CBOE Holdings' First Investor Day - Conference Call Transcript

Oct. 6.11 | About: CBOE Holdings (CBOE)

CBOE Holdings, Inc. (NASDAQ:CBOE)

Analyst Day Call

October 5, 2011 10:00 ET

Executives

Debbie Koopman – Director of Investor Relations

Bill Brodsky – Chairman and Chief Executive Officer

Ed Tilly – Executive Vice Chairman

Dick DuFour – Executive Vice President

Ed Provost – Chief Executive, Vice President, Business Development

Paul Stephens – Director and Department Head, Institutional and International Marketing

Gerry O'Connell – Executive Vice President and Chief Information Officer

Alan Dean – Executive Vice President, Chief Financial Officer and Treasurer

Analysts

Rich Repetto – Sandler O'Neill

Niamh Alexander – KBW

Ken Worthington – JPMorgan

Jillian Miller –BMO Capital Markets

Mike Carrier – Deutsche Bank Securities

Chris Allen – Evercore

Roger Freeman – Barclays

Dan Harris – Goldman Sachs

Patrick O'Shaughnessy – Raymond James

Justin Schack – Rosenblatt Securities

Howard Chen – Credit Suisse

Debbie Koopman – Director of Investor Relations

Thank you. Good morning, and welcome everyone to CBOE Holdings First Investor Day. I am Debbie Koopman, Director of Investor Relations. We are delighted that you could make the trip to Chicago to join us today and we’d also like to welcome those participants that are listening via the webcast. We will be advancing slides during our webcast presentation, but please note that a downloadable copy of the slides are also available on our Investor Relations portion of our website.

As you can see from the agenda, we have full schedule today this morning. We’ll start with Bill Brodsky, and then Ed Tilly and Dick DuFour. We are going to be discussing the company’s key strategic growth initiatives as well as the drivers that positioned CBOE so uniquely and advantageously to take advantage of the benefits of the enormous potential of the options market. We have also built in plenty of time for Q&A. After the morning pre presentations in the morning, we’ll break at 10 AM for about 15 minutes and then return to hear from Ed Provost and we’ll follow up with question-and-answer session with the management team.

In addition to the speakers that you see on the agenda, we also have a number of other senior executives, management team with us today. We have Joanne Moffic-Silver, our Executive VP and General Counsel; Pat Fay, our Senior VP of Corporate Planning and Development; Phil Slocum, our EVP of Trading Operations; Eric Frait, our VP of Strategic Planning; Joe Levin, our Vice President of Research and Product Development; Carol Kennedy, the Vice President of Corporate Communications; Dave Reynolds, our Chief Accounting Officer; and Laura Zinanni, Senior Attorney. So, hopefully you will get a chance to meet some of those folks as well.

We are going to break for lunch at 11.30 to 12.30 Chicago Time and during that break, we’ll take a break from the webcast during that hour. Then we’ll reassemble at 12.30 with a panel discussion from the group of our customers that be moderated by Paul Stephens who is from our Marketing Group; then Gary O’Connell and Alan Dean will follow that and will wrap up with another question-and-answer session with the management team.

We plan on ending the program at about 2.20 at which time we’ll have a bus take people over to CBOE for those of you who signed up to take the tour of the trading floor and the operations. We also don’t want anybody to leave here empty handed today, so we have some books on the table back here that I encourage you to take. One of them is VIX Trading, a book on VIX Trading that was written by one of the Options Institute instructors. We also have some posters on the VIX strategy. We thought you might need those to spruce up your office that is unless you can convince your significant other that this is a truly unique work of ours that deserves the prominent place in your home.

I know that we all have them in our four years. Before we begin our presentation I do have to do minor housekeeping saying and read the safe harbor provision. You should be aware that this presentation contains forward looking statement, which represent our current judgment and 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, risk, and uncertainty.

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 today’s meeting.

With that, now I’d like to introduce Bill Brodsky. Bill is Chairman and Chief Executive Officer while Bill requires little introduction because he is such a well-known leader in the industry, let me just give you a few highlights.

He has been Chairman and CEO of CBOE since 1977 and throughout his distinctive career which spans more than 40 years, he has helped physicians in every sector in the exchange base. Also he was the first leader of derivatives exchange to be named as Chairman of the World’s Federation of Exchanges. Bill will discuss our strategic focus and competitive landscape and provide you with an update on the regulatory environment. Bill?

Bill Brodsky – Chairman and Chief Executive Officer

Good morning. First of all, I want to add my welcome to Debbie’s. We are delighted to have such a full group of people in the room here. It’s our first Analyst Day and so we are very excited about it. Number two, I want to clarify, Debbie said I have been CEO of the CBOE since 1977 and it’s really was 1997. Okay. And third, Debbie said that there are two books in the back. She mentioned one of them, but I want to mention the other book, because I am personally very proud of it.

A year ago this week, the World Federation Exchange has celebrated 50th Anniversary and in commemoration of that we published a book and that book is on the back for you and the chapter that I am most proud of is there is a specific chapter about Chicago and why what you spent yesterday and today doing happily in Chicago? Why Chicago, not New York? And so as you peruse the book, there is a specific chapter and it basically was what was in the water in Chicago between 1972 and 1973 that allowed what now are the two leading exchanges in both futures and options to succeed in a global environment.

So, let me now go to my presentation and we’ll start off for those on the webcast, they can see this, the fact that we have some wonderful pictures up, but our exchange has a remarkable history. CBOE created the options industry in 1973 with the launch of options on the stocks of 16 companies. Today, more than 2500 listed products traded CBOE. Options trading has evolved into a dynamic and highly innovative industry that continues to grow at a double-digit clip. Many of these people that you meet today both here and our trading will help write that history. More important, they are busy writing the next chapter.

Working at CBOE is unique in that way. The person sitting next to you at lunch may have helped create the products that trade here today will design the systems that trade them. We leverage our expertise in product development, trading technology, and investor education to shape and lead the growth in the options and volatility space. This is the core of our mission and how we not only serve our customers, but create shareholder value. It is why we build our systems in-house, why we continue to invest in product innovation and why we operate our own options educational facility? It creates a book on VIX that you have in the back of the room for example.

Our strategic plan positions us to execute our mission to lead the industry’s growth. Specifically, we will continue to create new products and leverage our exclusive product line, expand our customer base, options education, and social media and build on the initial success of C2.

We continue to implement programs to attract OTC participants to the CBOE’s marketplace. We will pursue select strategic opportunities that enable us to diversify our revenue resources, to expand offerings along the value chain, and to capitalize on our core competencies. You will hear more about our strategy as we move through our presentations today. But first, let’s take a look at the opportunity at hand.

CBOE Holdings provides exposure to a large and growing market. We see significant opportunity to expand market penetration given the size of the options industry relative to the more mature markets such as equity. Total U.S. options volume increased 8% in 2010 over 2009 while in by comparison U.S. equity volume declined 11% in 2010 over 2009. As shown here, the industry’s compound annual growth rate since 2000 is 18% while the compound annual growth rate since 2005 is 21%.

The U.S. options industry has set annual volume records in 17 of the last 18 years. August 2011 was the options industry’s and CBOE’s busiest month ever. Trading is on pace to surpass 4 billion contracts this year making it the sixth consecutive year of record annual volume. Several recent studies have highlighted the trend in expanding the user base of options.

In a report released in 2010, the Tower Group found that 65% of institutional investors plan to increase their use of options. A May 2011 study by Bellomy Research found that 36% of the financial advisors with less than $50 million in assets under management used options to their clients’ portfolio last year. Among advisors with more than $500 million in assets under management, the use of options climbed to 94% one of these – one in three advisors that they plan to increase the use of options going forward. According to a June 2011 TABB Group report and I am quoting the demand for U.S. options continues to increase with great adoption across nearly all investor segments.

And in September, the TABB Group noted that European investors account for an estimated 10% of U.S. equity options volume, a trend that predicted would continue based on European institutional investors’ broad exposure to U.S. equities. Volume growth, independent studies, and our customer research all point to increasing demand for options across a large variety of customer segments and demographics. We’ve arranged for customer perspectives panel later today that we hope will provide you with additional color and insight.

Opportunities for growth have attracted new entrants to the market. Today, there are nine competing U.S. option platforms currently owned by six exchanges or holding companies, CBOE Holding, NYSE Euronext, and NASDAQ OMX operate two option platforms each and the Deutsche Boerse operates one through its ownership of IFC. With the planned NYSE Euronext and Deutsche Boerse combination that would reduce the number of holding companies, we would not expect it to change the number of option platforms. We would expect to compete against the same seven platforms in the same way that we compete with them today.

More important, we remain well-positioned to continue to grow profitable market share going forward regardless of any new business combinations among exchange operates. Among the nine options exchange holding companies, over 75% of the business is concentrated at three exchanges, CBOE, NASDAQ, NYSE Euronext. CBOE continues to hold the leading market share overall in any single options platform. The twos market share is 1.1% after our 11 months of trading. This really is just the beginning of the C2 story. Ed Tilly, our Executive Vice Chairman will provide some color on C2 in his presentation. At the end of September, CBOE Holdings’ total market share that CBOE and C2 combined is 26.6% or 27.5% minus dividend trades. We have maintained our overall market share in the 26% to 28% range for the past year without sacrificing revenue per contract.

Let’s take deeper into market share and see how it relates to RPC of the CBOE. We want every trade to come to CBOE, but not all trades are equal. We look at three options exchange categories, equity options, ETFs, and Index options. In addition to VIX futures which have grown to be another key performance metric. The first chart show CBOE is leading the highly commoditized hypercompetitive equity options arena.

Next, our ETF options where we hold a close second in a very competitive category. Each of the three leading exchanges are within two market share points of each other. The last chart illustrates CBOE’s dominance in the Index Options space that results from our proprietary and exclusive products.

CBOE trades more unique products than any other U.S. options market. Our Index Options include both multiply listed classes and premium products found only of CBOE. VIX futures trades only on the CBOE futures exchange. Each product category drives a different rate per contract opportunity. Looking at the RPC for the three months ended August 31, you will see the equity options are about $0.16 a contract, ETF options nearly $0.19, index options of $0.606, and futures contracts were $1.36, I’m sorry, $1.38.

The higher RPC CBOE Holdings enjoys in index options and futures is driven by our VIX product line as well as products based on exclusive licenses with our partners, Dow Jones and Standard & Poor’s. Dick DuFour who heads our strategic planning group at CBOE will discuss these valuable relationships later this morning while Alan Dean our CFO who outline our financial performance. In addition to our exclusively traded index options led by SPX, VIX, OEX and DJX, CBOE also trades RUT to the Russell and NASDAQ NDX options which are multiply traded. CBOE leads the industry in trading these two products as well.

The beauty of the option product lies in its utility and its versatility. Options may be used in virtually any market environment for protection or to enhance profit. There is useful to the buy and hold retail investor as they are to the most sophisticated quant. Over time, CBOE has taken the basic options concept and seen it evolve in ways we never dream possible. But nearly 40 years we have created equity options, index options, Leaps, FLEX options and VIX options. CBOE is the undisputed options innovator.

More important, R&D never slows at CBOE. We continually search for the next new thing. We didn’t plan to launch SPXpm on the eve of our first Investor’s Day, but it does lend a timely case in point. We believe SPXpm has the potential to be another game changer. Ed Tilly will also cover SPXpm in the session, and while product innovation most visibly separates CBOE from the pack, technology and customer education by strong supporting roles.

Later this morning Ed Provost, Head of Business Development will talk to you about our educational and marketing efforts and this afternoon our CIO, Gerry O’Connell will discuss systems development. Before I turn this over to Ed, I want to touch on the regulatory front and had few my own observations about the industry and about CBOE.

CBOE is the acknowledged thought leader. We continually educate policy makers and legislators in order effectively advocate to our customers and to favorably impact policy related to our business and our industry. The Dodd-Frank will continues to be the foremost on the agenda regulated. We fully support his broad mandate to bring more OTC-types of trade onto exchanges opportunities are to be centrally cleared. Attempts to implement the bills have become sub-politicized that is difficult to measure the impact we will have on the options marketplace.

Regardless of the extent to which Dodd-Frank ultimately influences exchange trading customer themselves have increasingly select exchange trade alternatives to the OTC market in the wake of the global financial crises. We continue to cater these customers. For instance, we retooled our FLEX options to trade even more like OTC products, while retaining the benefit of exchange regulated trading. SPXpm provides a common OTC settlement feature, well also enabling the user to minimize counter-party risk.

In addition, CBOE is well position to benefit to the SPXpm options traded in the OTC space require central clearing. CBOE and S&P agreed late last year that S&P may license more one or more clearing agencies to clear OTC options based on the S&P 500 index and that S&P would compensate CBOE for such transactions based on the notional value. Subsequently, OTC was licensed by S&P to clear OTC options based on the S&P 500.

That we have said, I quote some statistics regarding industry growth and its potential, but my personal view is that we really only begun to scratch the surface. Today’s young traders and inventors of the first-generation to learn about options in a text book. This is quite early in the evolutionary chain. The fastest growing segment of our business VIX trading is only seven years old. The VIX concept that attracted the best and the brightest in our trading community. A year ago we built a new pit will accommodate the growing number of volatility traders and many of the firms actively trading VIX options and Futures have established their headquarters nearly exchange.

We are pleased that one of these traders been longer than co-founder of Group One Trading and one of our resident next person volatility trading will join us at launch today to share his perspectives on the growth of volatility trading.

Our volatility franchise has been remarkable success story, but it is not the only nor will that be our last. People come to work at CBOE each day believing that they can and will be part of the next options breakthrough and you will meet some of these people today. And in an environment of fosters innovation, CBOE brings ideas to the marketplace and market recipients bring their ideas to CBOE. The impact of that environment is not easily quantified, but we believe it drives very measurable results and helps makes CBOE fully unique.

With that, I want to introduce Ed Tilly, Ed has been our Executive Vice Chairman since 2006 prior to acting he was CBOE’s member Vice Chairman and a highest member elected position. He was a CBOE member from 1989 to 2006 and he was trader on the floor as a market-maker with enormous experience in the business and five years of being part of the senior executive team. Ed Tilly.

Ed Tilly – Executive Vice Chairman

Thanks Bill. Thank you all for joining us today. I would like to spend my time with you this morning on product development and CBOE’s growth story as it relates to bring innovative products to the marketplace.

First, we can see nothing in the daily battle for equity options order flow, a highly commoditized with nine different platforms computing fiercely with fractional shares of the market. But we are equally committed to driving growth. We are developing new game changing proprietary products. CBOE is the industry’s only product innovator of consequence. As a result, our product line is highly differentiated includes more unique products than any other U.S. options market.

Our index options include both multiply-listed classes and most premium products offered only by CBOE Holdings. Today, I’ll focus on two products areas that have been very active as of late. First, I’ll discuss how the recent levels of market volatility relate to the ongoing growth of our VIX product line. And second, the plans for our new SPXpm product. Along the way, I’ll try to convey some color on how products are developed at CBOE.

I am often asked how long it takes to develop a product. The simple answer is it depends on the product. CBOE’s volatility index or VIX was launched in 1993 and seemingly overnight became the world’s premier measure of market volatility. The road to a tradable product was less direct. Among legions of VIX watchers, few thought to have the makings of the tradable product.

The idea of trading a standalone volatility product in like science fiction even 10 years ago, even those who thought it possible doubted (indiscernible). The CBOE always believed in it. We had figured out how to isolate volatility and we were determined to figure out how to trade it. At last, it was always when and how, never if. An unsung advantage if CBOE is trading for is that it means we have some of the industry’s most sophisticated options practitioners literally in-house. We tap into this resource on a regular basis.

You can imagine that the research team who help developed VIX coupled with the best and the brightest option traders in the business. We are not going to pass on the opportunity to create a tradable volatility product. Naturally, we set out to develop an option on the pricing of a wholly novel product was the major hurdle. And working on the early iterations with our traders, we determined the best path to overcoming the pricing obstacle was first to create VIX futures product from which options prices can be delayed.

So, we had a very a (indiscernible) sounding option product that you thought to trade, but we first had to create a futures contract and then a futures exchange to trade it. It certainly would have been simpler to license the product to another futures exchange. But in addition to helping price the option, we believe VIX futures had tremendous potential in their own rate.

Moreover, our custom bill trade engine enabled us to efficiently and cost effectively launch a futures exchange. CBOEdirect was engineered by CBOE for maximum flexibility and scalability factors that enable us to seize the opportunity afforded by VIX futures. You’ll hear more in our technology platform in Gerry O’Connell’s remarks later this afternoon.

We launched VIX futures and CFE our wholly owned futures exchange in 2004 and subsequently launched VIX options and CBOE in 2006. The growth of VIX futures and options has been nothing short of phenomenal. As shown on the slide, growth in VIX futures and options trading has been a steady upward client with trading volume in VIX futures nearly tripled year-to-date and VIX options nearly doubling compared with same period last year.

