has taken on a new dimension, as several new hedge funds have begun to deploy strategies involving VIX futures and options. We've seen the VIX universe continue to expand in surprising ways. For instance, a major investment group that principally trades energy and interest rate products, recently became a Trading Privileged Holder, or TPH at CFE. Other new users include European investors trading VIX products against fee stocks, a measure of volatility of the Euro Stocks 50. And banks in Brazil, now actively using VIX products for macro hedging. We also see increasing numbers of customers that sell implied volatility short, which has been an active topic in many trading forums.

It is important to note we are still in the early stages of developing previously-identified customer segments globally, such as hedge funds, CTAs, proprietary trading firms and institutional investors. Many customers in these categories are early adopters meaning there is considerable room to further expand every category of VIX user. Quite simply, we believe investors of every type can potentially benefit from the added dimension of pure volatility provided by VIX futures and options, and that education is the key to unlocking that potential.

We continue to see tremendous demand for education in VIX trading. As an example, CBOE's Options Institute recently conducted seminars on VIX options and futures in New York, San Jose, and Chicago, where over 600 individuals registered for three hour courses. Our online classes are also highly subscribed and VIX-related webinars attract more viewers than any other topic. Additionally, giving the ongoing mainstreaming of VIX trading, the Institute sees particular demand for VIX-related content from retail brokerage firms.

Our social media programs similarly reflect the great interest for all things related to CBOE volatility VIX. VIX topics dominate online chatter and VIX related blogs generate more page views than any other topic at the Options Hub, our online social media center. In one recent week, when our content was predominantly VIX related, the site had a record 13,000 page views, more than double the usual number. CBOE's Risk Management Conference brings us face-to-face with some of the most active and sophisticated VIX customers. This year's event drew more than 320 participants, and record corporate sponsorships for a content-rich program, focused on options and VIX-related strategies and trends. A Round Table held at RMC, VIX success drives vol market forward, featured leading industry authorities. I think it's fair to say this group was extremely enthusiastic about the evolving uses of VIX options in futures. We now look forward to holding similar sessions at our Third Annual RMC Europe, which will be held September 3rd through the 5th, just outside Dublin.

Broadening access to our marketplace is another avenue for future growth at VIX trading. As you know, we extended the VIX Futures trading day by 5 hours and 45 minutes late in 2013. The added hours respond to demand for additional trading time for US customers, and enable European based customers to access VIX futures during their local trading hours. I'm pleased to say that some 15,000 VIX futures contracts per day now trade outside of regular US trading hours, accounting for 7.4% of the product's total daily volume year-to-date. On certain days when overseas events triggered overnight volatility, we have seen the percentage rise as high as 15%. Pending regulatory review, on June 22nd, we plan to further expand our extended trading hours to nearly 24 hours, which will accommodate Asian market hours, and a growing worldwide user base. We also look forward to extending trading hours for VIX options, as well as SPX options later this year pending regulatory approval.

New product development represents a significant opportunity for us to continue to grow VIX trading. As you know we launched futures on our new short-term VIX index, VXST, in February followed by the launch of short-term VIX options last month. Short-term VIX futures and options leverage the most compelling features of SPX Weeklys, and VIX futures and options, including weekly expirations that enable traders to fine-tune the timing of their volatility trades. Short-term VIX is generally more volatile than VIX, which sets the stage for additional trading opportunities. While we would like to have a better volume story at this point, we have not had the liquidity provide our participation we expected early on, which has impacted market quality. Our concentration over the next 30 days will be working with liquidity providers who plan to trade, but are not yet actively quoting in this market.

We believe traction will grow as market quality improves. In addition, CBOE is working with issuers of exchange traded products, or ETPs, who have expressed interest in developing products linked to VXST futures, it's similar to what we saw in VIX, with VXX and other ETPs. So despite a slower start than we had hoped, we remain very optimistic on the inherent utility of these products. Other VIX product developments in the pipeline for 2014 include futures on CBOE, CBOT, 10-year Treasury notes volatility index, the first volatility index based on US government debt. The VXTYN Index is calculated by applying all of our VIX methodology to futures options data from CME Group's 10-year US Treasury note contracts. We began descending into index values in May of 2013, and pending regulatory review, intend to launch futures on the index by the end of this year. Diversifying our VIX product line across asset classes is an area where we see significant head room for growth. We view interest rate volatility as an exciting new frontier in the volatility marketplace.

Turning now to equity options trading where CBOE continues to hold the industry lead in market share, in March of 2014, CBOE and C2 accounted for 29.5% of all options traded. As of March 31st, CBOE held 28% of total industry market share adjusted for dividend trades, up slightly from 27.9% total market share at the end of December. In multi-listed options only, CBOE held 20.8% market share, up slightly from 20.3% at the end of December. In both cases, CBOE led all 12 options market by a margin of several percentage points.

