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CBOE Holdings, Inc. (NASDAQ:CBOE)

Q1 2012 Earnings Call

May 1, 2012 5:00 PM ET

Executives

Deborah Koopman – VP, IR

William Brodsky – Chairman and CEO

Alan Dean – EVP, CFO and Treasurer

Edward Tilly – President and COO

Edward Provost – EVP and Chief Business Development Officer

Analysts

Richard Repetto – Sandler O’Neill

Alexander Kramm – UBS

Jillian Miller – BMO Capital Markets

Michael Carrier – Deutsche Bank

Niamh Alexander – KBW

Howard Chen – Credit Suisse

Patrick O’Shaughnessy – Raymond James

Daniel Fannon – Jefferies

Justin Schack – Rosenblatt Securities

Kenneth Worthington – JP Morgan

Christopher Allen – Evercore

Gaston Ceron – Morningstar Equity

Matthew Heinz – Stifel Nicolaus

Edward Ditmire – Macquarie

Roger Freeman – Barclays Capital

Operator

Good day everyone and welcome to today’s CBOE Holdings First Quarter 2012 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we’ll conduct a question and answer session and instructions will be given at that time. (Operator Instructions). At this time for opening introduction, I’d like to turn the call over to Debbie Koopman, Vice President of Investor Relations. Please begin.

Deborah Koopman

Thank you. Good afternoon and thank you for joining us on our first quarter conference call. On the call today, Bill Brodsky, our Chairman and CEO, will discuss the quarter and our strategic initiative for 2012, then Alan Dean, our Executive Vice President and CFO will detail our first quarter 2012 financial results. Following their comments, we will open the call to Q&A.

Also, joining us for Q&A is our President and COO, Ed Tilly; and our Executive Vice President and Chief Business Development Officer, Ed Provost. In addition, I’d like to point out that this presentation will include the use of several slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website.

As a preliminary note, you should be aware, that this presentation contains forward-looking statements, which represent our current judgment on what the future may hold, and while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties.

Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, after this conference call.

Now, I’d like to turn the call over to Bill Brodsky.

William Brodsky

Thank you, Debbie, and good afternoon. Thanks for joining us. I’m pleased to report that fiscal year 2012 began with another strong quarter at CBOE Holdings. We delivered our seventh consecutive quarter of year-over-year earnings per share growth on an adjusted basis, as well as significant gains in market share. Moreover, we achieved solid financial results, despite lower industry-wide trading volumes by prudently managing expenses, while investing in future growth.

Our company’s mission is to create value for stockholders by generating industry-leading profit margins and growth rates who will diversify portfolio of risk management products and services. It is our mission to operate as a sub-regulatory organization with the highest integrity and confidence and to create an effective compliance in regulatory structure that functions as a trusted financial institution that provides all market participants and investors for the market price is reliable, efficient, and fair.

We issued annual 10-K filing disclosed with the Securities and Exchange Commission as investigating CBOE’s compliance with its obligation to the sub regulatory organizations. And the CBOE is simultaneously conducting its own review of its compliance.

We are unable to comment on the SEC’s investigation except to say that we continue to cooperate. We have conducted a rigorous self-examination of practice throughout our exchanges and we’re sharing the results of that review with the SEC.

In the past two years CBOE has navigated significant shift in our business and our ownership model. Our self-examination is an exhaustive inventory of all of our processes and practices to ensure that the highest ethical standards are embedded in every aspect of our current operation.

This past quarter we instituted company-wide educational seminars, the detail have the requirements of the SEC and our own rules applied to CBOE as well as, as an SRO. We have also begun to realign and add senior staff to key areas beginning with the recent announcement of our new Chief Compliance Officer. Additional new hires and appointments will be made in the weeks and months ahead.

Our entire organization is fully engaged in this process, and we are confident of our teams collective ability to deliver the highest standards for regulatory and compliance excellence.

Moving on now to update on our three key strategic initiatives for 2012, product developments, particularly focusing on our high margin proprietary products, optimizing revenue and market share and commoditized products and broadening our customer base. I’ll report on each initiatives and then focus the balance of my remarks on a major new technological initiatives currently underway, which will have significant long-term benefits throughout our company.