This tremendous growth is increasingly driven by a growing number of ETF and ETM products tied to VIX. Those products are brought to the market by major firms which CBOE views as partners growing the volatility space. My last count will be more than 40 such products with assets under management of about $2.7 billion. It’s instructive to note that the sustained study growth in VIX options trading even in periods of low volatility punctuated by sharp increases in trading and we have extreme volatility spikes as we did in August and September.

Not surprising when market volatility eases after periods of extreme volatility, VIX volume also received, but tends to put to a little higher level than prior to the spike. This pattern reminds us that volatility trading is still in the early stages with considerable for growth.

We see a similar pattern play-out in terms of customer awareness of VIX. CBOE is the go to place for both trading and learning about volatility. Our media coverage of VIX and volatility trading continues to steadily increase when what have been challenged during the recent high volatility groups to read, watch, or listen to the financial media report that didn’t include one reference to that. We think of this as mainstream of VIX. Peaks in volatility bring with them heightened public interest in CBOE and its products.

Volatility is headline news generates tremendous interest in VIX trading as well as CBOE and CBOE is well-positioned to leverage these marketing and educational opportunities. CBOE’s Options Institute, our award-winning website and our leading loan social media enabled us to cost effectively educate investors and elevate the profile both CBOE and VIX. Ed Provost will cover our marketing efforts later this morning. To further leverage the VIX brand, we’ve worked closely with our partner Standard & Poor’s to create a series of licensing agreements that are bringing the VIX methodology to key markets around the world. Dick DuFour will discuss license index.

Let’s turn to SPXpm. We successfully launched yesterday. SPXpm is another example of the union of product innovation, trading technology, and investor education of CBOE. SPXpm is an electronic cash-settled index option based on the S&P 500 with pm settlement. The S&P 500 index is the premier broad market indicator and CBOE’s SPX product is the most actively traded cash index option in the U.S. Year-to-date, SPX trading has averaged about 782,000 contracts per day, up 7% compared with the same period last year.

CBOE is trading for traders negotiate large and complex institutional orders in open outcry drives the ongoing success of SPX. Our goal was to harness the power of SPX in order to create the best-in-class among electronically traded S&P 500 products. CBOE’s creation of C2 or all-electronic options exchange laid the track for us to create an electronic product that complemented SPX.

Next, we collaborated with our vast index trading community to design a product with meaningful customer-friendly futures not found in other electronically traded S&P 500 options product. Although many customers were already using other electronic S&P 500 options, our research suggested I guess prior to a lower cost alternative with the leveraging found in SPX. We listen to the market.

SPXpm is 10 times larger than SPY options, which significantly lowers the cost of accessing a pm settled S&P 500 product. We made it cash settled as opposed to physically settled eliminating delivery of the underlying. We employed European exercise eliminating the risk of early assignment. The result is the product tailored to offer S&P 500 option customers, point-and-click access with greater efficiency, greater control and lower cost.

The launch of SPXpm on C2 complement with the trading of SPX on CBOE enables us to broaden our customer reach with too very deep pools of liquidity. One that favors the convenience of screen trading and one that favors the flexibility afforded by poor trading negotiate large complex orders. We received enthusiastic interest in SPXpm from a diverse group of customers beginning with liquidity providers currently trading SPX, active retail investors and traders, online users before a higher notional value S&P 500 contract.

And OTC users seeking an exchange traded alternative that minimized counterparty risk for all new important participants. We are rolling out a targeted marketing program in that rapidly building awareness of SPXpm among customers likely to be early adapters including users of SPY option and other index ETF. He has directly addressed the differences between SPXpm and other S&P 500 contracts such as SPY. We think that SPXpm will compare favorably for many users.

A word about SPXpm and how it relates to C2 our electronic exchange. C2 continues to gain tractions in the options market. Second quarter average daily volumes are 191,000 contracts, an increase of 18% over the first quarter 2011 and (indiscernible) trading. Third quarter average daily volume rose to 253,000 contracts, up 32% compared with the second quarter. Several in the users have recently connected to trade SPXpm and we expect these new customers will trade (indiscernible).

In closing, I’d like to say that product development not only differentiate at a point of private CBOE. We are able to reach new customers and have new market segments through our focus on innovation. The marketplace is always on the lookout for new products and allowing an idea of why then the CBOE stand apart in product innovation. The challenge lies in taking an idea and making it into a testable and tradable reality.

Product innovation at CBOE is disciplined ongoing development process led by a first grade research team. Our research staff meets regularly with voluntary community of liquidity providers from our media trading community proceed and that new product concepts, those do viable are then further refined by our research team and brought to a larger in-house development team, which includes system developers, market regulation experts, and attorneys. And if the idea is still breathing when the group is done beating it, you might just have a tradable product.

Next, the concept is presented to our business development team, CBOE’s liaison with the buy side community for additional input from a customer’s perspective. And when we feel the product idea is ready for the outside world, we presented to run users for their reaction. The entire product development community meets regularly at an ongoing process of betting, testing, refining, retesting and so we are convinced our product is ready for primetime, that’s where the trading community. The real asset for us we can literally field test ideas as we develop them.

We may tweet the process depending on the nature of the product, but we use the basic blueprint in all product development from the Leaps, FLEX, VIX futures and options, and to strategy benchmark indexes like CBOE’s S&P 500 violating them. Not every concept makes it to the finish line, but we always have and know the pipeline.

On that note, I’ll turn over to Dick DuFour who is going to discuss our licensing partnerships, because Executive Vice President of CBOE and overseas strategic planning research, product development, product licensing, and international relations. Thank you.

Dick DuFour – Executive Vice President

Thank you Ed and good morning everyone. I am going to briefly cover three topics. CBOE’s activities and with respect to development of proprietary indexes and the license into those indexes, the scope of our license with S&P and the opportunities that are created by the combination of our licensing activities, our proprietary products, and our relationship with S&P.

And those are opportunities both for CBOE and for our licensing partners. There’s probably two key takeaways from this briefing. One is that CBOE has long-term mutually beneficial relationships with all of our licensing partners and the second is that CBOE’s proprietary indexes when combined with our index licenses and our relationship with S&P provides tremendous proper opportunities for both CBOE and S&P.

Let me start with touching on the general characteristics of CBOE’s derivative index, proprietary index and licensing activity. We have a number of proprietary indexes, some 40 in all, you’re probably familiar with a handful of them. We use those to create options products, futures products, and we also use them to license and I will come back to that in a moment. We also have four principle licenses, where were the licensee and we use these to create primarily actions products.

The first is the S&P 500, of course, which dates from 1983 it runs till 2022 that’s exclusive till 2018. Second is the Russell 2000 which dates from the late 1980s. It runs until the end of 2012 actually. And in the case of Russell as an organization, they typically only extended their licenses for a year or two at a time. So, over the next 12 months, we would expect to be talking about them about a further renewal. Third is the NASDAQ 100 which dates from 1993 the current index was the license was renewed just a little over year ago and runs till 2015, that’s not exclusive.

Finally is the Dow Jones license that started in 1997. It actually also expires at the end of 2012. However, in the case of that license both parties have the right to renew it for an additional five years in the same terms for all practical purposes out there which runs till the end of 2017. I think the important point in all of this is that all of these licenses have been renewed numerous times and the longevity of these licenses I think reflects the mutually beneficial aspect of these relationships.

The third characteristic is CBOE also grants licenses, use of indexes, CBOE proprietary indexes, and we do this through our index partners, primarily through S&P. And these licenses grant third-parties the right to use the CBOE Index or use the CBOE Index methodology, where they may cover the use of CBOE data or certain marks associated with those licenses.

Of course, CBOE’s most important license agreement is with S&P with whom we have had our 28-year relationship. As you can see from the slide, it’s been renewed on multiple occasions probably of more importance is we are now up to Amendment No. 11 of that agreement. Each of these amendments has tended to broaden and deepen the relationship between the CBOE and S&P such that today I think of their relationship as more of a partnership than as a licensing arrangement.

So, let me now move on to the second topic, which is sort of a high-level outline of the S&P license. It has a number of assets. CBOE has exclusive rights to use the S&P 500 and the S&P 100 rate exchange traded securities actions. CBOE also has exclusive right to use the S&P 500 to create indexes we drive from that mix being an obvious example.

And third, CBOE grants to S&P the semi-exclusive right, I’ll call it to grant licenses to third-parties, when I say semi-exclusive, it relates to those indexes we developed that are related in some way to the 500. When S&P grants a license to a third-party, of course, the revenue is shared between CBOE and S&P. And this applies not only to indexes developed by CBOE using intellectual property of S&P it also applies indexes developed by S&P that utilized intellectual property at CBOE.

So, the economics are pretty straightforward. CBOE pays S&P for contract royalties on the products we trade. In addition, we pay S&P contract for contract royalties and some products that are owned by indexes and products that are owned by CBOE. And I’ve been asked why we do this? And the reason is pretty straightforward, one it was a recognition – done in recognition of the intertwining of our products and business model. And second, it was done as a means to ensure that we both had an interest in the success of these products.

The other question that I’ve got more recently is how does this reported arrangement between CME and McGraw Hill affect our license? First of all, it has no immediate affect on the license. Our license provides any change in control that works in both directions. And second, I’ve actually given this quite a bit of thought and I see nothing but positives in it.

CME understands this well as we do the synergies between their products and ours. We are, if not their largest single customer close to it, and I say us I mean our trading (indiscernible). And second, CME certainly understands the value of keeping these products traded in their own central market. There is no particular advantage to be gains and splitting up that liquidity. And I am sure I will get some more questions.

So that this takes me to now the third topic, I mentioned that is the opportunities traded by these proprietary products in the licensing. And I’ll focus on S&P although we have similar arrangements for the other index providers. I think the opportunities fall in the four categories. We create opportunities for investors. We create opportunities for firms that issue products based on these indexes that create of course opportunity for CBOE and for S&P 100 and touch on each of these.

I mentioned that CBOE has quite a number of proprietary indexes. We actually calculate and disseminate some 40 indexes. This slide shows some examples of some of them. Some of them we trade products. Others are simply using licensing or as benchmarks. These benchmarks and products tend to create opportunities for investors in a numbers of ways. For example, VIX gives investors a tool for gauging expected market volatility.

Second example, the buyer rate and the put rate provide a benchmark or options trading strategy and of course funds have been created relating to both of these categories and that takes us sort of the next opportunity, which is the opportunity for issuance.

At the end of September, they were some 40 structured products based on VIX or VIX related benchmarks, most of these, but not all are exchange traded note. Currently, there is something like $2.7 billion of assets under management related to these products. Of course the issuance of these products, create a profit opportunity for the issuers.

They also lead to the third opportunity, which is they generate more trading volume on CBOE. This happens as a result of the issuer of these products is in the underlying products SPX VIX Options and VIX Futures to hedge their risk. And you can see deliver all the illustration of this on this next page. This chart shows the relationship between the volume and VIX Futures in this case and assets under management in two structured products, the Barclays iPath, notes the VXX and VXZ.

The first exchange notes were listed in 2009, where you see that green line starting and as you can see this trading volume in VIX Futures is highly correlated with the assets under management. The same would be true by show the same relationship between the VIX Options and the asset under management.

I should also note although as we probably already covered in the month of August VIX Options and VIX Futures between the traded a combined 0.5 million contract trade book. So, that takes us into the fourth opportunity, which is the success of the structured products has generated additional licensing opportunities for CBOE and S&P. This slide shows the current license fees.

As I mentioned both S&P and CBOE derive revenue from licenses, fees, indexes both the index is created by CBOE and those created by S&P that are related to that. And note that the licenses cover a variety of products both exchange-traded and over-the-counter and the licensees range across the number of types of organizations ranging from asset managers to investment banks, exchanges and in one case an insurance company.

So, where we do go from here though obviously CBOE continues to work with S&P with the issuers for the exchanges to try and build on in the hands the success of CBOE’s proprietary indexes. Current emphasis is clearly on VIX and related products. We have also created something we called the VIX Network. The VIX Network is an affiliation of those exchanges that have agreements with CBOE is our VIX methodology. And the reason for this is we learned the hard way that developing a volatility of the experts robust enough to create traded products on as the number of landmine. A lot of obstacles that have to be overcome and we try to use CBOE as a case study in helping these other exchanges develop their indexes and develop additional products on them with the idea that ultimately the success of that will rebound after CBOE and S&P.

So, in conclusion let me repeat the two key points. One CBOE has longstanding mutually beneficial relationships with all of its index providers and in particular with S&P. And second, the CBOE’s index licenses when combined with our own proprietary products and licensing activity provides significant profit opportunities for CBOE and it’s index partners picking, particularly S&P. Thank you.

I get to introduce someone too. I get to introduce Mr. Coffee Break. So, we’ll take a break and back here at ahead of schedule, so 10.15. Okay, so have some coffee and we’ll take a break.

[Break]

Debbie Koopman – Director of Investor Relations

Everybody take their seats, we’re going to get started again. I want to welcome everyone back. It’s my pleasure to introduce our next speaker Ed Provost, Chief Executive Vice President of Business Development. He is also the Chairman of the Board of Directors of the CBOE Stock Exchange. Ed joined CBOE in 1975 and clearly knows this way around the derivatives market.

With that, I will turn the mic over to Ed.

Ed Provost – Chief Executive, Vice President, Business Development

Thanks Deb. Just let you know I started when I was nine years old. I’m pleased to speak to you today about our efforts to grow in the business it’s CBOE through various marketing and educational initiatives. The CBOE’s business development division is effort is organized into seven areas as said forth in the slide. Our primary objective is to increase the overall trading volume at CBOE.

We have over 40 individuals organized by a combination of customer type retail versus institutional versus liquidity provider and promotional factors. For example, advertising versus education involved in our business development efforts. Our efforts are global with customer facing meetings in every major country in the world. Our sales approach is multifaceted favor to the institutional buy side, sell side as well as the retail order flow providers and to the liquidity provider community.

While we promote all of the products at CBOE, our efforts are primarily concentrated on proprietary and exclusively traded products. Our key product groups are listed here on the slide. With respect to our proprietary products including our index and volatility products, our objective is to grow overall volume by increasing the understanding and use of these products by both institutional and retail investors through education. As the multiply trading classes we rely heavily on the industry’s educational collaborative one by the options clearing corporation called the Options Industry Council or OIC.

We grow the single stock in ETF option groups. Our objective with respect to multiply traded classes is to use our valuable resources to increase our slides of that type, while relying on the OIC to increase the size of that type. This slide shows our three major product segments. As the retail flow, most of it comes to CBOE and to other options exchanges with wholesalers or more commonly known as consolidators, user execution of the large market maker firms.

In contrast, institutional flow typically follows a separate path to the customer’s prime broker with the different set of decision makers. These orders are generally routed on an order-by-order basis. And finally just as we compete with order flow, we compete to the valuable interest of the liquidity provider.

Our constant challenge is to ensure that CBOE is the destination exchange where order flow of all types and is the marketplace of choice for the liquidity provider community including both market makers and sell side facilitation desk. This requires constant evaluation of our market model and the cost of doing business on CBOE.

This is the list of the firms that participate in our managing director’s advisory committee. These firms represent nearly all of the retail order flow in the U.S. options business. Our staff maintains a continuous and ongoing dialog with the individuals with an each of these firms that are influential in directing option order flow. We achieve that by our signing the primary and backup account manager or every single firm. Our challenge is to assure that the key decision makers in these firms have complete and current knowledge of our continuously evolving market models and pricing structures.

I can tell you that with nine exchanges it’s nearly and possible for the people of these firms to stay on top of everything. We insure that they have it right at CBOE. In the case of institutional order flow, we have a much more direct contact with the actual end user customer in that space. In addition to interacting with sell side desk is serviced the institutional community, we have numerous one and one meetings with institutional buy side customers, consultants, and advisors throughout the year.

We do this in part are utilizing the numerous global derivatives conferences is a cost effective means of interacting with our institutional customer base. As you can see from this very busy slide, we are participants in conferences worldwide ranging from several hosted in our own building here in Chicago, the conferences in Europe, Asia, and even some in mainland China.

One particular conference which I’ve highlighted on the slide is a CBOE’s own risk management conference. Now in its 28 year, the risk management conference or RMC is hosted by CBOE to promote use of our proprietary products through education, ensuring of the latest research, and risk management strategies.

This year’s (indiscernible) which was sold in late February or early March attracted a record number of financial professionals and traders. It also provided a unique opportunity for us to network closely with current and prospective institutional buys the clients. I thought it would be interest and show you the actual agenda for this year’s RMC.

On the first day, we get it to new users of our products with class is focusing on basic option strategy and an introduction to volatility products. You will note that on the second day, things become much more advanced with sessions addressing more complex strategies involving the use of our SPX and VIX products. On day two, we also run a parallel track for insurance company professionals. Many of whom had traditionally used the OTC market and hedge liabilities, which may be incurred in the products they offer such as variable annuities with, guarantee benefits.