We are pleased but never complacent with our overall performance in the equity options marketplace. We closely monitor the daily changes in this very fluid arena, and are prepared to quickly modify our CBOE and C2 models in response to competitive pressures. Clearly we see considerable opportunities on the options landscape and in the volatilities base going forward. We continue to capitalize on favorable operating leverage inherent in our business, through disciplined expense management, and prudent allocation of capital, while ceding our companies future growth with programs aimed at developing new products, expanding our user base, and optimizing our market share in commoditized products. On that note, I will turn it over to Alan Dean to report on our financials.

Alan Dean

Thanks Ed, and good morning everyone. I'm pleased to report that CBOE Holdings is off to a strong start this year, posting record revenue and earnings per share for the first quarter, driven by growth in trading volume and disciplined control of operating expenses. Let me start with a recap of our first quarter results. We delivered operating revenue of $157.9 million, up 11% compared with last year's first quarter. Adjusted operating income was $84.6 million, representing an adjusted operating margin of 53.6%, a 270 basis point improvement over the first quarter last year.

Adjusted net income allocated to common stockholders was $50 million, up 14%, with the first quarter compared, with the first quarter of 2013, resulting in adjusted diluted earnings per share of $0.58, a 16% increase versus $0.50 per share for the same period last year. Before I continue, let me point out that our GAAP results reported for the first quarter of 2014 and 2013 include certain unusual items that impact the comparison of our operating performance. These items are detailed in our non-GAAP information provided in the press release and in the Appendix of our slide deck.

Turning to the details of the quarter, as shown on this chart, the growth in operating revenue was primarily driven by higher revenue from transaction fees and market data fees. Transaction fees increased $13.7 million, or 14%, compared with the first quarter of last year, due to a 31% increase in trading volume, offset slightly by a 13% decrease in the average revenue per contract, or RPC, versus last year's first quarter. The growth in trading volume was driven by volume gains across each of our product categories, with trading volume from equity options up 37%, exchange traded products up 38%, and indexed options up 18%, and futures contracts up 34%. Our blended revenue per contract including options and futures, declined to $0.329, from $0.378 in last year's first quarter. The decline was primarily due to an increase in volume-based incentives in the first quarter of 2014 for certain multiply-listed options traded at CBOE under our volume incentive program, reflecting the impact of fee changes implemented in February and March of 2013.

In addition, the product mix shifted in lower margin multiply listed options accounted for a higher percentage of trading volume during the quarter compared with the first quarter of 2013. As a result, the RPC in our options business declined to $0.281 compared with $0.333 in the first quarter of 2013. The revenue per contract on equity options and exchange traded products declined by 42% and 25% respectively, while the RPC for index options was unchanged year-over-year at $0.67. CFE's revenue per contract of $1.62 for the first quarter was relatively unchanged from last year's first quarter. While multiply-listed options represented a higher percentage of our trading volume during the quarter, the percentage of transaction fee revenue contributed from these contracts fell, due to a lower RPC and the strong growth in trading volume from our higher margin proprietary products.

As depicted on this slide, in the first quarter of this year multiply listed options accounted for 65.3% of total contracts traded versus 62.1% in last year's first quarter. Trading in our highest margin index options and futures contracts represented 34.7% of total contracts traded, down from 37.9% in last year's first quarter. Converting the volume into transaction fees you can see that in the first quarter of 2014, index options on futures contracts accounted for 81% of our transaction fees, up from 76% in the first quarter of 2013. As Ed noted in his comments, we continue to focus our growth initiatives on our proprietary products that generate the highest return.

Looking at revenue drivers outside of transaction fees, most of our other revenue line items were relatively unchanged this quarter, compared with last year's first quarter, with the exception of market data fees. Revenue generated from market data fees increased $1.6 million, as a result of higher market data revenue from OPRA, reflecting higher share of industry transactions, and a rate increase for OPRA terminals. CBOE and C2's share of OPRA revenue increased to 24.5% from 18.9% in last year's first quarter. In addition, we saw higher revenue from CBOE's streaming markets, reflecting an increase in subscribers as well as rates.

Moving down the income statement to expenses, this next slide details total adjusted operating expense of $73.3 million for the quarter, up $3.2 million or 5% versus last year's first quarter. This increase primarily reflects higher employee costs and royalty fees, offset somewhat by lower expenses for outside services. Core operating expense of $47.7 million was unchanged compared with the first quarter of 2013.

Looking at the details, the key variances were higher employee costs, offset by lower expenses for outside services. The increase in employee costs was primarily due to higher salaries resulting from staff additions, mainly in regulatory services, as well as an increase in the provision for incentive compensation, which is aligned with our growth in pretax income. The decrease in outside services is due to lower legal expenses. Overall, through March core operating expense annualized is tracking in line with our guidance range, and we are reaffirming our guidance range for core expenses of $191 million to $196 million for the full year. Looking at volume based expenses, royalty fees increased by $2.7 million, or 21%. This increase primarily reflects the growth in trading volume in our licensed products, and to some degree fee adjustments that occurred in conjunction with the extension of our S&P licensing agreement on March 8th of last year.