That CBOE are broad challenge is to make the case of exchange traded and centrally clear options and specifically our proprietary products of better alternative than the OTC market.

This slide show some of the larger providers of liquidity at CBOE, a group that needs to – that need to be responsive to as much as we do our order flow providers. Although, once dominated by colorful individual sole proprietors, the market make role has been mostly institutionalized and dominated by firms shown on the left side of the slide. On the right side of the slide is the list of firms where significant participants in providing additional liquidity to our markets through the commitment of capital from their facilitation and institutional trading desk.

The presence of both of these liquidity product provider groups is the essential to ensure a continuous – continuously disseminated quality market with additional liquidity when necessary to support the execution of larger sized orders. As with our other sources of business, our constant challenge is to ensure that CBOE is the exchange, which provides the market model and fee structure then it sends both of these valuable sources of liquidity we choose CBOE.

As I stated earlier, the key to growth in the options product is education. The Options Institute is widely recognized as the industry leader in options education. The institute provides quality education to numerous groups ranging from brokers and pension consultants with institutions and retail advisors. We also provide options education to governmental agencies including the SEC, the Federal Reserve Bank, and even the IRS.

CBOE’s commitment to education really differentiates us from any of our competitors. I’d like to show you an example of the value of options education. We developed a new program called Options Institute Plus and we’ve been working with Charles Schwab to customize their program for their use and they offer it to their clients for a fee. (indiscernible) which is the document that the customers give. They charge $800. They have had a tremendous interest in their program to attract the trading activity of the customers who avail themselves of the program and guess what the data shows that following the completion of this program, the option activity has increased in the accounts of those clients who undertake the effort. We are developing similar programs with other firms as well bottom line here is education works.

CBOE’s website, cboe.com is the definitive source for option trading information on the web and is the most widely followed option-specific website. Cboe.com which has received Forbes’ best of the web recognition since 2001 is the portal for all things CBOE. Through cboe.com, we project our entire brand including information about CBOE Holdings, its four exchanges, and its products through over 75 micro websites. In order to accommodate our international following, the site is available in Spanish and Chinese as well.

CBOETV is one of those popular areas of cboe.com. In fact, you saw some clips earlier today. The primary focus of CBOETV is market news, education, and of course, again our proprietary products. We produce 24 shows weekly with over 500,000 viewings each week.

In the area of social media, CBOE maintains a massive Twitter following with over 0.75 million followers. Also we use Facebook for promoting educational events as well as product information. This year within our website we launched CBOE communities the section that contains articles written by Options Institute instructors and selected contributors blogging about market news education and new products.

After a news article is published, we use Twitter to announce the article and then through the miracle of re-Tweeting, the existence of the article becomes instantly known. I am sure that most of you, the savvy people on the room have already downloaded the CBOE iPad or iPhone application for those of you who may not have that’s the picture of those, they have then downloaded thousands and thousands of times.

Finally, we do use traditional media to convey our message as well. Starting upon the focus of our ad, we use our online ads or print pubs going on the slide. They range from publications like SeekingAlpha and the Financial Analysts Journal for institutionally oriented ads and Yahoo! Finance for individual investors.

An example of one of our online ads is VIX ad. We are currently running in Barron’s online. This is the print version of that same ad that is currently in Barron’s. It was in there on Saturday. And this SPXpm ad will begin running both in the online version of Barron’s and in Barron’s printed version this Saturday.

Last but not least, we have a couple of sponsorships for Chicago professional sports teams, the Chicago Cubs and the Chicago Blackhawks. This picture shows a logo of the dash about United Center, where CBOE has been the presenting sponsor for the Chicago Blackhawks for the last three years. With both the Cubs and the Blackhawks, it is a section of seating called the CBOE seats which are good seats where the price is determined utilizing an online auction as opposed to a fixed price, thus the connection with CBOE as an organization that facilitates price discovery. Unlike the Cubs who haven’t won a championship for 103 years in counting, the Blackhawks accommodated us by winning this family cup as the National Hockey League champions in just a second year by sponsorship, but personally as a long time (indiscernible) and others always next year. I want to thank you for listening my presentation and look forward to your questions and answers at the Q&A session, which is nearly following.

Question-and-Answer Session

Ed Provost

We have couple of people in the audience that have wireless mike. So, if you have a question I’d ask you to raise your hand and somebody will bring a mike by. Don’t be shy people, your opportunity.

Rich Repetto – Sandler O'Neill

We had an opportunity.

Paul Stephens

Why don’t you identify yourself first?

Rich Repetto – Sandler O'Neill

Rich Repetto, Sandler O'Neill. We had an opportunity to talk to couple of market makers, option market makers both the SPXpm and what you’ve said had about you’re still in a rollout process in tweaking. I guess what was the trade-off like theoretical the advertising and balance both you get in trade 10 S&P, SPYs for one SPXpm.

But where is the balance between this become at a retail product or do you think going to accomplish it at these pricing levels it becoming actively traded retail product versus the whole price U.S. this week coming down like they were saying, the market makers are saying it might be will price inhibitive at the levels you’re at right now. Is that fair to say or is that.

Paul Stephens

What’s your second part again Richard?

Rich Repetto – Sandler O'Neill

Well, when do you start tweaking price at that what point and where is the balance between lower price we may get more retail activity that’s what these couple of market makers. But that the price is high enough that it may impede the very active retail, but you disagree with that?

Unidentified Company Speaker

I think I’d push back a little bit and we know that there is, I don’t think the targets certainly isn’t to quantify what retail trader. I think retail in this five contract I think our average contract size and final retail levels more 50, 54 contracts, where the retail size and then equities about eight. So, we’re really looking to move that 50 to 100 large retail maybe larger retail into the five and ten life category that’s (NYSE:CM) of course trading a tenth of the size is much more efficient, effective.

We think making the argument is to high cash settled offers in economic benefit that because it settles by there doesn’t with great X driven and funded rate in a immediate advantage for the retail investors point that excited. As far as the cost again we keep reminding end-user some firms pass the cost and whether a retailer with end up trading and a make take exchange for example and trading 10 times that make number. There are two aspects and one time fee. So, we haven’t really received that push back yet and there is still optimistic targeting.

Unidentified Company Speaker

Historically firms had passed this, some of fees Richard, I think it remains to be seen how they handle that. But we’re optimistic that we follow the client-driven trading this out after that this will successful as it currently price. But we find ourselves always adjusting, when the marketplace drives to adjust.

Rich Repetto – Sandler O'Neill

And just one follow-up this for Bill. The one thing isn’t cover to me in agenda sort of regulatory update and whether that’s just so murky that you don’t really have it. But things like class trades that be one, some of the other issues that the SEC looked that in the concept releases become most two years old now. Do you have any feeling any significant things that you see on the, before year end arisen from a regulatory standpoint?

Bill Brodsky

The answer is that I don’t see as much coming out of the SEC before yearend on when I will call these older issues on structure as the right option, primarily because the SEC focus on the Dodd-Frank deliverables and well the legal SEC legal focus and I spoke of it in a different conference about two weeks ago. And the SEC staff confirmed my view that the main focus they will have over the next several months will be audit trail. Because if you go back, lot of the issues you brought up came up pre-flash crash, then you had flash crash, then you had Dodd-Franks enactment, flash crash in May, Dodd-Franks was in July and the SEC has been working at a feverish pace and try to resolve the Dodd-Frank issues.

Then on top of it they have the flash crash, how to deal with that. So,, my view that the SEC’s main focus as it relates to our business and exchange market will be the composite audit trial BAT vehicle and that is a big, big job that will involve something that has never been done before that’s to create a consolidated order trial, stocks, options and other futures, that’s a big task.

We will go back to the flash crash of licensing SEC has done admirable job of dealing with circuit breakers, limit up, limit down other things that if we don’t have quote another flash crash. But they didn’t have it this time that’s why it took so long to reconstruct it, it was an order trial were they can see pretty quickly what’s happened in markets, it is still marketing different now, they were before NMS and other things and we wish it so. I actually believe that’s the correct things do it’s a big test.

Rich Repetto – Sandler O'Neill

Hi I guess this morning we have a lot focus on the exchange proprietary product franchise. So I have two question on that first how optimize would you say, your in leveraging the proprietary products that’s how we maintain and grow profitability within the more competitive multi-listed products?

Unidentified Company Speaker

Howard I will start (indiscernible) because the way in the design. I promised a few months ago we are constantly looking at structured how we do this, but I would say that we’ve done it pretty good balanced. If you look at the slides during my presentation, you will see the dramatic difference and the fees that we received on our revenue per contract basis from the individual equity to the EPS to the index product and futures. I think we’ve found a nice sweet spot, what we’re trying to is don’t want to lose market share, but we don’t want to roll this profitability just in the sake of market share.

Unidentified Company Speaker

We’ve got a pretty, which came along is that I would say that’s an issue we look at everything say just not frequently, lets take a look at our ARPU.

Unidentified Company Speaker

However we have two aspects of our fee schedule where we find the leverage, the ETF, the option pricing, I guess proprietary license that’s in the liquidity providers sliding scale. That sliding scale cuts across all products though if you’d send a lot of volume to SPDRs and Google and the rest of those multiply listed products. You as a liquidity provider you could be paying us $0.01, we trade the next SPX contract and so you want, so that’s one example.

Another example is our firm fee. We have on the multi-list side $75,000 monthly cap for firms and so as soon as they hit, they would stop paying us fees, but if they keep on spending firm contracts and that gives them the ability to pay us last index on SPX. So that’s how we leverage things and you might think well the cap fees that are good think, what kind of incremental revenue is that bringing, whether there is other side for the trade. And so there is always on an average there is incremental revenue on some of the options expense there (indiscernible). So that’s how we use our fee schedule and try to leverage our proprietary.

Rich Repetto – Sandler O'Neill

And I know we’re just really on day two of SPXpm but if we best for us to say here. How are you all going to define success, is it percentage or notional of SPY or a certain backlog profitability or ADV that you achieve, I mean if we comeback on a year like what are you going to grade and how successful SPXpm has been.

Ed Provost

I will again give the slide on that and as my colleagues just said, I have probably long time ago, it’s not predicting values or success in a number of our new products (indiscernible). Our goal was SPXpm is not to cannibalize as very successful product in SPX which if you look at the numbers from zero to one.

And yet it has been alternative to those one use of SPXpm for any of the variety of reasons besides the contract will be exercised settlement contain with the taxes and lots of reason people do with SPXpm, but anyone use SPX is going to just need do a complex trade or the enormous size products, but the average contract size in SPX is very large.

But also we try to get people to use this SPDRs to get them to promote those, but we are seeing around a little is the beginning of roll out, but it just beginning we have a educational thing. We have large firms, but the big educational effort. I will tell you that if now the success of SPXpm from my point of view is I will know when I see. I’m not going to give you any special matrix on them.

Bill Brodsky

I was going to. But I think you said it in the right way. For the measure of success will change over. So, for the next quarter it will be the systems reliability. There was a huge test yesterday with volatility in the market. At the end of today the processing power that we proved to those more than two people of liquidity providers, who dedicated from day one. We prove to them that this is going to be reliable experience that we trading a huge notional contract that many of them have never quoted, but for us that was a success.

Gaining on that first day experience, we will look now to successfully see them tightened their market as their comfort rises and the experience. We expect to see markets to come in. As a matter of fact today we see them tighter than yesterday. That’s the next step. We can go out and (indiscernible) go out and point the end-users whether it be what we are targeting here around moving SPDRs values, which comes out or fits the institutional value we look for immediacy in this way of business that is 500.

We have got something to point out. For those who will be successful that will build on along the way. And then it’s may or may not all we have another rollout in October 17th, where we will become fully rollout the order types and processes that will be available in the hedge complex order and we don’t have that the October 17th and rollout the order mechanism.

By simply that allows for an institution to dedicate liquidity as a point of origin and paired orders in this we have to do that today. Again we are going to build on those tools to marking different age of fact. I think Bill is right. We will know it and we will know it primarily, when SPX volumes have didn’t suffer as a result of its effect.

Ed Provost

Maybe there is a different way.

Rich Repetto – Sandler O'Neill

Ed and Bill, how would you compare the SPXpm rollout to other new products? How do you do relatively?

Bill Brodsky

I will tell you from the amounts of interested parties on day one. This is pretty spectacular. Don’t now that we shared publicly for license in second time, 18 or so dedicated liquidity matters yesterday. That’s terrific on day one new product launch and the contract value the size of 6,000 contracts just about three times just started. But again the yesterday’s success processing huge of both volume and traffic of pickup push back, I will comment our end users. Alan and Gerry if you would like to comment on what you saw from the distance perspective that’s very, very special.

Alan Dean

I think that’s you covered it what yesterday there towards the last hour of the day there was about 400 points going in the market. So, growth volume had been the product of largest I have ever seen in any products keeping (indiscernible). Relatively we trade a lot. There is a lot of variances. I said a lot of variances on the first day.

Gerry O'Connell

I actually talked got to realize customer yesterday we put a trade in the morning as well as in the afternoon along with the market we are getting and only one (indiscernible).

Rich Repetto – Sandler O'Neill

Couple of questions, one is just go back to Richard, question on the retail. I just wanted to (indiscernible) question, but what does in spite that the target – the customer that you’re targeting that higher volume customer. What are they paying (indiscernible) as I thought about ERP schedule in your contract sometimes the size and if you’re going to look at average retail rates we have sort of above the trade about $0.75 the contract, I mean, is the minimum you’re getting to $0.75 by magnitude. But I’m presuming that customer base already is trading a much lower level. Can you just give you some respective around that?

Dick DuFour

So, you’re talking about difficult Ameritrade (indiscernible) in a retail…

Rich Repetto – Sandler O'Neill

Regular retail or professional.

Dick DuFour

Using the public media.

Rich Repetto – Sandler O'Neill

Retail.

Dick DuFour

795, 995.

Rich Repetto – Sandler O'Neill

Right.

Dick DuFour

Great, plus a charge for contract.

Rich Repetto – Sandler O'Neill

Right.

Dick DuFour

I think the Richard’s question is if the firm is going to absorb some feel because this is the proprietary product whereas we are typically getting pay for order flow at across the customer. I think it remains to be same. I think that ultimately the retail firms will probably pass on the exchange fees, but (indiscernible) speak for them. In the short run, I don’t think all fee schedules for us I know.

Rich Repetto – Sandler O'Neill

I think that $0.40.

Dick DuFour

Again, it’s hard to know, but I don’t think so you’ve got a contract this 10 times notional value of (indiscernible). So, even if they get charge of the exchange fees in the commission I can’t imagine that being a showstopper for someone who wants to trade notional product electronically.

Unidentified Company Speaker

I think we also it’s our job to educate those online of discounts buyers that from their cost prospective our fee is one thing, but Ameritrade clearly roughly averages about two and three quarter cents, that’s the sense of the sign. The regulatory fee that comes through $0.21 on an average asset senses. All these things are going to connect with the decision some how much fraction we gain for the actual online or discount provider really show up on their site. We’re very aware of that and then users prospective fee their experience.

Rich Repetto – Sandler O'Neill

Okay. And actually we can get my second question, which is I mean education, how to handle on this – our presentation on this. How do you – how would you rate your education today both may be on the retail side, but also institutionally, you had been innovated in your product rollout and I think there has been some – I think some both dealers particularly intuitional investors have not fully understood at a trade our product and it’s – it’s been difficult not that bad experience as I think lot of had good experiences, well, but how far – where are you on that spectrum is really driving to education product adoption is probably the opportunity I would assume.

Unidentified Company Speaker

I think that will make this product so exciting and that is just a learning curve here is not like a VIX so, you have to explain our whole new concepts. You sold that product quickly once again probably to get more specific in terms of the retail versus new decisions. But VIX is a whole new literally asset class. So, I would behave is very difference in SPXpm versus in SPX versus (indiscernible).

Dick DuFour

That’s well, again you’re right the VIX was a hugely different product and anything historically we’ve traded with this product is really not much different from an understanding standpoint or to the SPX product. We have at the end of the month what we call our SPXpm advisory committee coming into Chicago. I think it’s a 20th of October. It is a educational heads of each of the high – the active option centric firm. So, options expressed E Trade, Ameritrade were really all a good question to retail order flow comes – comes in both of these people who are ahead of education at those firms. Our former options institute instructors so, we have together in most of the agenda is SPXpm and well, little walks with strategy ideas affected it’s nothing that they are really tied.

It’s really an awareness issue, so that within the firms they are making that product better known to the client. So, again, the challenge is with the awareness more than it is education in terms of how you use the product.

Rich Repetto – Sandler O'Neill

Thanks. Dick, you mentioned during your presentation that the concentration of the SPX and one liquidity pool is the positive, can you sort of contrast that to why is that significantly better than when you have a multiply listed SPY, for instance. What are you seeing that actually makes that statement accurate?

Dick DuFour

The advantage of multiple listing isn’t multiple listing it’s having multiple liquidity providers competing to make market. One to put a product in an electronic environment, all the major players are there, you don’t getting anything by spreading them around on multiple exchanges. Well you really accomplish is you lose any price impacts and S&P understands that as well as we do.

[Technical Difficulty]

Niamh Alexander – KBW

Thanks. Niamh Alexander, KBW. Two questions, number one, and the OTC you had with as the big priority, can you just walk through where you see the revenue opportunity to most you see, because it is more you have fungibility in the product? And then how many understand how you prioritize the revenue opportunities there, not necessarily sighting them, but how to prioritize?

Unidentified Company Speaker

I’ll give you the first shot at it. First of all, as we’ve been in the OTC equity option market as opposed to interest rates, FX, or other asset classes, the study that we say that we’ve done in the research we have would indicate that the bulk of the OTC equity derivative business is actually in the S&P500. So, although you could have an OTC, no IBM, GE, Microsoft or whatever, the bulk of it is concentrated in the S&P Index option.

And so when we made the arrangement with S&P in the spring of 2010 before Dodd-Frank had even been finalized what we said is it appears that both statute is going to go in a direction that will either mandate that these trades you put on exchanges which did not ultimately happen, but certainly what became much more clear is that there would be a very strong push to have them cleared.

So, we went to S&P following on Dick’s conversation about amendments to the contract and we said look even if we don’t trade, if we trade, we make a fee, but even if we don’t trade it, if it’s an S&P 500 Index option, traded OTC, but cleared in a central clearinghouse we would allow our license to extend to that and then we would then get paid. In the meantime, S&P made a deal with OCC to clear those trades. So, it’s really more watching what happens in Washington with Dodd-Frank as to how much of a mandate there will be to see products cleared on in clearinghouse. And so if it is cleared and if the bulk of the business in OTC equity derivatives as S&P 500, we will be a direct beneficiary.

The question is what’s going to be required and when will that happen. I will tell you something else though that in the wake of Dodd-Frank and names like Lehman, we have gone to institutional investors and said forget about Dodd-Frank, do you want to have counterparty risk, do you want to have the flexibility to have terms that you won under our FLEX program, which we now call C-FLEX and you can do that today. You don’t have to wait for legislation, it’s up to the client to decide do they want to do an OTC, I don’t think. And we have had some very reputable insurance companies among others come in, the names you would know that understand that they don’t need to have the counterparty risk out there to do the kind of trades they want. It’s a slow learning process, but it’s we now have tools that we didn’t have a year ago.

Unidentified Company Speaker

So, let me summarize the tools. So, with the uncertainty we have positioned ourselves to be ready if you will for just about any of those outcomes. So, the most obvious is exchange look alike goes just listed. So, CBOE has an AM listed alternative and now we have an electronic PM subtle alternative and it’s important to note the PM subtlement is the convention in OTC trading. So, number one, two exchange traded products for the most exchange look alike OTC alternatives.

Next as Bill points out the FLEX system, CBOE’s FLEX system is the only electronic alternative for FLEX trading today. We, over this past year have decided to build a FLEX system in-house. So, Gerry, who is up here same technology, our FLEX system beginning at the end of this year will be available on CBOEdirect our trade engine. And then third as Bill points out, the alternative that five passes in exchange were well positioned to take advantage of that as well. So, not knowing where this was going to play out. I think we put ourselves in a good space take advantage of those three we think most likely scenarios as we play out OTC.

Niamh Alexander – KBW

Thanks so much. And my second question I guess.

Joanne Moffic-Silver

One second. Can I just could you guys move closer to the mike, I’m being told that our webcast participants are having troubles hearing. So, could you just hold the mike closer to you for them and identify yourself, when you answer the question. Thank you. Sorry Niamh.

Niamh Alexander – KBW

No problem. I guess my second was more on the risk because we get closer to kind of another round of the deficit reduction. The tax issue comes again and I think it was slowed that recently that the treatment of trading derivative, the treatment of capital gains and set of ordinary income tax. Help me to understand the risk there. Is it mostly just to the individuals that are trading individuals or with that play also to corporation kind of group maybe where the risk or may be some volume or something like that.

Bill Brodsky

If you’re referring to the blended rate is that you were trying to?

Niamh Alexander – KBW

Yes

Bill Brodsky

So in the option business the only group of participants in the option business to get the blended rate it is still bright by the way, is in the broad based index options. So, it doesn’t apply to most of the volume that we do or any other options exchange does. So, for example it does apply to SPXpm for customers. It doesn’t apply for customers in SPDRs. It doesn’t apply customers in Google, Mircrosoft, GE individual equity options. So, there you would not have any impact at all.

Then the question is to what type of businesses can benefit from it. And it’s all over the lot I’m not going to go and giving tax advice, but it doesn’t apply to all our users today. So, it’s narrow. In our business it applies to the market markers, but not to all the market markers are structured to benefit from it to some large market making firms that are and I believe it is corporations cannot benefit from. I think the LLC do, but I don’t want to be taken 100% on this. But the point is that not all of our liquidity providers get the benefit of that in any case.

Joanne Moffic-Silver

Ken.

Ken Worthington – JPMorgan

Hi, Ken Worthington from JPMorgan. I know this is a million years away, but when licenses have renewed in the past, what kind of change in terms that typically come out of just negotiations if something towards working for both sides to the term just basically say the same and the contracts get extended or are there real changes in terms and I guess that the second part of that question would be.

You’ve mentioned before about the deep relationship with S&P and there is many different layers of revenue sharing and contractual arrangements there. Can you go further from your previous comments and actually flush out, what those different layers are and which are contractual and which are more voluntary?

Bill Brodsky

I’m going to turn this to Dick.

Dick DuFour

This is Dick DuFour. I can’t really comment on what’s happened in the past renewals not having they public is what the fees are. The pioneer the second part of your question, on the layers of fees there really aren't that many further layers of the economics, we pay per contract royalties as I mentioned. It varies from one contract to another in some cases the amount varies over volume. We separate from the per contract royalties they’re sharing of revenue associated with licenses and again that half of the actual the miracle values that are public information that I can share with you. No, it’s not hold out new information.

Ken Worthington – JPMorgan

Let me try it again.

Dick DuFour

Okay

Ken Worthington – JPMorgan

See you pay on the SPX their stuff on ETNs, their stuff on ETNs, their stuff on ETFs, is the revenue sharing on the VIX contract, because the VIX is priced on S&P volatility. And are those things that you volunteer to do or are they things that you have, have to do as part of your overall S&P 500 relationship?

Dick DuFour

The VIX index is owned by CBOE. It does not use the S&P 500 in its calculation. It’s the calculation based on options price in SPX. So, in theory, it’s the CBOE owned proprietary product. We wouldn’t have to pay anyone anything. But out of our discussions with S&P, we agree to pay them. Our agreeing to pay them was voluntarily, but we made part of the contracts. So it’s now it’s a contractual obligation.

So, we do have a contractual obligation to pay them there, when we talk about ETNs or ETFs those. There are no fees pay to index providers other than by the creator of those products. So, for example I might as an issuer get a license from S&P to create an ETF and S&P 500 foreign exchange trade now. That’s between the index provider and that issuer. If they’re going to trade, if they’re great to create a note based on the VIX then that’s we evolve CBOE intellectual property. At the license still issued by S&P, but CBOE and S&P share in that revenue.

Ken Worthington – JPMorgan

Thank you.

Dick DuFour

And typically the revenue on those are tied to assets under management basis points on assets under management.

Joanne Moffic-Silver

There somebody upfront here Gary needs the mike. Have you done? Did you have more?

Ken Worthington – JPMorgan

Let me try one more.

Joanne Moffic-Silver

Go ahead, okay.

Ken Worthington – JPMorgan

In the ongoing discussion between SPX and SPY in the futures market the many products have been taking market share from the standard products. I think one of your comments was that the SPX contract is very large contract. As you think about product development is that in ongoing threat to SPX the smaller size of SPY and how hard is it and is it something that you have thought about launching an mini version of the SPX.

Bill Brodsky

I think your comparison of the E-mini and the S&P future there is a different situation quite frankly when CME introduced the E-mini future. It wasn’t is much because they wanted to differentiate it from the big contract, is because the board have traded just received the contracts license from DOW and they will concerned about having the E-mini product to be with the DOW product. As it happened the E-mini became the market or S&P futures and I think sizes are relevant. I think the sizes smaller because from the very beginning it was attempting to get ahead of Board of Trade, which was in the archrival trading E-mini futures products so they downsize the S&P 500 at the time.

The liquidity is all there. One of the interest things we’ve done with SPXpm is the terms are different. We’ve an am and pm. They could coexist and not only coexist, but you could have inter-market trading between the two that I haven’t get figured out. How they’re going do it in terms of the different ways the firms will use it, but they will figure it out, in that way distinguishable.

Ed Tilly

But I think you bring up this is Ed Tilly. I think you bring up a good point. So,, with the awareness that we are planning on and that we are focused on for SPXpm and bringing to the market the benefits of cash settlement, European exercise all things I think that retailers there some learning curve. The benefits are cleared to those of us, who spent time on this. I avoid early assignment. I avoid losing my underlying with cash settlement.

We do have the opportunity to promote our notionally equivalent mini version of SPX. That’s trades currently on CBOE as XSP. It is actually one-tenth the value of SPX with all the same characteristics. So, there is an opportunity with this awareness campaign that we are beginning with the pm contract to raise the visibility of the mini. So, it is a terrific point and one that we will be focused on.

Jillian Miller –BMO Capital Markets

Thanks. I’m Jillian Miller of BMO. So, Dick, when you were answering someone else’s question earlier you kind of made the point that, that having a single liquidity for the SPX in to S&P you have for those of fee structure. I understand that, that I guess maybe you could tell us what’s the stop the competitive bidding process, when your license is renewed by another options of change running an exclusive license, when we saw the Russell come out recently I essentially paid more and got that from E-mini contract just shifted.

Dick DuFour

It’s always possible that its (54) we have a huge advantage because of the intertwining of SPX index.

Jillian Miller –BMO Capital Markets

Okay.

Dick DuFour

If someone else had the exclusive, there would be no VIX revenue to S&P.

Jillian Miller –BMO Capital Markets

So, you are kind of indicating that is a substantial amount of revenue and something that be hard for another exchange to maybe replace without making the contract inevitably expensive for them?

Bill Brodsky

I think that’s correct, yes.

Jillian Miller –BMO Capital Markets

Okay. Thank you.

Joanne Moffic-Silver

Mike back there we have to.

Mike Carrier – Deutsche Bank Securities

Thanks, Mike Carrier, Deutsche Bank. So, you guys gave a lot of information on the product innovation. I think on the customer base facility, the one area of the market, where the penetration, whether it’s on the retail side or the institutional side is still relatively invent. On the retail side, you have the online brokers that can do the marketing for you to some extent. Among the institutional side, any stats that you have over the last five, ten years in terms of the increased customer base that you have seen and more importantly what you guys do in terms of the sales effort in order to try to go out the pension funds, asset managers, hedge fund either to use these products or show what the advantages are.

Bill Brodsky

The exciting thing about the option business is that this all these customer groups are fertile grounds for growth. A lot of our work in the past has been on the retail side and in the retail side we really have three groups. We have the online brokers, where we partner with them as Ed Provost showed you earlier was Schwab and others you have the major firms, who don’t want to lose their customers to the online brokers. So, their advisors do that and we would partner with those firms as well and then you have the financial advisors, who are independent of all this.

Those are three groups just on the retail side then we have the whole institutional group it provoke expand at more, but in the meanwhile one of the exciting things about our business is that in all of these areas we believe there is still tremendous upward growth and I actually think there is more on the potential on the institutional side is enormous.

Ed Provost

Yes, and I agree with that Bill. So, there was a recent app study that was out. Don’t remember exactly what the percentage was. It was something around 30% market penetration on the institutional side, which in on the one hand you think 35, 40 years down the road we do have much more penetration in the institutional marketplace than that. On the other hand the positive is there is a tremendous upside potential.

I think the challenges of the pension consulting committee. I think they have been slow to come to understand the product. We had earlier this year, a class of the options to here in Chicago specifically for focused on pension consultants trying to make them understand how the product work and how the pensions that they consult for would benefit from utilizing various options strategies. With the volatility in the markets we have seen in the terrible under funding of various pensions people are looking at returns and when they look at what the implied return is for funding purposes they are not meeting those targets and our effort is to make sure that they at least consider the use of options to take the volatility out of positions and raise their income.

So, the pension consulting committee, I will say it again, is an area that we are focused heavily on. We are very focused on getting them to our RMC, where we are having classes here in Chicago. We are going out and visiting them and trying to deal with their societies, so that they can better understand what this product, how this product works. Too many plans aren’t able yet to trade the product, where as a client the customer because educated and makes his own decisions. Pension money is a much did more difficult area to break into. We are making progress, but as much as we would like, but its coming.

Joanne Moffic-Silver

Mike could you pass the mike behind you there, Chris.

Chris Allen – Evercore

Thanks, a couple of questions. Chris Allen from Evercore. Let’s keep (indiscernible) on SPX I’m just wondering the VIX is calculated on product volatility the SPX in a hypothetical situation someone bid away the SPX. Will that harm your ability, basically what would happen to VIX franchise in that kind of scenario? As to Q4, it will be very easy to calculate the same exact value is in the (indiscernible) arthritis is an example.

Okay. And then just going all the way back to Dan’s question just in terms of products look to the multiple pools, multiple exchanges or trading platforms versus single listings, wouldn’t customers benefit from trading across different market structures and competition among exchanges. And then even from let’s say the index provider and that kind of scenario, obviously, they would lose pricing power, but wouldn’t there also be volume advantages in terms of arbitrage between different platforms?

Unidentified Company Speaker

You might see some increase in volume, but I think when you look back historically, you had two things happen pretty much simultaneously, multiple listing and electronification of options. My belief is it was that with growth of volume was not the fact that you had a specialist on one exchange competing against the specialist on another exchange, but rather you now had 10, 12, 15, 20 or more people all quoting in the same product competing against one another.

And I might have been doing this on different exchanges and might have different kind of arrangements that might cause them to correct their order flow to one place or another, but for a product which is large and primarily institutional like SPX, I think that the advantages of having multiple people quoting into the single market is going to optimize your total revenue potential, let me put it that way. And of course, we have allowed one other exchange license to trade SPX and that would be C2. Cool, keeping it in the family.

Debbie Koopman

Okay, Roger?

Roger Freeman – Barclays

Hi, it’s Roger Freeman, Barclays, not the hard one, but I was trying to just summarize I understand as playing out if you had a strong relationship with S&P today, but if something changed, if it went multi-listed you basically then sort of recapture a whole VIX product in that whole revenue pie for yourselves. If it went exclusive elsewhere same thing and S&P would have to cover that. And I guess the thing we don’t know, correct me if I am wrong, is just how big the revenue pie is tied to VIX and how much – and to get to the point of if you had volume growth from multi-listing or whatever, then how much would that volume have to grow in order for S&P just to offset the VIX revenue loss. And also how important has that been for their own marketing for surrounding the products globally?

Unidentified Company Speaker

There are medium S&Ps?

Roger Freeman – Barclays

Yeah.

Unidentified Company Speaker

Well, let me start back to beginning which is that I can’t really quantify for you how much of the revenue they get from us is related to the contracts we trade on VIX which is on options. I can tell you it’s substantial. That’s not the only revenue they get. Remember, they are also doing this licensing, which they share in the revenue for. And also the licensing at least in some of these products like the exchange traded notes where the license fees are based on assets under management, so there is huge upside potential there over time. So, I think that there is a lot of risk could you overcome with increased volume possibly, but with that multiple listing it’s going to come – big competition which is going to put pressure on what you can charge for a license fee. So, there is a lot of trade-offs we thought through preparing S&P issues. And the other thing to remember is that exclusivity runs through 2018, the contracts runs through 2022. So, even if 2018 you allowed someone else to trade it, you can’t give them an exclusive.

Roger Freeman – Barclays

Right, okay.

Alan Dean

One other comment. Alan Dean, Roger that the growth rate in VIX far exceeds the growth rate that we are seeing in SPX right now. The VIX class as an asset class is the hottest asset class out there. So, I am Standard & Poor’s, I have to take that into consideration as they think about the future and my revenue in the future and do I – I wanted to be a part of the fastest growing asset class out there right now. I think that has to be considered. (Indiscernible) question?

Roger Freeman – Barclays

Just give the separate topic on what else you think – where else is there an opportunity for you to develop – we would have developed the risk management product like this may be are there any kind of a opening on market right now. And I think that I mentioned in the past as I think that are – the correlation risk by stock and the real challenge on fundamental investors things along those mines where we’re looking at it, you could pursue.

Alan Dean

First of all, we are ahead of that, that we do the real estate product from our futures exchange that’s the new criteria for us. But there are many things that we believe that we have in the pipeline, we won’t comment on because there in the pipeline they are going to be deploying based on the current successes we had. (indiscernible) in the background, but that the point is that we have a very aggressive, a very product development assets and the key for us is to build on our current successes and we’re very optimistic about the future for the consensus.