Our GAAP effective tax rate for the quarter was 39.9%, versus 38.3% in last year's first quarter. The increase in the effective tax rate reflects the recognition of a discrete tax charge in the first quarter of 2014 versus the discrete tax benefits recognized in the first quarter of 2013. The tax charge was primarily due to a change in New York state tax law effective for 2015, changing to market based sourcing, which impacts our New York state apportionment factor increasing our deferred tax liability. Although the effective tax rate exceeds our annual guidance, we see this as a timing issue. Based on what we know now we still expect the full year tax rate to be in line with our guidance of 38.5% to 39.5%.

Taking a look at the balance sheet, we finished the quarter with cash and cash equivalents of $199.1 million, compared to $221.3 million at the end of December. Our solid financial performance, along with a strong balance sheet, has allowed us to return a substantial amount of capital to stockholders in the form of share repurchases and dividends. For the first quarter of this year we have generated approximately $88 million in cash from operations, paid out nearly $16 million in regular dividends, and $44 million in a special dividend, used about $12 million for capital expenditures, and another $39 million to purchase stock.

Under our share repurchase plan, we repurchased over 700,000 shares in first quarter, at a total cost of $37 million, at an average price of $52.99 per share. Since the inception of our plan, we have used over $179 million to repurchase 5.3 million shares, at an average price of $33.55. At quarter end, we had $120.8 million available under our current share repurchase authorizations. We remain committed to using our cash flow to optimize stockholder value by reinvesting in our business, and returning excess cash to stockholders through consistent and sustainable dividends and share repurchases. We will continue to be disciplined in our repurchase activity, which will vary based upon stock price and other factors.

In closing, our first quarter results demonstrated continued financial and operational discipline and execution, marking the sixth consecutive quarter of year-over-year growth and adjusted operating revenue and adjusted diluted earnings per share. We're very pleased with our strong start to 2014, and we believe we are well-positioned for continued growth as we execute on our strategic plan. With that, I will turn the call back over to Debbie.

Debbie Koopman

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

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Rich Repetto of Sandler O'Neill. Your line is open.

Richard Repetto – Sandler O'Neill & Partners

Good morning guys, and congratulations on I think the 15th consecutive beat.

Ed Tilly

Thanks, Rich. Good morning.

Richard Repetto – Sandler O'Neill & Partners

Good morning. And don't kill me for asking this question, but I have got to turn back, since you spent a fair amount of time on the VIX futures, that the open interest at the end of March was, just say it's still down from peak levels. I know you explained, Ed, that's this tail hedging strategy, where you actually tell people, as the VIX rises to lighten up. But I guess the question is, given everything that you doing, that you outlined in the prepared remarks, that factor is, that the factor of just growth isn't outweighing sort of this strategy of lightning up at higher volatility and adding with lower volatility? And also, if you could, maybe the percent of high frequency traders in VIX futures?

Ed Tilly

Rich there aren't going to be any more questions left after that.

Richard Repetto – Sandler O'Neill & Partners

Okay. Just take the first one.

Ed Tilly

We'll get them both for you. So I think to your point, beginning in 2013, the VIX futures volume actually began to be less correlated with the VIX futures open interest, as we increased the diversity of the VIX market participants, right? So today more sophisticated traders, the vol arbs funds, they employ strategies involving VIX, SPX, OTC variance, VIX-linked ETPs. So if you grasp that rolling 12-month correlation on a month-over-month change in the futures versus the open interest since 2007, you will see in 2013 much to your point that the correlation turned negative, right? Indicating that the open interest really isn't driving the VIX futures volume.

Rather, what we've seen, and I think I've hinted on the last couple of calls, if you look at and track and kind of overlay volume of VBX or the vol a vol, as it relates to the VIX futures average daily volume, you see it correlated a bit more than open interest. So historically VBX is high 80s, 86-ish. And then if you look at where we're today, April you'll see the VBX actually low, it is almost 70. There's less volatility in volatility right now. When we ask our product development guys and our research guys to look at cause and effect, we actually point to a lower vol of vol, rather than a change in open interest. And as we saw in the first quarter, as volatility increases in the vol of vol increases, our volumes go up. So maybe if I can get Debbie to run you some VVIX numbers and kind of show you what we're talking about, that might make much more sense than us going back continually to the open interest, and how it's not correlated to the growth in VIX. Coming off another record quarter, it kind of reinforces what we've been telling you all along. Volatility in the marketplace, good for CBOE. Volatility of VOL very good for VIXs futures and options.

I think your second question was percentage of HFT in CFE futures. In earlier on discussions with the entire investment community, we did give some top end estimates of what we viewed HFT at CBOE and CFE, but with the ongoing debate, there is really not a consensus of defining HFT. And therefore, difficult to kind of gauge how trading would be impacted. So we're kind of hesitant to put forth numbers at this time. But really, at the end of the day, if we defined HFT, much the way it's defined in the Lewis book, we would not be impacted materially in any way at CBOE or CFE. And as I said in my opening comments we actually see the potential for some upside as more and more trades would be transacted in the lit marketplace. So I hope I've given you kind of our look at the first two questions of the day.