Roger Freeman – Barclays

So, let me just add a little bit more said to it. If you take the success with trajectory index obviously for us there is not a better blueprint. What we want to be trade that of course, are you going to try about those space, yes. I think an expansion in a logical progression if you will is to explore the launch we had at the various contract on a futures exchange. We think that’s an opportunity for us to pay more attention to in the next quarter or so and really bring that back in the focus.

We think it’s a terrific contract. We’re making some changes, but we can make that will make it more attractive to those training OTC and that will be coming another focus. Not a new product, not a new idea. It certainly it will become a focus now that we’ve had the success and employ about sort of the index in the futures.

Roger Freeman – Barclays

Okay.

Dan Harris – Goldman Sachs

Dan Harris, Goldman Sachs. So listing on the big framework. What do you think the international opportunity is there given the brand of (indiscernible) to license about exchanges more globally? What you’ve done so far. What do you think the opportunity as in the next few years?

Unidentified Company Speaker

Yeah, outside, number one, we have license of variety of exchanges and this is where our partnership with S&P become very productive because they have offices around the world. We work with them and one of the things we did back in March we create because of VIX network. So, it’s almost as it we bring if we gave the franchisees once the year or so and you in part to them the lesson we had because the volumes and the experience of having index so far beyond anything, anybody else is having that the exchanges what we’ve done right and more, so that they can help develop their own.

So, I think that the potential is nationally is large and it take some time and my hope is that that now we then help other exchanges, which helps us because we will benefit in some of the revenue rose of that. But to more that we educate other market prices and in other countries about how you trade volatility, but more it comes to our benefit here because the real VIX is ours in terms of our volumes in fact we recently extended the trading hour’s index.

So, in many respect if you teach them on in Europe or an Asia have a trade volatility, one of the volatility price that going to want to use more than any other the one which fighting on exchange. So, it’s both price and in fact having to the (WFE) meeting in three day and I’ll be meeting with other exchanges about VIX and in terms of licensing to them etcetera and (indiscernible) at the time.

Dan Harris – Goldman Sachs

(indiscernible) buyers going to add, but I don’t know how many people in the room is basically what the methodology for the (indiscernible) of VIX. But it takes a pretty robust options product in order to calculate a value to be willing to kind of have something trade in it and not that many markets in the world, some of my licensees in that working on it. But as those other options might which grow, I think the potential for number of volatility and business around the world based on this methodology is quite large.

And just the second, but on relating question, so as you again think about the S&P contract. How important is it S&P that the vitality and robust hence at the floor is what makes that relationships so good. Could it be a more electronic exchange or something that less like the CBOE would be as attractive or is it that attractive hybrid model that’s than important.

Unidentified Company Speaker

I think truly the end user right and that’s what the perspective that we’re most interested in and why I think you see us offering two alternatives, one that maintains the flexibility of negotiated large (multi-leg) strategy. From the end user’s perspective that’s very, very important now what remains to be seen as who weak and attractive C2, which is that other exchange who just got into that on that doesn’t use a trading for. So, C2 all electronic offerings strictly point in click. We will be able to test that for S&P. But most importantly our end users will be the ones endorsing one platform all the other and we’ve given them the perfect choice, open archive or all electronic version on C2.

Dan Harris – Goldman Sachs

Just concern with morning start, perhaps I mentioned this before I missed it, but I just wanted to check. Can you say anything or have you said anything regarding if the exclusive licenses is not up until 2018. I think as we said what point did you or will you begin to try to renegotiate that I mean is that an ongoing process that’s what you’ve stared or set further head or what’s kind of timing on that from your point of view.

Unidentified Company Speaker

What I like to say the people is we don’t wait until December 30th, the day before the contract is up. We don’t disclose the timing of our renewals and in fact until we have an IPO. We never disclosed the fact what determined to contract was. But we have a very healthy ongoing dialogue with S&P on many issues we’re just not going to get into contract renewal timing or dates.

Operator

Patrick, go ahead.

Patrick O'Shaughnessy – Raymond James

This is Patrick O'Shaughnessy with Raymond James. My first question would be you guys recently acquired the national stock exchange. Can you kind of give us some color on what your plan is trying to integrate that with the CBOE stock exchange? And what your accurate exchange plans are.

Unidentified Company Speaker

Yeah, Patrick thanks for the question. Let me just give you the preliminary on that is the CBOE did not acquire the national stock exchange. CBOE stock exchange of which CBOE is a 49% owner, it progress the chairman of that board. I’ll turn the rest over to Ed.

Ed Tilly

Patrick thanks for the question. Yeah it’s not unlike you’ve seen with every exchange good in CBOE. CBOE to compete in this marketplace both on the cash side and on the option side because we believe multiple market model. So in the case of CBOE, we have our market model hybrid traditional pricing. In the case of C2, we have in our electronic market they could take the pricing.

On the stock side, each of the stock exchanges as those mergers have come together have preserved this separate medallions allowing each of them to run high make lower take, lower take high make. And the CBSX, which is a maker taker all electronic exchange again sort an opportunity to acquire an exchange where they can run two medallions feel the different kinds of customer group. So their plan is generally to have two medallions, two exchanges under one umbrella running models that appeal to different types of users and that again as pretty consistent with what we’ve seen both on the cash side and on the option side. So all funded by that exchange of their balance sheet. So, we’ll hope that they achieve success and we’re optimistic.

Patrick O'Shaughnessy – Raymond James

So after just (indiscernible)

Unidentified Company Speaker

Alan Dean.

Debbie Koopman – Director of Investor Relations

Put the mic closer Alan.

Unidentified Company Speaker

(indiscernible).

Alan Dean

Its closer wasn’t turned out. But I know is that I know, now okay. We have no value would all in our balance sheet for CBSX zero. There is nothing there all that capital that CBSX has was contributed by the other partners that the other 50%. So, there is really no financial statement impact of CBSX by (indiscernible) or though it’s ongoing operations.

Patrick O'Shaughnessy – Raymond James

Understood, thank you for that. And then a question for Bill, if you put on your WFE as I think there is in FDR called the other day were you recorded talking about transaction tax and certainly you have some pretty strong feeling baddish is investor sit in this room, how should people – how concerns people will be by the general trend towards transaction taxes push back in hyper to trade in maybe the general thought that things are going too far, too fast and the regular it was going to do something to clamp down to that.

Unidentified Company Speaker

Sure. Well, two things. One we always have to take it seriously. My thesis is that there have been enormous amount of market structure changes in the last 10 years. In this country and by extension in Europe premises that have changed the dynamics of the market. But my belief is that the markets although there maybe some issues certainly better today for investors than they were 10 years ago. I mean think about it, 10 years ago the New York Stock Exchange was still operating with special system and still it was not even public.

If you think of the dramatic changes and the regulators has would not be surprising, that not fully understand all the ramification now include, but throughout the debut it’s a best what it make no sense and one of the things I think that is very positive is those countries that have had taxes and watching what was going on the two that comes to mind specifically Sweden and London. Understand that this can have a tremendous showing effect and we have the same issue in our country and that is that people say, we will just put a tax on without understanding what’s the dynamics are and I think it can be very, very counterproductive.

I also want to remind you and others that we already have a transaction taxes in securities in this country. It’s on every stock sale, at every option sale in this country. There is money that goes to the general treasury. So, when people say put a transaction tax and time out is already a tax and don’t hurt something that everyday investors need for their 401Ks or IRAs and the pension funds.

So, this is something that I do feel very strongly about and I think people have to understand that these markets are critical of all the things that didn’t work or didn’t work during the crisis in three years ago and going forward. The one thing that did work was trade markets. Don’t cripple something that what we are.

So, my expectation is in this country, people in Washington at the highest levels including Geithner are against a transaction tax in terms of what you had talked about and as long as London holds firm, I don’t think anything will happen in Europe either.

Joanne Moffic-Silver

We probably have time for one more question. Is there anyone else, who have a one last question? Rich.

Rich Repetto – Sandler O'Neill & Partners

I guess a lot of times this political relationships and restrains on why you can’t say, do certain things. For example, see me can grow just to say you want to maximize OTC revenue in trade and clear. Let say and you want to clear. I’m not in a choice of with the deal or so. So, anyway my question is when you first asked, when people asked prior about you talked about maintaining, where we would SPXpm was a successfully you said whether it exceed or will you maintain the pool of the SPX.

And then your second answer were more balanced, but I guess the question, when do we get to the point we understand the part of rollout you had fantastic. But when do I guess get to the point, where you just say, we are just going to maximize our revenue to get whether its, you know, you have the pm, the SPX contract or we just go and just maximize. We don’t maintain a lot of liquidity, you know, we will just maximize revenue from this thing.

Unidentified Company Speaker

Let me start, I want to make sure that, I tell you why, you know, this is well. I think you asked the distinguish between what we have in SPX today and what we view SPXpm as compared to Futures product like S&P for example and how these products in many respects were indistinguishable. We have when we were doing the research on bring up an electronic version of SPX, the dealers community said to us, we have something very special. I have been told by people some of the firms represented in this room that in the single most liquid exchange contract in the world and they can get things done there, they can’t be done any price us.

So, it’s not a question of do you want to cannibalize it. Do you have something that’s worth preserving? The marketplace will determine whether it’s worth preserving. We will provide these alternatives. We are not voting for one versus the other. We are letting the marketplace decide, but I can tell you by talking to as I talked about real retail customers, real institutional proprietary trading firms that are actually offsetting derivative positions in S&P or taking down the enormous positions against clients, where they want to hedge. And they are saying this is something extremely special don’t destroy it, so we are not going to do anything to destroy it, the marketplace is going to decide.

Unidentified Company Speaker

So, let me punch a little bit, so we have the unique opportunity look back is with the hybrid exchange as to see how customers choose the matter in which the orders are represented that best serve them. And the greatest example I can give you of late is needing to build a larger VIX physical pad for a product that can be accessed and traded 100% electronically. There is a paired order mechanism. There is point and click access from any number of users and there is multiple streaming quotes.

Our users have chosen to use. We have been Ben Londergan logged in, our DPM, the system we have in place, the face-to-face negotiation, because there is a value add. When the value add goes away, we think that we will see an increase in electronics and the end user will have voted and we will take the appropriate action that hasn’t happened. Don’t think it’s going to happen in the short run, hasn’t happened when we look over to the CBOE side and look through to VIX, we had to expand that physical location. So, we are kind of agnostic on the ultimate platform and really we went up to the customer.

Unidentified Company Speaker

But Rich I want to thank you for the question, I know that at some point Debbie is going to tell you we are going to take a break, but I want everyone to understand that one of the things we have offered to you today is an opportunity go to floor and see exactly what we are talking about, to see the VIX bit, see the SPX bit, and if you have the opportunity, I would really urge you to do it, because it is something very special.

Debbie Koopman – Director of Investor Relations

Thanks a lot guys. We are going to be going right across the hallway here for lunch and ask that everybody get back here by 12:25, so we can start properly at 12:30. Thanks a lot for your questions.

[Break]

Debbie Koopman – Director of Investor Relations

Okay, we need to get started. Welcome back to the afternoon session of the CBOE Holdings Investor Day. We are delighted to be joined today by a group of individuals who clearly understand the risk and rewards of the options market, their discussion of the markets and investment opportunities will be moderated by Paul Stephens, our Director and Department Head of the Institutional and International Marketing for CBOE. Paul plays a key role in the success of our risk management conference that Ed talked about earlier and many other marketing efforts we have. So, I want to thank all the panelists for joining us today and I think this will be an interesting session. Thank you.

Paul Stephens – Director and Department Head, Institutional and International Marketing

Well, good afternoon everyone. This should be a fun session. It’s actually the idea of this session is very, very, very simple. This is a customer panel, so the idea is for us to have some of CBOE’s customers give some color on why they are into our business and how their customers, if they have customers are using the options product. So in short, we’re giving color by colorful people, right? And Ed Provost, my boss, Ed Provost talked little bit earlier today about the client base that we look at CBOE. How we look at that and obviously it can be very complicated thought process to think about the demographics of the options user base.

I am going to make it even simpler than Ed said. I am going say these four guys, right. And I think we got the four guys pretty well covered and realistically I think it’s not a bad way of thinking about it. So, we’ve got individual investors which is going to be represented by John Grigus from optionsXpress. I am going to tell him a little bit more about his (indiscernible), but I want to give the big overview first. The John Grigus would represent retail investors or individual investors, then you’ve got institutional and I have got two guys on the institutional side.

One is we like just often times at CBOE like to think about the hedge fund guys little bit differently. Well, Chris Rich on the end works for Jones Trading Institutional and many of his clients are hedge fund. And also it has other types of clients as well like for example, Jon Grodnick come back to that in a second.

Let me next talk about the other side of the institutional equation. One side of institutional as you think about is the hedge fund types and then what I like to call everybody. Someone we call in the industry and my business is just the real money accounts. So, it still call smaller Lowery Asset Consulting, the second from the end, and I’ll tell you a little bit more about him in a minute, but type of people that he talks to is more the pensions, foundations, endowment types. It’s kind of a different animal that the hedge fund type that’s Chris Rich would speak to.

And then last would be Jon Grodnick to over from me. So, Jon Grodnick worked for Chicago Trading Corporation always known as CTC. So, Jon is often taken the side of many of the other choice that you see from the others, right. So again we’ve got institutional two flavors retail and then a market maker.

Let me spend a minute reading some of the bios, because I think that’s important and the reason why I think its important is that why to pay attention to him and what kind of questions that you should be asking from them. I think that prioritize important to do that. I know it’s on store, but it’s important to do it. So, John Grigus again right directed to my left is a – runs trading at optionsXpress. For those of you in the room (indiscernible) optionsXpress their Chicago-based derivates trading house recently purchased by Charles Schwab.

So what’s also nice to know by John Grigus is that regularly – if regularly interacts with this client base both experience options traders and more now with option traders. We are going really want to know what all these people think and how they differ from say cash investors, we’ll talk about that. You also know that John currently host the options broadcast and options inside the radio. John has a fair amount of experience of where we’re going to put them on this buyer. We will see about, okay.

Next, I want point to maze will go left to right doesn’t really matter here. Jon Grodnick, I said before Jon worked in CTC or Chicago Trading Corporation, he is Managing Director and Global Head of Index Option Trading. I said no Jon hope for while Jon and I first met when Jon was working for CTC is the head of the London office. So I part of my job I do in a national business development. So, I’ve got no Jon from his experience taking there. So, big – those important for everyone here, I want to ask questions about how people outside of the U.S. coming to the U.S. that should be able to answer some questions and talk about how U.S. is different from trading in Europe for example.

Next, Phil Kosmala, taking to the end, Phil is a Executive Vice President and Director of Manager Research at Lowery Asset Consulting. Let me read this is perfect. His primary responsibilities include manager research, tactical asset allocation research, and providing consulting services to the firms institutional and family trust plans. We also cherish the firm’s investment committee and directly manage our research efforts for their firm.

Well, I think it’s important to also point out when somebody says consultants everybody knows that could mean many different things. Mitch, I think it’s somebody does pension and consulting for pension foundation developments is kind of a unique animal and a unique way of producing our industry. So, still full comment about that more later on.

And then last Chris Rich on the end is Managing Director and Head Options Strategist at Jones Trading Institutional Services. He has started their 2009 with a new outset for Jones. Jones is not new at all. They are a large firm in the cash equities business. I am sure (indiscernible) and hear about, but you might not notice that Jones more recently got into the derivatives group. There is a group here in Chicago and in New York that’s pretty active in trading. And as I said before, they have many of their clients are hedge funds, but also prop trading like Jones. So, I think we have got a great mix of people, let’s move it forward. Okay, so let me we tell you again what we want to talk about is very simple. How some of the clients are using the options product? So, I am going to have some questions just to try to get some color on that and then we’ll open up to the floor.

Question-and-Answer Session

Paul Stephens

My first question going to be to Chris Rich and for Chris actually everybody is going to get a similar question which is why are options important? But for Chris I wanted to cover two angles about why options are important, one is for the firm and the next from the client base. Chris?

Chris Rich

Hello everybody. Options are important for number of reasons. In an environment what we have seen particularly recently in the last couple of months with volatility been very high and risk for people who are investing, they need ways to protect themselves and to have less risk and that’s why I was just recreated in the first place was because you can have defined risk profiles. So, options that are being used for institutional and for small investors too give them a way to target the kind of risk profile and the kind of pricing in terms of how much risk they can take and that they are willing to take. So, that’s one of the beauties of it and with the difference of options that you have on single stocks, on indexes, ETFs, the myriad of different products and part of the beauty of placebo is producing these products and then introducing them. You can very much hold and give a specific risk profile.

Paul Stephens

So options give you options?

Chris Rich

What?

Paul Stephens

So, options give you options?

Chris Rich

Options give you options. That’s the beauty.

Paul Stephens

That’s the beauty. What about for Jones Trading now? I mean, why won’t you talk a little bit Jones Trading and why you’ve got, I mean, you have made a potential to Jones Trading your management recently. I know they called me up and asked me for slides.

Chris Rich

The reason that Jones a longstanding equity shop very well-known been in the business for over 30 years, one of the largest cash equity box comes on the speech, quite to dig it in the options, you want to be in the options, we are growing business. And if you are growing business, you want to be with where the growth is and the options are growing as they talked about before with 18% year-over-year I think, but the number that we have talked about growth, I want to be and Jones wants to be where that kind of growth is if you are going to grow.

Paul Stephens

Okay, now, so we talk about the versatility of options, but we definitely talk about how a hedge fund is different than say a real money count, but that’s we can come back to that and we plan to come back to that. Let’s turn over to Phil now and ask the question about why are options important and talk about the type of clients that you face?

Phillip Kosmala

Sure. Good afternoon everyone. I think with the endowment fund that are, after we hit the lows in March of 2009 we had lot of investment committees sitting around vastly underweighted equities. And so what we were thinking as this maybe a way “a chicken way” to get back into equities as you cover call writing strategies. So, the first benefit obviously then would be first and foremost would be to reduce the equity profile, take some of the risk off the table, some of the clients that were really worse or hit hard by either hedge fund lockups, the lack of private equity capital coming back into endowments and foundations or pension plans. So, it was really a risk mitigation tool first and foremost, but recently it’s kind of morphed a little bit. I would say (indiscernible) holding franchise in the mid 2013 at this – I see my low levels endowment foundations or funding is hard to generate income. And I think the prospect looking at a 10 year treasury under 2% in locking that in for a longer time period that also creates some habit for asset allocation.

So, generating premium by writing options is another thing that we found committees have been embracing and have been moving towards that goal. So first and foremost, I think with our clientele is risk reduction and then secondly income generation.

Paul Stephens

Once talk about that little bit more, are you using mostly single stocks or indexes?

Phillip Kosmala

Primarily index options at this point.

Paul Stephens

Why using index options for the single stock?

Phillip Kosmala

There is a great. I think (indiscernible) done a tremendous job with getting great academic pieces out or if you get those trade academic pieces out. Your average endowment foundation, you’re guided by prudent manner in most of the states with pensions you’re guided by which means personal liability. So, rest of clients are generally speaking very reluctant to be leading edge the phrase in our business, pioneers get the errors, and so there is the tendency that to be very slow to move. So, what we’ve seen is there is great academic – underpinning great academic evidence said cover call strategy using index options is typically take you get the same return as the S&P 500, but you’ve got the volatility by a third. That’s something very attractive from an asset allocation prospective.

Paul Stephens

What kind of so we, I’m not really covered for the (indiscernible) what is something audience knows this already, but once you talk a little bit about who you are and why you are – how you interfere with like Gargoyle and not in Oklahoma.

Phillip Kosmala

Is it – we really is it consult more quarter back in the process with endowments foundations, pension plans. I’m helping them to set asset allocation to pick managers, not necessary executing the options trades. So, we work with from Boston. We work with Gargoyle. There are many of the firms not only doing this whether doing options or relate strategies on an existing equity portfolio and using index options to in some way reducing exposure to the equity markets or the increased income in those portfolios. So, what we do is we helped hirer the managers and then select what the percentage should be that the writing premium on for the equity asset allocation.

Paul Stephens

We can keep going on this, but I want the firm back to Chris, because we’d I left that sort of hanging than at way. So, we talk about real money account is now what sale and that the keyword that I think you said that was risk mitigation. So, when you’re talking to hedge funds and risk mitigation how – what’s important to the hedge fund?

Chris Rich

Absolutely, risk mitigation is extremely a point and when they are looking at positions whether it will be a long shore, whether it will be a market neutral, whether it will be just even some of the play mostly from the long side. It’s important for them to have a – at the amount of risk that’s tolerable. That’s what during the business being a hedge fund or due through a hedge fund that’s part and part of what your charter is that you have defined risks and so you can device not (indiscernible) and as you talked about in terms of selling call or buy inputs or spread or different types of ways calendars were mentioned in and that launch over the VIX either all different strategies for you can define your risk and give a look at that few investors we feel comfortable with. So, that’s why we see an increasing number of hedge fund always used them, but we’re seeing an increasing number of hedge funds due that.

Paul Stephens

Increasing number of hedge funds in line.

Chris Rich

Right.

Paul Stephens

I didn’t (indiscernible) which is that.

Chris Rich

I said an increasing number of – an increasing number of hedge funds are using them and in the market environment that’s there – the number of institutional players is increasing, people we never thought would touch options are asking and or trading them.

Paul Stephens

To getting expansion of the types of hedge funds that are getting while in the business, how is the hedge fund different from say some of the real money accounts?

Chris Rich

Well, the chart is different. Real money tend to be long on the – they tend to have a mandate and the question of how they can lever the amount of risk they have is how much exposure they have to the market from the long side where the hedge fund will have both longs and short and how they that the risks have been short is that you have unlimited risk on the upside. So, people will say I understand I think the (indiscernible) going to go down, but I am not too excited about the fact that if I am absolutely wrong, that I can use a 100%, and if so, maybe what I’ll do is buy an upside (indiscernible) to prevent that. And then I know I’m locked out at a certain point in time my risk will be mitigated by doing that. So that’s one of the many ways, or buys a put on that or put spread they will do that instead of just going outright short.

Paul Stephens

Right, okay.

Chris Rich

And just one thing to add to that, another part of our business is evaluating hedge funds. And so we get a look through and get a feel for what’s happening with net and gross and how various hedge funds are managing exposure to the equity markets or fixed income markets. And that’s one of the trends that we’ve seen too. I think a lot of mangers have come into our office, the hedge fund managers and have said, we’re really not that good at shorting. We always have to move this aggregate or short performance versus our long performance. And generally speaking very few have done a good job on the short side. And so we’ve actually seen a pretty steady increase in the use of options, it’s a way to hedge and more on to (1:00) structure in the hedge funds.

Unidentified Company Speaker

Yeah, it’s interesting how lot of times people will make comments about how pension plans don’t get involved with the use of options. But let’s bear in mind that there is people that have pension plans that are buying hedge funds or using options. So we’re still getting that business right?

Chris Rich

Absolutely.

Unidentified Company Speaker

So that’s changed in a row little bit and let’s, we have our investments broaden it out a little bit. Let’s talk about individual investors some what. So John Grigus works for optionsXpress, as I have stated before. So let’s bring that back to the beginning and talk about why are options important to the optionsXpress customer. I think it’s pretty obvious why it’s important to optionsXpress.

Unidentified Company Speaker

Yeah, I mean with the fairly optionsXpress.

Unidentified Company Speaker

…do that.

Unidentified Company Speaker

Yeah, 60% of our volume, we offer stocks, bonds, futures 60% of our volume comes from options. So we care directly to the options retail investor. And what we noticed by product is that year–over–year, quarter–over–quarter we see more growth in options stating that we do in any other product. So we try to push it as much as we can. We look to promote new products when CME comes out with us, especially the SPXpm they came out yesterday.

From a client perspective, what we’ve seen over the last five to six years in this market environment. I mean basically the markets, the major indexes are still where they are 10 years ago. As Phil mentioned, income generation has been huge. I mean it’s a simple strategy, if someone that maybe in an IRA account, we allow options rate in IRAs, seize a way to generate income on a monthly basis and a weekly basis they want to trade weekly.

We’ve also seen people hedge their portfolios buying VIX, buying puts and major indexes. These clients tend to be more sophisticated traders than your normal buy and hold IRA stock purchaser. So I think for the individual investor, options are a new way to generate income, to increase the return on the portfolio for long-term. We talked about earlier in the markets I’m not sure if they’re going to be going anywhere, no one knows. But we see growth in options, we see people using options to increase the portfolio and I think it’s going to continue for the retail environment.

Paul Stephens

Let’s think about how the options investor differs from the stock investor for a moment little more deeper. So do you ever get options investors that have never traded stock before?

Unidentified Company Speaker

No, they’ve all traded stock, they all have background in stock investing. They seem to be highly educated, more sophisticated, the options investor is open to more advanced strategies, new products. We watch the weekly’s explode in the summer of 2010. I mean of course they had OEX and SPX in few weeklies but when they started to go on individually listed in the equities, we openly saw a large amount of our clients move into that product very quickly.

Normally people would be apprehensive and stand off and see what the volume was, what the spreads were on the (bidders). They jumped right into them, and not only did they jump right into them, but they did strategies that were more advanced than you’d see out rights, buying calls and puts. These people were premium sellers, they were doing synthetic covered calls, they weren’t year average buy for directional modes.

Paul Stephens

I think there is a lot more that we talked about with weeklies and some other products. But I want to bring it over to Jon Grodnick and ask a, sort of a two part question, I believe you talked about the clients, so do you have any clients? How do you get it and a relating question, which is this. I think for a lot of people when they meet people that that all they do is they trade options and some people have this idea that, how can you possibly succeed in the options business when you’re trading against somebody who is a professional options trader. So how do you think about the whole idea about, do you have clients and how do you think about the idea of how anybody competes with the….

Unidentified Company Speaker

We don’t have clients. We don’t have customers, each season market they confirm that we trade on our proprietary (indiscernible)?

Paul Stephens

Can you look (indiscernible) shares?

Unidentified Company Speaker

Yes, futures key trades proprietary capital so, you know, we do not claims customers we are actually prohibited from talking to at least the clients or two-third option customers, who have said (indiscernible) sure. Futures key trades only on exchanges so we don’t give any over-the-counter derivative. We trade only on listed exchanges. We prefer transparent fair marketplaces, where we have access to order flow from various customers. Now, in terms of how the customer can compete with CTC? Well, CTC even though when the other side these customer trades, we usually don’t have the same long run exposure to customer.

Typically, option customers want to make a long-term debt on either market direction or market volatility either to hedge their portfolios, speculate the market. CTC the second we against the trade we pick those out one we trade, we immediately hedge the market risk. We trade that to neutral and that’s what the vast majority of our competitors do also.

So, from that point the momentum we take up this market risk. We no longer have the same customer loss profile as the customer on the other side, but we usually don’t stop there. We don’t like the volatility risk or the interest risk or any of the other risks associated with these option. We tend to unpack these options of various risk and layoff that risk with the market.

And we are trying to make a small bid asset spread on every transaction that we make. So, we have the customer maybe looking to kept portfolio, we will make few dollars on the trade hedge fund. CTC is looking some turnover a couple of pennies on each share.

Paul Stephens

Okay. So far what we have accomplished as we have talked about now retail investors are looking at the urban product, we talked couple of different flavors of institutions and start looking market (indiscernible) and a little bit and talk a little about growth when you started to sell.

Unidentified Company Speaker

We always talked about a little bit about how pension plan get involved without using options and foundation in that way. Presumably as well similar, but what we haven’t really done is talked about what needs to happen before we can get more (indiscernible).

Unidentified Company Speaker

I think first and foremost what we have seen with the institutional (indiscernible) very slow to move here in Illinois police and fire plans working inside no greater than 10% equities is reasonably is 1998. So, the industry, the pension industry moves very slowly. However, endowment and foundations they move quickly and we have seen a lot of interest. If you look at P&I, Pensions and Investments, which is one of the big industry publications. There have been several RSPs are recently I think CTC Seattle their pension plan looking for by-rate strategies, by-rate managers to execute.

And we are talking relatively large allocation. And so this is an area that’s really under penetrated, when you look at the aggregate size, the 800 largest endowment and foundations in the country have the exact numbers about $850 billion in assets. Debt capital sitting there very few institutions when you go out and do presentations for new business, very few institutions have a by-rate strategy or an options related strategy in their own (indiscernible) it just not their.

The mutual fund industry just getting, if you pull-up Morningstar you will start to see a lot of on gateways you got about $7 billion in assets under advisement doing a simple by-rate strategy. But when you look at other funds that are coming up there is M.D. Sass Fund. It’s got a lot of traction, whether are doing individual equity options. Again just writing premium there is a fund from our CM. So, we try to isolate how does the trend is continued and how it’s growing.

Right now there are about $20 billion only in by-rate strategies by-rate mutual fund and that’s a $5 trillion equity mutual fund universe, so very under penetrated. The pension if you pull up the way this I just got this data this morning the federal reserves comes out with the flow of fund, the data just come out two weeks ago.

So, mutual funds $5 trillion and equity mutual funds very few are doing equity option, closed-end funds and closed-end funds are $1 trillion. Closed-end and EPS if you aggregate those together again not a lot of product that go about 20 by-rate strategies are put rate strategies out there at this point in time. So, you just don’t feel a lot of activity the size of that marketplace. So, we think the opportunities that it just had educational, if I get to your question Paul, the educational component is really the struggle here. Some of the pension plans, endowments and foundations have probations against options in their policy statement. The perception is obviously as everyone knows with derivatives, derivatives equal risk. So, it’s an education process. And I think the one good thing that CBOE has done a great job to have out on the website in seeing a lot of great educational pieces that we can go out where I am good in helping educate committees to get over that hurdle.

Paul Stephens

Let’s talk more about education Charlie, so John Grigus, what does education mean to your front?

John Grigus

I mean, it means, making people comfortable with trading new products. I mean, education, I would say is the number two priority at optionsXpress. We have light events throughout the whole country. We have free webinars. We did the podcast and making people comfortable with the options even in my own family, I mean, trying to give people to learn to accept options as a way to improve the returns is huge. I mean, it can’t be done if you are not, if you like stocking to go out there and buy it anyway, why not so get secured products you are going to get it at a discount.

If you are long stocks (indiscernible) again so you are missing opportunity and you should be bothering your full service broker and asking why he is not doing that. As far as education on the side, I mean we have an extensive virtual trade. We run the OIC virtual trade. We just have an extensive amount of education, I think once people accept the fact that they can take these courses whether on the CBOE website or our platform or anything else out there we’ll understand and accept and start to trade more options. I think it’s a huge growth potential.

Paul Stephens

And then well how about Chris or Phil talk about education choosing that that’s going to – what is in play for growth?

Phillip Kosmala

Well, first of all, as mentioned CBOE website is a fantastic tool to be used. And the education tools on that are wonderful, but the amount of information and data on there is just tremendous and I would suggest anybody please go to and take a look and if you could spend days literally going to where everything that they have there.

For education, education is growth and long, long time ago when before there was an OIC, I tried classes on option trading and with the early traders train them, but this is what makes the industry grow and makes the CBOE special is that there have always been at the forefront of creating educational programs and OIC things of that nature. So, when you – again because the options industry is growing you need education, you need to train people, you need to give people new ways to do things and to understand how to go about doing it.

Paul Stephens

Okay. So we have covered so far how the different client bases are using the products? We talk about the importance of education. What I’d like to make sure we do talk about is to talk a little bit about products where we just announced we just have the SPXpm, so let’s talk a little about SPXpm and I am going to open up for the floor. So, let’s try and (indiscernible) what did you see in the SPXpm and was your firm involved?

Phillip Kosmala

Yeah, we were involved. We noticed that there were both to proceed with the 20 groups or so quoting on it on the SPXpm and you confirm that was the actual case and we saw 1700 contracts roughly. So, we were impressed early on that the product immediately took hold that there was people out there ready to enter that market straightaway. So for now, we see what happens today and tomorrow and the next day, but it seems to us that it’s got good prospects to think of start.

Paul Stephens

It’s 2700 contracts, so how many (indiscernible)?

Phillip Kosmala

The trends were tighter than they were on the let’s say the SPX driver, the SPX quoted market, electronically quoted market, not necessary tighter than they would be if there were checks in the trading path, but certainly tighter than the market you see in the SPX.

Paul Stephens

Jon Grodnick, do you see any assets in the class?

Jon Grodnick

It stays very close, but the SPXpm has been a product that I think from a retail standpoint and from speaking with the retail clients over the last six years, it’s something that we have long waited for. I mean the fact that you have dissembling trouble out four hours after the index opens and during 2008 and 2009, but for hours to get out settlement on an all pretty much electronic industry. It puts a lot on stress on for the retail clients in the people that support of. Having a P.M. settlement, SPX, it will be huge. I know you said you had a bigger contract volume then you did on the VIX on their opening day. I think here in the next week or two and we have to look for more products similar to this.

To give the retail client (indiscernible) plant look level playing field as suppose to waiting for the next day for that settlements come out and like I said earlier in 2009, we saw settlements outside the daily range and really a big part of this business is having trust and having that the retail client believe in the effected exchange or be honest and they can count on little bit be there and makes the function in a orderly fashion its SPXpm product will do that.

Paul Stephens

My personal experience is that out there, obviously from my chart I speak to lot of institutions don’t assume that institution means smart and know everything. (indiscernible) lot of the institutions said that gotten confused over the – are the A.M. settlement process works and it’s always a process and so they have the P.M. settlement.