Richard Repetto – Sandler O'Neill & Partners

All fair points, Ed. Congratulations on your consistency here of the results.

Ed Tilly

Thanks, Rich.

Alan Dean

Thank you, Rich.

Operator

Thank you. And the next question is from Mike Carrier of Bank of America Merrill Lynch. Your line is open.

Mike Carrier – Bank of America Merrill Lynch

Thanks guys. Alan, just on some of the expenses, I guess mostly on the trading side, it just looks like if I look sequentially, the royalty like fee rate and the volume incentive fee rate, it looks like it decreased a bit. So I just wanted to understand, does it have to do with changes in pricing, changes in volumes? And I guess more importantly, just in terms of the outlook, are these like run rates more normal, or is it back to where it was over the last couple of quarters?

Alan Dean

Good question. I think if you look at the rate per contract under royalty fee this quarter and compare it to the first quarter of last year, I think it's really close, if not identical. And that could account, could be caused by anomalies in the way that we recognize or pay the royalty fee. Other than the change that went into effect March 8th of last year when we extended our contract with Standard & Poors, there's really nothing new that happened since last March 8th, and I don't anticipate anything continuing the rest of this year. Probably the biggest thing that could impact that rate per contract in royalty fees is a product mix, so not all, we don't pay the same rate per contract on all products, and if a higher one happens to trade more in a quarter than a lower rate per contract one on the royalty fee side, then that could impact that rate. So you'll see slight anomalies quarter-over-quarter but there's really nothing new going on there.

Mike Carrier – Bank of America Merrill Lynch

Okay. Thanks a lot.

Alan Dean

Sure. Thank you, Mike.

Operator

Thank you. And the next question is from Chris Allen of Evercore. Your line is open.

Chris Allen – Evercore Partners

Good morning guys.

Alan Dean

Good morning.

Chris Allen – Evercore Partners

Just a quick numbers related question. Just on the futures RPC, I know it's flattish year-over-year, but we tend to look at more sequential basis, obviously a nice jump up in terms of trading volumes, and also nice jump up in futures RPC, so I'm just wondering if there's any explanation from that, whether it's customer mix or something else?

Alan Dean

Yes, a lot has to do with the mix within the product. So if we're, because not all participants in the product pay the same. So if a higher fee category happens to trade more during the quarter, that will impact RPC. But I want you to know that on January 2nd, we did increase customer fees on VIX futures slightly, and I expect that had some impact on our revenue per contract and futures in the first quarter.

Chris Allen – Evercore Partners

Got it. Thanks guys.

Operator

Thank you. And the next question is from Alex Blostein of Goldman Sachs.

Alexander Blostein – Goldman Sachs

Good morning guys. Wanted to touch base on the short term VIX product, it sounded like there was a fair amount of enthusiasm about this product early in the year. And it sounded like from your comments, this had a little bit of a softer start, so maybe spend a minute on what it is that the liquidity providers are not seeing in the product, or if there's anything that you need to change structural about it to see a better uptake would be helpful? Thanks.

Ed Provost

Alex, Ed Provost, I will take that one. We remain very enthusiastic about the product, every conversation that we have with potential customers of the product are very positive. Because we chose not to bring up a VIX weekly, but rather to create a new spot index of VXST, it became a new product, and that triggers technology work that needs to be done by the liquidity provider community, and even on the flow side, it requires products to pass through the compliance areas to get approval, because indeed, it is a new product as opposed to a weekly end of VIX, which would be an extension of an existing product.

So those are some of the reasons why we have not had as much market maker participation early on as we had hoped, and why some of the significant players in the VIX have not been active in VXST. So I just think it's a question of it being a new product, we are as optimistic as we've always been that it will be a key contributor to our VIX, to our volatility product mix. But we've acknowledged it's a litter slower out of the gate than we had hoped for, but we continue to be very optimistic.

Ed Tilly

Ed, let me add a little bit to that. I commented on market quality in the prepared remarks, and really what we mean by that is when we look at the bid/ask spread, and the size of the display market, very, very important, and key driver in attracting the end user to our contract. Really the market quality is really different than what we see in VIX futures. For example VIX futures are tick wide. The sharp term VXST can be three, four, five ticks wide. So what we're working on, and Ed was referring to the dedicated or liquidity providers that are in the market day in, day out, those are the ones that we have to incent to get into the marketplace first. Then the end user, the hedger, the speculator will come to the marketplace. It's a pattern we seen time and again when we launch new product categories, did. Ed and the business development guys that's what they're working on, getting those liquidity providers, the dedicated day-in day-out users of the contract into the marketplace, better market quality, and then the daily users will come after.