Unidentified Company Speaker

Yeah, I do explain the special opening quotation more times than I.

Paul Stephens

Yeah and then on the retail side as well, I mean, I expect on lot on work on the weekly (indiscernible).

Unidentified Company Speaker

Although we should open – I like to now open up to the audience, which is still start about 12, 13 more months left. Perfect time to open up to the floors and hopefully there is some good question from anyone in the audience.

Patrick O’Shaughnessy – Raymond James

This is Patrick O’Shaughnessy of Raymond James. So, my question is may be switch gears a little bit. Can you talk about the thought process that you guys go to want to determine where the revenue orders to or is that you like about that it tend to better place or retail order flow or intuitional. How are you making your decision for routing for the multiple listed options that (indiscernible)?

Unidentified Company Speaker

I think we got three different prospects on that.

Unidentified Company Speaker

I guess, I’ll start, I mean when we look at retail side, I will be pleased to three of the type. We as sort as before decided sent flow to certain exchange. We look for best execution that’s primarily after expressed reason for running order for their certain exchange and we just don’t turn it down and sent it there we look for price of group and to look for best execution. I think the spread, liquidity, and then return on the (indiscernible) and send the order flow to that exchange.

Patrick O’Shaughnessy – Raymond James

I have to be with quick answer. Our mandate is that we as to do the best help for our and with that means that we have to go to the exchange with the best – that the best market and where we can get the most side done if we have the size order and that the CBOE inevitably is on that market a very close to it. So, a fair amount of the paper. I’ll potentially used protocol to our revenues and just to explain that what that is that whether new making a decision on what I think is best. That will be a small and that makes the decision electronically. But those decisions are made on for the best we’re the best market, the deepest market, the tightest market are and the small routers end up routing like percentage of that business to the CBOE.

Unidentified Company Speaker

Is that model on the (indiscernible).

Unidentified Company Speaker

Sometimes yes, yeah, they are different models, they are may take their models and not getting go into our (indiscernible) ease of that here, but the – that is an important consideration, but that is in terms of the what’s most important, it’s not in the top three in terms of the decision made on where we by note, first thing we have to do is get the best price and we have to get the size. So, that comes as the third in the list of what’s important.

Patrick O’Shaughnessy – Raymond James

(indiscernible) on the other size in the phrase you would interface with, but both despondingly and for the open up thing you see for different people comments to the open up or just built it own.

Unidentified Company Speaker

Sure. I guess I could comment on most directly is where we choose by that liquidity.

Unidentified Company Speaker

Okay. For CTC, what we look for specifically with regards to the multi-rich product, what we look for is I see structure, that’s the number one team that motivates us. That’s not the only thing that motivates us. We also look at which exchanges has the best infrastructure in terms of technology, which exchanges at the best compliance department quite frankly, if there is a problem on the exchange, if something goes wrong, if there is an out trade, who’s going to handle this any, the most responsible way but there is possible way. And we have noticed the wide disparity among exchanges and how these things get traded. We have been in situations what we called our quotes or stocks providing liquidity and various exchanges because of a particular incident will come up if not handled in a fair and just manner. And we see always this space in that exchange that we feel we cannot trust that exchange. So those are the kinds of things that are very important to us.

Stepping back from just multi-list products, just in terms of what markets we enter and where we chose to provide liquidity. What we look for mostly is large healthy markets that are very popular, the volume is definitely attractive. That’s one of the big things that we look at. We look at for our fee structures that may get cost effective for us to trade on those exchanges.

But we also look for fairer market places, market places were there is no barrier for us having access to any sort of order flows, which means no block rates, no built in inefficiencies that make it a very exclusive market for some that does not promote competition from ourselves. So those kinds of things are very important to us, the reason they’re important to us is, our experience have been, is that the fairer and the bigger the market. The more or likely it’s going to be there in five years and the more money we make. Even if we’re making less money per contract, we find these markets to be the most profitable.

Patrick O’Shaughnessy – Raymond James

And these include SPX and VIX?

Unidentified Company Speaker

It definitely include SPX and VIX.

Paul Stephens

Other questions?

Justin Schack – Rosenblatt Securities

Hi, thanks, Justin Schack from Rosenblatt Securities. Jonathan, I guess as a, maybe a follow-up to some of the comments you were just making. Can you give us a sense of what the dynamic is between firms that are, what I would call freelance liquidity providers in the options space as opposed to the firms like your owning which takes part in some of the official market making programs. And I know that it’s been over the past few years some of the more traditional firms that have found it more difficult to compete with some of those freelance type firms and maybe comment on how that dynamic changes with things like volatility and other market conditions.

Jon Grodnick

I guess, could you clarify what you mean by freelance market.

Justin Schack – Rosenblatt Securities

Well, there was a slide that it was list, a bunch of sort of the official market makers for various products. And I know as for my get goes speculates in a fast and fair and I know that they have a very large presence in the options business. So it’s sort of the dynamic of those types of firm versus the folks that are officials or lack of the better market makers on various exchanges.

Jon Grodnick

Absolutely and so I understand your question more clearly. It is a big issue for us and the issue is we like to provide liquidity, on transparent electronic exchanges. When we do so we prefer our coding obligations, we are kind of prey to various types of trading firms. Maybe that’s, they may not even have a theoretical value for the option. That they can tell by our prices, what we would want to buy and when we would want to buy it. And they know when the market moves and we no longer want to buy these things. So they know it’s a good trade and the fact that they don’t have to calculate a theoretical value going to complicated option models, make it very easy for them to, to somebody we have nothing to but it’s a very technologically speaking to execute before we can pull our cloths.

This is a real challenge for us. We’ve talked to various exchanges about the things that they can do to make it safer for us to quote. But for the time being, what ends up happening is that we quote a fraction of the size that we would quote, it would be a safer place to quote and we closed wider than we would otherwise.

Usually what you see on the screen for CTC determining quotes is about a fifth of the size that we really want to do at each peculiar level, but it’s just risk of being picked off. That’s very, very expensive for our firm, among the fact our company to constantly buy these servers and invest in technology and faster fees and make sure that we’re not too moved up and slow. So I hope that answers your question.

Justin Schack – Rosenblatt Securities

I think it does. Thanks. And if I may just add one really quick follow-up for all these mighty international holdings, just trying to do launch new options exchange, you don’t fairly give another options exchange.

Jon Grodnick

So if we need another option exchange, I would prefer more consolidation among option exchanges definitely. For us to write the API to all these exchanges and get connectively with no enough expenses and to keep all these changes to introducing new functionality take those months to get that. So, it’s enormously funds for us quote electronically and still we are not everywhere even then. So, yeah, if I could say nothing usually say no more options and procedures I definitely would. I’m sure the people would.

Unidentified Company Speaker

Yeah, hey John represents so we all agree with that statement right?

Unidentified Company Speaker

Yeah, absolutely.

Howard Chen – Credit Suisse

Thanks. Howard Chen, Credit Suisse. So, by all measure it’s been a record and to say here for the options industry you have all touched on some of the trends just why that may continue. But I’m just curious what are each year outlooks for how much volume your firms are going to trade, if you allocate resources and budget maybe on a one, three year basis. I think you will do more the same less volume. Thanks.

Unidentified Company Speaker

Let me start to half answering that. We were started to offer the three main shaft a little over 2.5 years ago and were six main shaft and we plan on doubling that in the next couple of years just options specifically in the options space. So, that’s our belief of what’s going to happen and why we should be there and then we need to be there. That this is the place to be.

Unidentified Company Speaker

Yeah, I think option express, Rob recently purchased first slightly over billion dollars. I mean obviously they could taken the time and the resources of the money imported in to building their own options derivatives platform and have the technology and the people regarded to support it. But they saw an opportunity to get in from something that was growing, continue to grow. So, to answer your question we are definitely going to do more volume and option express we have this year. We have already seen in 2011. I will see it I was wondering this goes from 18 to 42, but the market is uncertain here and I think that options will continue to grow.

Unidentified Company Speaker

I want to. I think institutionally, when you look 1966 to 1982 Dow comes in a 1000 ways with 1017 years later. For 10 years supply returns now and with the very low rate environment the prospect of increased volatility low returns. I think the trajectory for asset allocations clearly in the way of using some alternative strategies in writing premiums. So, I think our trajectory is actually probably going to go a little bit more exponential.

Unidentified Company Speaker

From that perspective, you have to speak for equity index options and equity volatility product we got the very, but I focus on. I’m obviously optimistic that it will continue to grow. I’m hopeful that a lot of the legislation is going to force some other OTC business solicit exchanges, so if that happens the way I hope it will. I should be busier over the next couple of years then I would be otherwise.

In terms of we were allocating resources, we are investing more dollars on a relative basis in the U.S. than we are in our U.K. operation and that’s trends continues over time and I think it’s the number one reason I would tribute that to is with the healthier marketplace, with the healthier until our marketplace. We are seeing that actually matching engines in that necessarily just crossing facility. So, that’s what really attractive in the U.S. market.

Bill Brodsky

Right this is a good spot to close it up. I wanted to thank everyone for their questions and thank the palace. We appreciate it very much. So, everyone give applauds for our client that would be great.

Paul Stephens – Director and Department Head, Institutional and International Marketing

And now let me introduce the next speaker. The next speaker will be Gerry O'Connell. Gerry O'Connell is Executive Vice President and Chief Information Officer at CBOE. He has been with CBOE since 1984 and he has been instrumental and creating and he is actually running the technology platform for not one, not two, not three, not four, but five exchanges. Gerry was also honored by one of Institutional Investor magazine’s Tech 50 recipients in 2011. He also has 99.99% uptime and I think that’s telling a little short. So, obviously he does a great job. Please Gerry.

Gerry O'Connell – Executive Vice President and Chief Information Officer

Thank you, Paul. Good afternoon. My name is Gerry O’Connell and I am here to talk about Systems.

Systems are cornerstone of CBOE Holdings. Systems are critical components of all exchanges. There is a very stiff systems competition among exchanges. CBOE is the leader in that exchange technology competition and I am here to tell you why? We are leading because of CBOEdirect, the center of that slide. CBOEdirect is our match engine technology. As Paul mentioned, it currently runs five exchanges, two options exchanges, two futures exchanges, and a stock exchange. CBOEdirect was designed and developed totally by CBOE staff.

All software in CBOEdirect is 100% owned by CBOE Holdings. The software was written in a way that it can always run on the latest fastest server hardware available. Also CBOE Systems’ all other applications were rewritten to under that same standard. There are no mainframe proprietary hardware or software servers in any of our data centers, in any of our environment at CBOE. CBOEdirect, we talk some more about that.

Let’s talk about what’s in it, how does it run five separate exchanges, and how does it do it from a single code base? The answer to that question is really that the system is designed specifically to do that. Maximum flexibility was built into this system. Configurability was a key to every piece of functionality that went into the system. Options, future stock, all have different product types, match algorithms, order types, and business roles. Another example is on the options exchange markets themselves they are different. For example, the matching algorithms in C2 are much different than the hybrid matching algorithms in C1. This configurability is really how we can bring to the marketplace exchange technology much faster than our competition.

Hybrid, our CBOE hybrid market model provides both electronic and open outcry participants in the same market. This technology is very specific. Today, in the hybrid market model, most order execution is electronic and not for initiated. While there has been a significant migration to the electronic portion of hybrid, some larger contract orders I still prefer to be negotiated and filled on the trading floor. I think Ben mentioned that at lunch time. So, what this slide shows is the floor still contribute a significant contract volume in that market in that hybrid market on the right hand side there. All right.

We run many servers. As I mentioned, our systems design allows us to migrate to the latest and fastest hardware servers as they become available and we can add servers, any level of our architecture anytime. We can expand what’s required in any exchange that we run. We scale the different amounts of servers on each level, for example, futures are much different than stock and options and we can add servers.

Everything is backed up. Each server has a hot backup of the same hardware and software as the primary server ready to be used. We have a sub-second fail over capability from the primary to the hot backup. In the case of a whole data center failure, we have a remote data center site that is capable of running each exchange that was within the failed data center.

CBOEdirect can handle a very large number of products. And that means we generate messages that are very high volume and rate, the highest in the industry. CBOEdirect is the leader in high volume message processing.

Okay, let’s talk about low latency after release this. This says we are into microsecond around trip times from our match engines. As little as two years ago, we were less than three milliseconds round trip and that was industry competitive. Today, we’re averaging 300 to 500 micros, micros of 1000 for the millisecond which is 1000 for the second. That is an average per day on all full pockets and all orders in that industry leading plus we have plans low latency even further.

Large market moves are key to sustain low latency. The key to low latency is to be there when you need it. That is during times of we have message traffic. Some recent examples of that were the flash crash in 2010 and some very high volume days in August. CBOEdirect delivered on those busy days with the same low latency all day.

Innovation, CBOE is doing for the long time. When you look back over many year, CBOE has been in the industry has been the industry innovator in exchange technology. From floor technology to the current hybrid technology, CBOE was first. Soon, CBOE will be the first exchange offer electronic flux options that are fully integrate length of the exchanges platform I mentioned there earlier.

So if you’re looking for single platform to support multiple asset classes trading across multiple exchanges there is now equal to CBOEdirect.

So, to sum up, how do we do this? CBOE is a deep base of industry knowledge and experience when it comes to designing the building trading systems. We believe that in-house design leads the superior quality and system performance continuous evaluation. We actually track every call in every order in every trade introduction all day on the latency aspects, the other aspects of each one of those things. That data helps us to ensure that we provide high availability or low latency to our firms.

And we share that information to the firms every day. Regular testing, 24x7 basically all the time with our onshore and offshore resources we’re testing the system all the time. We try to minimize development time and contain cost by balancing these resources between onshore and offshore resource.

Finally, CBOE listens to customer feedback and works with the industry to develop products and technology that perform in today’s competitive marketplace. That’s all I had. Ready for introducing, Alan.

Paul Stephens – Director and Department Head, Institutional and International Marketing

All Right. I’d now like to introduce Alan Dean, Executive Vice President, Chief Financial Officer and Treasurer. Most of you the room are used to talk you with Alan had industry conferences and on our earnings calls. And now just our knowledgeability is in every financial aspect to CBOE. He comes from years of experience as Alan served in this position since 1988 and then with CBOE since 1979, (indiscernible).

Alan Dean – Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Jerry and good afternoon everyone. Last, but hopefully not least that’s me so, in preparation for today we reached out and to find out what you want me to talk about as well as the rest of today and what we heard back is that while you’d like me to discuss our capital allocation philosophy are take a deeper diving to our income statement, our P&L look at revenue and expense a little bit closer. Talk about revenue per contract, some dynamics there and discuss expense control. So, all those things are in plan I’m touching on in my presentation today.

Compelling proposition, yeah, CBOE does enjoy significant operating leverage and that’s because of our predominately fixed cost base. This isn’t a new story to lot of you, but its worth repeating because most of our expenses are fixed and there are some variable items all go over but most of our expenses are fixed. Every time we trade an incremental options contract they add $0.16 that we realize if it’s an equity options or $0.60 if it’s an index option. Most of that incremental revenue goes right through our bottom line, and then allows us to realize margins that I think are enviable by most companies.

We have a balance sheet that offers significant financial flexibility. I think we do because with are debt free and if we add some mostly on the buy side, analysts suggest that we aren’t optimizing our balance sheet, that we should borrow money. We are risk debt averse. Well, we think that having a debt free balance sheet gives us more flexibility to respond if we see an opportunity that we think is on the best interest of CBOE or our shareholders. We have significant cash flow generation because of our strong profit margins and modest CapEx needs.

Finally, a strong track record of returning cash to stockholders as evidenced by what we did just two months ago, increase the dividend by 20% from $0.10 to $0.12 per share and implemented a $100 million stock repurchase and that’s after all a year of being a public company.

CBOE has a record of creating value for shareholders and the last 18 months we generated $227 million on operating cash flow. We returned $481 million to shareholders through $163 million in dividend, $80 million for share repurchases and last $12 million we successfully began and completed a $300 million tender offer for shares using all of our IPO proceeds. We also reinvested $42 million in our business through capital expenditures.

So how do we generate all that cash, let’s take a closer look at our sources of revenue. This pie-chart represents our gross revenue for the first six months of 2011, so on the bottom you can see it’s $244 million which was our gross revenue. All right, so no surprise, the largest section is transaction fees, accounted for $176 million or 72% of the total. The next largest area is access fees $34 million, 14% and tied for third place, two categories, market data fees and regulatory fees both accounted for $10 million each representing 4% each of the total.

Now let’s take a closer look at each revenue line item. Transaction fees, all of you in the room know how we get the transaction fees, volume times revenue per contract. The volume is easier to predict, right, everybody knows that, but after volume, revenue per contractor is a little bit harder to figure out. That’s because there are so many things that can affect revenue per contract. The fees that we charge, that can change. There is transparency in that, you can see what fees we change, what fees are in place, on our website.