Alexander Blostein – Goldman Sachs

Got you. I guess it is just you are going to switch the product to the weekly as opposed to launching your new product, I'm not sure if there's an actual benefit to having a new product, or just an extension of the existing, so it creates more volume sooner?

Ed Tilly

It's a great question. Now we have not ruled out a weekly contract. Rather, this contract was brought to the marketplace because to this so responsive to the short term to market driven events. Using a nine day weekly contract in our VIX methodology to come up with a very volatile number that reflects the state of the market in the short term was really how we preferred to launch. And it's what our users said they were interested in us bringing to the marketplace. So we are nowhere near giving up on this concept, but it certainly to your point does not rule out offering another alternative, a weekly contract based on the 30-day.

Alexander Blostein – Goldman Sachs

Great. Thank you so much.

Operator

Thank you. The next question is from Alex Kramm of UBS.

Alex Kramm – UBS

Good morning. Wanted to maybe spend a little bit outside of VIX. It seems like you're really focused obviously on broadening the VIX franchise, but how should we look at this from your perspective, like when you think about the SPX business or even the multiply-listed business, do you still see growth opportunities there? And if you do, like what are you actually doing to kind of spur those or catalyze those growth opportunities? Thanks.

Ed Tilly

Well, Alex, in my prepared remarks, I spent a fair amount of time kind of defining who we see coming into the marketplace. So the greatest opportunity remains here domestically. That demand is by no way satisfied for all things VIX, or VIX related. And then to the educational and the globalization, I think if you take a look at the numbers that we see, when there is volatility in the non-US trading day, our trading before the open or after the close for that matter, before we even incorporate the Asian trading day, where we're averaging roughly 7% ADV in VIX futures, but on the days when there is uncertainty we double the percentage, right? So March 3rd, a day back in January, last Friday in the economic news, we go from 7% to 14%. There is demand across the globe. And our educational and business development efforts reflect that, but I want to continue to say every opportunity that we get, the growth, the greatest opportunity is to continue to expand domestically, and then the global demand will come as we are focusing our efforts in a much broader way. Ed, do you want to add anything?

Ed Provost

No, I would say consistent with what you said, Ed, every stop we make, both in the state and outside of this country, where we talk about both VIX futures and options we find again a level of interest that is amazing. And we have no reason to believe that there is any limitation in the, immediately anyway, in the upward growth of this product. Our RMC Conference which we had here was a phenomenal success, and we are very optimistic that we're going to set a new record in Dublin, when we have our September Conference there. I mentioned in these calls before, that we're looking at doing a RMC in Asia. So we continue to be very optimistic that VIX is in its infancy, and its growth curve will continue much as it has up until now. So we're very, very optimistic on the VIX front.

Ed Tilly

Ed, why don't you give a little color as to the participants in RMC in March, and how at the 320 or so attendees, how we saw new faces.

Ed Provost

Yes. It's a good point. So we have averaged in the last few years upwards of 300 or so participants in the US Conference this year we had 320, which was I think the second highest we've ever had. Major participants include public pension plans, insurance companies, hedge fund portfolio managers, obviously all institutional oriented. A significant portion I think the number is about 70% of the people are new attendees, so it is not the same people coming back and enjoying the warm weather in Florida or California, but rather new people coming to try to understand how to use this product. Sometimes people from the same firms, but new faces learning how to use volatility products. So again, that demographic analysis is very important to us in understanding exactly who it is that is coming to these conferences, how we need to modify our agenda from year-to-year, but we continue again to be very optimistic, and I would encourage you, you on the phone, to if you get the opportunity, to attend a RMC and see the actual users of these products, you would be very, very impressed.

Alex Kramm – UBS

And real quick, sorry, since my question was mostly focused on VIX, it's not a follow-up, but on the non-VIX products are there still development and product development efforts outside of VIX that you can talk about? Because I'm sorry, maybe I didn't ask the question correctly, but that's what I was trying to get at, as well?

Ed Tilly

Sure. The product development pipeline here it never ends. We have a team committed to working with liquidity providers, discount brokerage firms all sit around in our product development committee and come up with, in an attempt to fill the gaps from the demand side. What it is that we can bring to the marketplace to satisfy that demand in those gaps. So we have a full product line. And as contracts go from the idea stage and approach implementation we'll be sharing them with you but we do have things coming forward. I think the one we focused on today, which we're most excited about, is later this year, the VXTYN, and that is bringing volatility to the ten years. So yes, there is a pipeline. We never stop, and it is all driven by our end users, both institutional and retail.

Alex Kramm – UBS

Alright. Thanks for that, too. Bye.

Operator

Thank you. And the next question is from Ken Worthington of JPMorgan. Your line is open. Ken Worthington Hi. Good morning. Ed, you may a teeny tiny little investment in Tradelegs earlier this year, and it wasn't something we had really seen before from CBOE. Can you talk a little bit about the appetite for investments going forward, and maybe the philosophy and opportunity for growth through acquisition?