But another factor that can affect RPC is who is trading the product, so in equity options customers trade for free, zero while liquidity providers like CTC will pay. And then there is volume scales, so all that can impact revenue per contract. What products we’re trading also impact the RPC, so index options $0.60 per contract, equities, ETS much lower $0.16 and about $0.20 per contract. Then there is volume discounts which I talked about.

Access fees account for $34 million and revenue in the first six month of this year driven by trading permits and permit rates. We’ve given guidance on access fees in the past and we’ll probably continue to do so in the future.

Third line item exchange services and other fees, well what is that, that’s mostly revenue that we are driving from our trade engine, CBOE direct either through collocation, people like CTC that want to be close to our computers, our log-on fees, things like that accounted for $9 million of revenue in the first of half of this year.

Market data fees amounted to $10 million, about two-thirds of that number is from OPRA, that’s Options Price Reporting Authority, the industry console data type. And the other third of the revenue that is coming from information that we own and that we’re selling on our own.

Regulatory fees also about $10 million, this is revenue that we generate, that is intended to directly support our regulatory effort and then other revenue $5 million. The three largest categories of our areas within other revenue are internet ads. We saw lot of ads on our website. Licensing fees, Dick talked about that and we drilled down into that quite a bit. So fees that we’re realizing by Standard and Poor’s marketing, VIX, and other things that we license and then fines that are regulatory related.

The line on the bottom of this chart is important SPXpm trading on C2 will contribute to revenues beginning in October 2011, of course it started yesterday we talked about that. And I’m hopeful that a year from now, when we reconvene if we do that will be a significant item that I’ll be talking about then.

Let’s take a look at historical revenue per contracts. So these all line checked goes back to 2006 and there is four lines on it, the grey line, the line in the middle that represents our overall revenue per contract. And you can see that over time over this period of time, it’s been fairly steady. While the two lines underneath it, that represent our RPC from equity options and ETF, DTF options have been on a slow decline. So those two product categories are then offset by the red line on the top. Index options, a nice increase in that over time from $0.50 to about $60 per contract traded. So all in, we’re able to lean on our license and proprietary products in order to maintain a predictable revenue per contract for CBOE.

Now let’s take a look at the expense side of the P&L. Again going back to 2006 this chart here has a number of bars on it. And each bar is broken up into three sections. The blue section of each bar represents core operating expenses, the green section is depreciation and amortization, and the purple section is volume-based expenses.

I think we’ve done a pretty good job of cost control over time and one metric to see how what kind of job we’ve done is to look at the line on the bottom of this chart. So it reads core operating expense as a percentage of adjusted operating revenue, so expenses divided by our total revenue. So in 2006, I meant that our core operating expense the blue section of each bar amounted to 55% of revenue dropped dramatically in 2007 to 43%, another nice drop in 2008 to 37% kind of levelled off, even went up a bit in 2009 to 39%, 2010 back down a bit to 38%, then a nice drop in 2011.

So this gets back to that operating leverage point, the very first point that I made on my first slide. We can hold expenses relatively flat, then we can realize the full benefit of the revenue that we drive through volume growth and in this case also in 2010 and ’11 access fees which are really new to CBOE began July 1 of last year. So that’s one metric that we use in measuring what kind of job we’re doing to managing expenses.

Let’s take a closer look at the line items within core operating expenses. So employee costs, represents half the total $50 million, more than half of the total, it’s $50.2 million of the total and in the first six months of 2011 the largest area within employee costs is salaries 62% of employee costs are salaries, the next two largest line items are incentive compensation and stock-based compensation both significant but much lower than salaries. And when I talk about employee cost, the story I’d like to talk about and describe is CBOE’s express. On 1987, we had 1204 employees, where we are doing four 500,000 options contracts per day. So now fast forward, 24 hours year later today we are about 590 employees and we are doing over 10 times the volume. How will we able to do that?

Well, mostly because of the automation that Gerry put in place and everybody at CBOE has worked towards and disciplined cost control. So, we are very careful about how we add resources. It’s not only expensive to higher people, it’s even more expenses to let them go.

Next line item is data processing, $9.3 million for six months of the year, hardware maintenance, licensing, license software costs, and telecommunications line cost for the hardware. Next line item outside services $13.8 million for six months of the year, two categories account for most of this line item, legal fees $5 million of the $13.8 million, and contract programming and consulting fees also account for $5 million of that total line item. The next three line items are relatively insignificant compared to the other three. Travel and promotion, mostly advertising facilities costs, we own our own building which some of you will be at later day or have visited in the past.

Then other expenses, the largest two areas in other expenses in the small item are insurance in the first six months, the write-off of fixed assets that we no longer use. So, how do we control costs in the short run? And I think we have done a good job of doing that. So, this is a short run strategy. The strategy in a long run would be similar, but different. So, if we see volume turndown what we do first of all is look at employee class. We might freeze hiring, we have done that. We might freeze salaries, we have done that. We might freeze benefits, we have done that.

We would in the outside services category we’d look at kind of track programming significant item for CBOE. This is essentially programmers that are IT, so Jean Thierry will hire to help with specific project. So, we can stretch that out. We can delay projects. We can delay the start of projects. There is another way for us to control costs and in travel and promotion and promos area. Advertising is something that can be dialed up or down relatively easily and we have used that dial in response to downturns and volume on the past.

Okay, volume-based expenses and depreciation, royalty fees, correlated index volume. This is one line item, I always like to see go up, it means I have a lot more revenue. Trading volume incentives, this line item correlates to equity and ETF volume. And then the last item on this page, depreciation and amortization $17.7 million for six months of the year, $11 million of the $17.7 million relates to the depreciation of fixed assets, while $6.8 million of the $17.7 million, $6.7 million relates to the amortization of capitalized software.

Okay, capital allocation guiding principles, so we are probably very similar to other corporations in our approach to capital allocation. We reinvest in our business where we have to. We have modest capital CapEx needs, but we do it when we have to maintaining our business making sure it’s growing is the prime importance. We return cash to our stockholders. I have talked about increasing the dividend and our stock repurchase. We also want to make sure our balance sheet is strong and that will allow us to maintain our financial flexibility should some opportunity come before us.

We are different in one material aspect from maybe most other companies we are diverse. So, if we determine to implement a strategy that requires the humiliation of cash, we should be able to communicate that strategy to our shareholders. And if we can’t communicate this strategy and they can’t understand it, then I think we all look to our shareholders to find ways to return cash to them, I think we have done that so far. We have only been a public company for 15 months, but we have a very good track record of cash flow generation. We paid out over $433 million in 2010, $300 million came through our settlement for the exercise right relating to board and trade members, $133 million for special and regular dividends.

Additionally, we used IPO proceeds for our tender offer last fall reduced shares by 12%. And we paid out over $48 million to-date in 2011 for dividends, which accounted for $30 million and our share repurchases of $18 million, $15 million of which fell under the stock repurchase program that we implemented in early August. A press release came out today and we bought since early August 599,900 shares at an average price of $24.82.

M&A considerations, how do we evaluate potential acquisitions, I don’t think anything is you will find anything stunning here are new. We would like any acquisition should we acquire today to be accretive to earnings within 12 months. Additionally, we would want any acquisition to complement our core business by either expanding our product offering, broaden our customer reach and its trade process either before trade, pre-trade or post-trade or extend our reach geographically, really no brain surgery there, pretty common sense.

And ongoing, our financial goals are continuing to drive margins and cash flow enhanced by product innovation, prudent cost control, and by doing that we can then capitalize on the operating leverage inherent in our business. We will reinvest capital when needed to drive returns and return excess cash to shareholders.

And now the last slide, this chart depicts historical operating income and profit margin percentage. And so, the bar chart is operating income line is profit margin. If you look to the third bar from the left, third quarter of 2009 we had operating income of about $30 million and the profit margin of 33% and that has grown nicely, so that second quarter of 2011 were up for about $55 million on operating income and a profit margin of 47%. Our job, our goal is to keep that trend going and I think we will do just that. So, thank you for your attention. Thank you personally from me for coming and participating. And now we are going to go to Q&A.

Question-and-Answer Session

Debbie Koopman

Last question of the day with another shot at Q&A for the management team, Bill had a commitment. He had to leave for a few minutes. He is going to hope to get back, but sure the team here can carry the day.

Paul Stephens

Now, I just had a few on the financials. Okay, first is you can go to the 2012 budget fees and are there any specific growth initiative costs we should be mindful of that would drive upward pressure to baseline expenses or CapEx?

Gerry O’Connell

Not that I can see right now, we’ll give guidance of course as we do our fourth quarter, when we do our fourth quarter earnings call, we can give guidance on core operating expenses for 2012, so that will be the definitive answer.

Paul Stephens

Okay, great. And then the second one, just curious how do you go about evaluating and making the decision to potentially charge and add a surcharge for a proprietary product like VIX, where you have won with products like SPX, SPXpm today?

Gerry O’Connell

Well, it’s not a simple answer. All right, here we go, the answer is complicated. It’s complex. Let’s take SPX for example, it’s the license product, but I still view SPX is having competitors. I think many in the future is product, which competes with SPX after certainly options and futures currently competes with SPX asset. So, we have to be mindful of the fees that our charge murky thing that I look at on an notional basis was that, that kind of analysis.

Over-the-counter options in XPSa lso direct competitor to SPX. So, I don’t want to – my objective is set to pricing, overall pricing at a level that maximizes revenue doesn’t discourage firms from I want them to bring us as much as they possibly can to our floor, not keep it upstairs or not consider using the future that’s what we strive to do through the price setting process.

Joanne Moffic-Silver

Right we need the mike, sorry.

Paul Stephens

So, just a follow-up and you have a more competitive product in SPX that you have sort of access fee surcharge attach to it right? I mean you have a more proprietary product than the fixed that you don’t. So, can you just walkthrough why that might be different?

Bill Brodsky

Well, we have transaction fee surcharge on SPX fixed on every other licensed index that we have to pay someone on and setting the prices on each one of those products. The analysis is really identical what’s take a competitively traded option. So, what MDX would be good example, right. So, I have to look at whatever all the other changes are charging for MDX and make sure are competitive.

Joanne Moffic-Silver

(indiscernible).

Paul Stephens

Kind of going back to Howard’s question very differently like if you look at slide 86 you said that you were able to maintain compound RPC because you have an uptick in index and the ETF is kind of trending lower. So, how much we already have in index going forward and you were saying how take into consideration competing products. Is that possible you can need to do that offset the multi-listed product RPC, when higher index RPC?

Bill Brodsky

Well, one another factor and addition to my ability to have increase prices in SPX of this another thing that is helped us as we have seen a lot of growth in SPX and it’s relative to equity options. So, that’s really helped our revenue per contracts. So, do I have more upside? I hope so.

Paul Stephens

Have you gone place back in time because you did increase the fees earlier this year like and clients have pretty okay with that change?

Bill Brodsky

You know that whenever we increase any fee unless it so small that it just doesn’t hit any radar screen. I always hear about even if it’s a penny I will hear about it. So, our customers are very mindful of fees and we have to be careful and deliver it what we are doing and how we are doing.

Joanne Moffic-Silver

Patrick.

Patrick O'Shaughnessy – Raymond James

So perhaps this was the question I should ask to the customer panel, but I will address to you guys. How sustainable do you think your access fees are? Certainly there are other option exchanges out there that don’t charge access fees or it may be make feature to CBOE five years from now, 10 years from now. Do you think you are still able to charge access fees because you guys have a different value proposition than your competitors?

Unidentified Company Speaker

I can start. So, you can try them well. That’s a good question. Access fees like any other fees is subject to competitor pressures and you are also correct in saying that some options exchanges have little or no access fees. But access fees come in different play risk and not every exchange has SPX and VIX.

So Patrick I’m not going to look at my crystal ball and tell you that in five or 10 years will it be there, and at what level. But all those issues will come into play as we look at access fees for 2012 going forward.

I think as I said, let me add a little bit to the thought to complete that our very mindful of the actual month in, month out access fees that we charge. I think when you look at other exchanges and consider what it costs a user to access and exchange, able to take into consideration collocation fees, line fees, storage fees, look up fees and a number of other fees that CBOE at this point it’s really been primarily focused, and you’ve been primarily focused on that month in, month out access fee.

Coupled together and putting those and categorizing those is really the cost of access near exchange. I think Alan was right to point out that we need to remain competitive and when we can add a value-add a better story, a differentiation is really what we take advantage of that situation and that’s what we should be doing looking into next year.

Patrick O'Shaughnessy – Raymond James

Got it.

Paul Stephens

It’s just an follow-on, number one on SPXpm, I know it’s kind of sort of talked about or maybe I missed it. Do you expect any migration, any substitution obviously the product is different enough that you’re open to fact, obviously new customer base. I’m just thinking through, I mean access fee side, whether to be any moving over would, dealers maybe get back some other licenses on CBOE. Today one license covers trading of certain number of securities and I think SPX dealers have more than one, then largely also anything along those lines that we should think about?

Unidentified Company Speaker

So all access fees and any premium value that we can extract is really driven by the opportunity. So today SPXpm doesn’t command premium product fee or say like the CBOE version of SPX. If volume increases and we can offer opportunity really imagine, our average daily volume and the ability to interact with flow we would then be able to consider bringing product access fee.

But again let’s go back to, the original question was if there is migration. The goal, they way we’ve set up SPXpm was first take some multiply listed volume we think is in the SPDR complex, b, attract and attract two SPX, the PM users that happen to be trading OTC again not a substitute. And really, not we don’t think, initially we were going to be cannibalizing the end user who really needs to interact with that broker to handle very chunky, very complex orders. So two questions that you had and I hope we can put aside the straight cannibalization, I don’t think that’s going to happen, and then the opportunity looking down the line when volume picks up of whether or not, it’s time or it’s appropriate to charge a premium access.

Paul Stephens

And that point you’re just referring to the value charge having $4000 on C2 for SPX versus $6000 on CBOE?

Unidentified Company Speaker

C1 $6000 in the premium three month Alan?

Paul Stephens

That’s correct.

Unidentified Company Speaker

And C2 $5000 without a premium, so it really will be all opportunity based and I think it really goes to the heart of why, how and when do you charge these, whether they are fee, premiums or access premiums, it’s all based on opportunity. First I assume yesterday too, we still use this Illinois CAG okay.

Debbie Koopman

No we would speak to the point if someone didn’t ask that question right.

Unidentified Company Speaker

Yes. I do have real question, just to close this loop on the idea went back to my market makers as to why they said that the SPXpm might be more expensive. You compared, they’d acknowledged what you do is ten times greater than notion value. But they said on other exchanges SPY is traded for free by the customer. So it’s not fair to say take ten times $0.18 to $0.20 of the equity but they say not all that make or take exchanges, this is a take fee, but there is always a bunch of exchange they rate trade for free is that are there.

Unidentified Company Speaker

It’s absolutely accurate for CBOE the customer as a different economics they do on our, for example the highest take fees of the business that’s for sure. From a market maker perspective and they were cost to coding, so what we expect to see and the expected spread, the market makers transaction fees, and what it costs the market maker to push on various exchanges even at CBOE our vast market makers. The one that enjoy the furthest point down on Alan’s sliding fee scale may average $0.09 of contract, $0.08 of contract, maybe they’re really so for a great year, a great month or down to $0.07 for them next $0.70 in the SPDR contract, 10 times notion. So that’s going to show up and did ask us well. So when we start asking the question, what does it cost a customer to trade PN versus SPY. We do have to consider the spread and watch the all in cost for customer to trade, not just be one aspect of the cost, be it exchange fee and I’ll repeat what I said this morning there is clearing cost leading OTC and there is regulatory fee that’s 10 times the size of SPDR. So it’s really an all in experience that we’re going after, look at it, as we said its not for the one and two trader, it really is for the large and medium-sized customer who we know SPDR to them.

Debbie Koopman

Thanks. Other questions. No.

Bill Brodsky – Chairman and Chief Executive Officer

So thank you. On behalf of the CBOE team here today, I would like to thank you for joining us for our first Investor’s Day. As you can see we have many irons in the fire. I hope we’ve been able to convey to why we’re so bullish on CBOE and in meeting some of our senior management today. I hope you see what I believe we have the best team in place to continue to drive growth in this exciting industry.

My colleagues who presented today, just a few of the many talented people at CBOE who are equally passion about the business and about CBOE. And of course I’d like to give a special thanks to Debbie Koopman, our Head of Investor Relations at CBOE who organized today event. Most of you know Debbie and how committed she is to getting the information that you need from CBOE. We’re happy to have you on our team. So thank you Debbie.

So some of you will be joining us with the trip to the trading floor and I know others have planes to catch. But I’d do really want to thank you all again for joining us today and learning more about CBOE and hearing our story. Debbie do you have any closing remarks.

Debbie Koopman – Director of Investor Relations

For those of you that are going over to CBOE, I just ask that you go up by the registration table and we will make sure that you get on the bus to get over to CBOE. And thanks again for your time and attention.

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