Ed Tilly

So we haven't actually changed the way we view potential investments in outside opportunities. Anytime that we have an add-on business, one that CBOE perhaps has not designed in-house, we where can interact with our customers at any stage of their trading, either from the decision stage as we've made an investment in a front end, to risk management, and in this case, Tradelegs is an opportunity for our end users primarily institution at this point, to become smarter in their trading strategies. We're going to look at them very closely. And if it fits that core goal of CBOE to touch that investor earlier or later in the process, we will take a look at it. Has to make sense for us, but we look at opportunities that, not daily but on a regular basis. Alan, do you want to add anything?

Alan Dean

The other opportunities that we pay very close attention to involve new product opportunities, so if we can find through an investment in a company, or an idea, or some IP that would lead to a product that we could trade, that we could charge pricing, premium pricing on, well that interests us as well. Of course we are open to any other M&A activities that we believe would enhance shareholder value, but beyond these smaller one-offs that we have invested in now and then, we really haven't seen any other opportunities. Ken Worthington Okay. Great. Thank you.

Operator

Thank you. And the next question is from Niamh Alexander of KBW, your line is open.

Niamh Alexander – Keefe, Bruyette & Woods

Thank you for taking my question. If I could just go into customer groups, and I have asked a few times before, it's the retail participation like we're seeing some good activity levels from some of the online retail brokers and some of the non-onlines so far in the year, I was just wondering if you think maybe that was part of the strength in the first quarter as well, that you're starting to see a re-engagement there. I know you see it kind of coming through the brokers, but there's probably a large portion of the brokers just given the size of the market where you can tell that you're starting to see retailer engagement. It hasn't completely gone away, but do you think you're finally seeing it start to really take off and from growth here?

Ed Provost

Hi, Ed Provost. Yes, as your own analyst reports have noted, the retail brokers have had a good quarter, there's obviously confidence back in the market among retail investors. But to be honest with you, while we have seen an increase in retail flow, our general mix of retail versus institutional remains fairly consistent. We're seeing growth both at the retail level and in the various areas of institutional participation, including the hedge fund or a more sophisticated active institution, as well as traditional institutional, including the pension plan players, as well.

And I would say also that we have historically been a primary destination for retail order flow, given our market model, which is very accommodating to retail. So we benefited from the renewed growth of the retail space. We don't talk about it, the retail as much, because it is not so self-limited by Board mandates, and things like that, and the area is so well serviced by the retail firms who are very option centric. But we're very optimistic that there is continued growth potential in the retail space, as well as institution. But again, we often focus on the institutional side, because we think that has the most untapped potential.

Niamh Alexander – Keefe, Bruyette & Woods

Okay. I'll get back in line. Thanks.

Operator

Thank you. And the next question is from Christian Bolu of Credit Suisse.

Christian Bolu – Credit Suisse

Thank you for taking my questions. Just a quick one on interest rate VIX with CME, just help us understand how market participants currently get exposure to interest rate…

Debbie Koopman

We can't hear you. Can you…

Christian Bolu – Credit Suisse

Hello. Can you hear me?

Ed Tilly

That's better now.

Christian Bolu – Credit Suisse

Sorry about that. Question was on interest rates VIX with the CME, if you could just help us understand how market participants currently get exposure to interest rate volatility? And if there are any conflicts with CMEs options about. I asked the question because that seems to be a growth area for them?

Ed Tilly

So the exposure in volatility in interest rates now would be much the same as exposure in volatility in a single line stock, meaning every time you trade an option you have volatility exposure. So similar to any of the single names or ETFs here at CBOE that do not have a VIX futures contract tied to it, would be the same way you can gain exposure in interest rates, just using basic option strategy. So this obviously is a coordinated effort with CBOE to bring VXTYN to the market, so we have the support of CME, and certainly we'll be using their option data and our VIX methodology to first launch a futures contract and then hopefully an options contract based on the futures. So this is very much as I said a coordinated effort, but today the volatility exposure would be very traditional in that you would be using options strategies in the ten-year option.

Christian Bolu – Credit Suisse

Thank you.

Operator

Thank you. And the next question is from Kenneth Hill of Barclays. Your line is open.

Kenneth Hill – Barclays

Hi, good morning everyone.

Ed Tilly

Good morning.

Kenneth Hill – Barclays

You guys have given a lot of good detail today on many so of the education efforts you have driving some of the growth in the SPX and the VIX products, but as you increasingly look to penetrate groups like hedge funds, commodity trading, prop firms outside of those education efforts, what kind of things can we expect to help grow in those segments, is there perhaps maybe more hiring to be done on the sales front, and even in other geographies as you extend some of these trading hours over time?

Ed Provost

Ed Provost again. We have in New York a very committed and dedicated team that's primarily focused on the institutional space, and specifically the hedge fund community. Our business development staff has grown over the last several years, consistent with the overall growth in our market. We have areas, we have people who are specialized in certain customer types, such as hedge funds. We have certain people that are specialized in certain product types, like volatility.

So we have a very sophisticated calling program, where we engage not only current users but potential users, both domestically and abroad. We record all of the visits we have so that there is a communication across all of our sales force to understand what the open issues are, what kinds of questions are coming up.

So we're very, very engaged in one-on-one meetings. We, of course, have talked often about our RMC, where we engage in a number of clients. And then we partner with other organizations and are participants again not only in the US but globally. We are in front of our customers on a regular basis and believe that is the way, the best way to get our message across. So we're very, very focused on the institutional community. Probably a lot more than we are on the retail, because I go back to my earlier comments where the retail community is very much self engaged through the options boutique firms who service them so well. We think the institutional space is the one where there is still the greatest growth potential. And we think that our sales staff is very, very attuned to their needs, and is in great contact with them on a regular basis.

Kenneth Hill – Barclays

Thanks for taking my question.

Operator

Thank you. The next question is from Jillian Miller of BMO Capital, your line is open.

Jillian Miller – BMO Capital

Thanks guys. Just going back to the VIX complex, you have this aggressive education plan for 2014, and I think on slide eight you have got OTC users, asset managers, pension funds, insurance companies that you're targeting, I was just hoping you could give us a general idea, I know it's not by any means an exact science, but a general idea of like what percentage of each of those user bases are already using the VIX products, versus what you think that could be or should be at some point in the future?

Ed Tilly

It's a great question, Jillian, and I think it's unfortunately my answer is going to be very, very similar to it has been in the past, every quarter, not every quarter but when we set new volume records, as we did first quarter, it tells us that there's so much more penetration to be had, that we're still really, really early. And the traders that we see today were really first movers, and we're still enjoying the first movers, and going out and teaching them what we see in the strategies we see, in both futures options trading as I said in the prepared remarks, trading all S&P volatility exposure across ETPs, SPX options, VIX options and futures, that we're able to then go out and convert those that haven't made the move yet in any of the categories that we've been talking about this morning. So again, I think I would just tell you that we're really, really early, coming off of just a terrific quarter again in VIX futures and options, that once we, if we see a plateau in the next few years, we'll certainly look back on this one and say yes, this was still in the early stages just like we told you last time, last year at this time.

Jillian Miller – BMO Capital

Okay.

Ed Tilly

I don't know if there's any other color you would add Ed.

Ed Provost

No, I think back to our RICs and how the agenda is setup, starting out with some pretty straightforward simple concepts, and move towards some of the most sophisticated concepts, and the sessions that are really the fullest are the ones that are at the learning of the basics of volatility. So there's plenty of people that are coming down there and learning about volatility, and are no doubt not yet currently using the product. I think between that and the visits that we have would suggest is a significant untapped user base out there, that we're trying to get to adopt to the use of these products.

Ed Tilly

Jillian I know your question was primarily around VIX but we see the same thing when we look at Weeklys, and I had a recent trip to a couple funds in New York, their use of weeklys and the growth of weekly use was very surprising to me. It is such an easy lay off for hedge in the short term, that is how this one fund just began using Weeklys a short time ago. So it's not just VIX, it is really the awareness of an access to all things S&P 500, and the Weekly shares that story, much the same way as trading VIX futures and options do.

Jillian Miller

Thanks guys.

Operator

Thank you. And the next question is from Gaston Ceron of Morningstar Equity. Your line is open.

Gaston Ceron – Morningstar Equity

Hi good morning.

Ed Tilly

Good morning.

Gaston Ceron – Morningstar Equity

I just wanted to go back to the seemingly never-ending HFT topic for a second. I hear what you said about I see very limited or I think you said no material impact on you guys from HFT activities. I was wondering would there be any kind of spillover affects into options though, if HFT were curtailed in some material way in the equities world, what would be the kind of spillover affect into options?

Ed Tilly

Great question. I think the issue is first defining HFT. So let's just say in the broadest sense, or if you use the enough fluff piece book, and define HFT that way, if there was some curtailing of HFT in the frequency of trading, we could see the markets widen a bit in the underlying equity markets. Assuming that the debate does not include an entire national market structure debate, which I think there could be some benefits we can talk about those as well. But just the pure HFT, the ability to change your market in a ratio that currently exists today, and we curtailed that ratio, we cut that back a piece, we could see the spreads widen a bit in the equity market. The result not surprisingly may be a slight widening of the markets in the equity space.

That's probably the impact that we see at this point. I know it's very, very simple, but it would show up in the bid/ask spread we can make an assumption in the options space. Now, that said, if the debate is broadened, and there's a market structure debate on dark pools, for example, that do not exist in the options space, and there was a movement to curtail dark trading and those trades showed up in the lit markets, then I think my answer is completely different, and the opportunity for all market quality would improve. Volumes would improve in the lit marketplace, and I think market quality and options would improve as a result. So we're so early in the debate and the potential changes to market structure, it's just how you define HFT, and then really how broad the market structure discussions and changes may be.

Gaston Ceron – Morningstar Equity

Got it. Thank you.

Operator

Thank you. And the next question is from Chris Harris of Wells Fargo Securities. Your line is open.

Chris Harris – Wells Fargo Securities

Thanks. Hey guys, just a kind of a big picture question on your margin, great quarter, record quarter for margin, nice leverage in the model. I guess what I'm wondering though, as you guys are at 53 percent-ish today. If we look at the pure play futures operators, they have margins kind of in the 60% zone. So as your business continues to migrate more towards proprietary, do you guys think you could get the margin up to that level, or is there something maybe structurally that prevents you from getting there, whether it be having to support all the secular growth we're talking about on this call, or having to operate the multiply-listed options business, which might really hamper the margins? Any color on that would be helpful.

Alan Dean

Sure, Chris. Alan here. I think there is room to grow margin, although that's a nice number, and I'm proud of the number we generated in the first quarter. Our first and foremost we're looking for profits to shareholders, and that's our focus. But the limitation really is just the variable expenses. So the royalty fees, trading volume incentives, some compensation is somewhat variable and tied to profitability. And that would be the limit, the top end limit to our operating margin percentage. There is room to grow, and it will happen in periods when we have high volume in our premium products like we had in the first quarter, and we've seen in other quarters, as well, if you look back historically four years we've been a public company, the big operating margin percentage quarters were always those quarters where we had big SPX and VIX volume. So there is room to grow, and there's no reason why it can't go higher.

Operator

Thank you. And the next question is from Rich Repetto of Sandler O'Neill.

Richard Repetto – Sandler O'Neill & Partners

Just a follow-up and to put Alan on the spot here for a second, the D&A, $8.6 million in the quarter, if you run rate that out it's $34.4 million. Just trying to see what's going to jump to get to the $38 million to $40 million range, because that would imply close to $10 million a quarter in D&A?

Alan Dean

Yes. The D&A is tied to our capital purchases, and when we put things into service we still believe that the guidance of $38 million to $40 million for D&A is good, and so that would imply higher D&A the remainder of the year, and so that's how we see it right now.

Richard Repetto – Sandler O'Neill & Partners

Okay. Just wanted to say Go Bruins, that's really why I got back in the queue.

Alan Dean

Oh, wow.

Ed Tilly

Rich I thought you had another open interest question.

Richard Repetto – Sandler O'Neill & Partners

Thank you.

Operator

Thank you. And the next question is from Alex Kramm of UBS. Your line is open.

Alex Kramm – UBS

Rich just asked my follow-up. I'll leave it at that. Thanks very much.

Operator

Thank you. The next question is from Mike Carrier from Bank of America Merrill Lynch, your line is open.

Mike Carrier – Bank of America Merrill Lynch

Just one follow-up for Alan on volumes, two points,- when you extend the hours to Asia relative to Europe, would you expect more uptake just given the users in Asia, typically are higher users of options. And then the second thing is, when you look in the market overall, when you see certain stocks like do splits, particularly when markets are hitting new highs, and you may have more new activity on the split front, are there any type of like options strategies that you would expect, like a pick-up in trading activity around those?

Ed Tilly

So on the extended trading hours, Mike, we of course would hope and expect to get incremental business, that's clearly why we do it. We know that in our current trading hours some of the flow coming to us is from Asia through London. But by extending our trading hours as we're going to be doing in June, we believe that we will receive incremental business directly from Asia because we'll be open during those hours. So that's clearly what our expectation and hope is.

Your second question was, let's go back to the first just for a moment. One of the nice trades that we're seeing and enjoying in Europe that we would love to see develop coming out of Asia, in the prepared comments we said there's a trade now in V stocks versus VIX. We think that is going to be we think a continued opportunity for us, and look forward to the same trade between when we look into the Asian markets versus VIX. We think that has a potential to build, and with our partner Standard & Poors are out, we actually have our key strategy guy now in Asia. So that is an opportunity for us going forward as well. And what was the second question?

Alan Dean

With respect to splits. I guess when you talk about that, I think of the Apple split coming up, and you take a product like that that's trading at $600, $700 and you're splitting it down, what is it, seven to one, or whatever the number was. Typically we've seen industry volume in the options increase. If the objective of a split is it will draw more investors into the stock because it's a lower priced stock, I think what we have generally seen is that's favorable to option volume. So as to specific strategies, it would be tough to comment on that, but splitting a stock of that number down to a smaller more investable size, which I believe is what the corporation's objective is, would generally result in the similar increase in volume in the options space.

Mike Carrier – Bank of America Merrill Lynch

Okay. Thanks a lot guys.

Operator

Thank you. There are no further questions at this time. I'll turn the call back over for closing remarks.

Debbie Koopman

That completes our call this morning. We appreciate your time and continued interest in CBOE Holdings. We will be available today for any follow-ups you may have. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference, you may now disconnect. Good day.

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