Turning first to product developments. As you know, nurturing the early growth of SPXpm, our newly launched electronic S&P 500 option products is a primary focus to CBOE in 2012. With experiences is our guide, we aim to establish traction and steady growth by working closely with early adopters. At the same time we expanded a comprehensive market and educational program and send it to increase awareness and understanding of SPXpm to a broader audience of likely potential users.

I’m pleased to report that trading in SPXpm continues to gain traction, despite turning the depressed industry-wide trading, since the products they viewed on October 2011. We are very encouraged both by customer feedback and trading activity. Monthly trading volume in the first quarter saw a steady sequential gains and average daily volume increased 16% over the prior quarter. It is gratifying to note that the open interest in SPXpm continues to build copying the 100,000 contract mark for the first time in March and April. I should also mention that open interest of 100, 000 contracts in SPXpm is the no show equivalent to open interest in 1 million spider contracts.

In addition to grow SPXpm we were also expanding our VIX product line in 2012. Fixed options and futures continue to show tremendous growth even in low volume, low volatility trading environments. First quarter VIX options average daily volume rose 36% over the previous quarter and 4% over the first quarter of 2011 while trading in VIX futures continue to ride wave of dramatic record breaking growth. Really 2 million VIX future contracts changed in March 2012 the product’s busiest month ever.

Volume for the first quarter of 2012 reached a record of 4.1 million contracts topping the previous quarter by 74% and the first quarter of 2011 by 57%. To put those figures in perspective, it should be noted that VIX featured a 10 times the size of VIX Options. VIX Futures growth is fueled in part by growing number of exchange trading products tied to the VIX Index. These products are brought to market by major firms, which CBOE views as partners in growing the volatility phase.

There are currently more than 45 ETPs for the assets under management of $5.1 billion, an increase of 82% from December 2011 followed up $2.8 billion. We continue to expand our volatility marketplace by increasing awareness of CBOE as the world’s go-to source for volatility education and to expanding our roster of tools to help investors understand, calculate, and trade volatility.

In March, we began publishing values of CBOE, VIX, VIX Index, which is VVIX, which as and implies tracks of volatility in the VIX Index. VVIX was developed for volatility traders seeking ways to formulate strategies based on the relationship between market volatility as measured by the VIX Index and the volatility of the index itself.

This stage puts a significance of the VIX Index as the market indicator and we are pleased to offer benchmark tracking with worlds most watched volatility index. In all, CBOE Holdings now offers more than two dozen volatility benchmarks and strategies, which is real-time option prices to variety of investors with a snapshot of expected volatility in various asset classes, also the benchmarks a meaningful value ads that keep customers coming back to CBOE to our website, through our options as a suite, and to our trading facilities.

We often see customers demand for tradable products tied to volatility benchmarks that proved to be a particular benefit in measuring and creating trading strategies such as the case with CBOEs ETF Volatility Indexes. In 2011, CBOE rolled out six benchmarks designed to monitor volatility in highly active sector specific ETS. This year based on customer demand, we introduced security features and options on three of them, the CBOE Emerging Markets ETF Volatility Index., the CBOE Brazil ETF Volatility Index and most recently CBOE Crude Oil ETF Volatility Index.

We look forward to further expanding our decks product line in the months ahead. We are pleased to announce last week that CFE completed agreements with DRW Trading Group that allows us to create variant features that were more of a coding conventions and economic performance of OTC stock index variance swaps. By combining the conventions of OTC variance swaps with the benefit of exchange traded features reaching out for meaningful benefits to OTC index as well as customers who are not traditionally participating in the large OTC variance swap markets.

We plan to initially introduce a new feature contract based on the variance of the S&P 500 later this year subject to regulatory approval. Currently, variance swaps in the S&P 500 index are estimated to trade $10 million vega notional per day in each – in the OTC market. Vega is the dollar exposure to changes in volatility. At the reference clients each VIX Futures contract is equal to $1,000 of vega.

Now, to report on the second of our three major strategic initiatives for 2012, the optimization of revenue and market share in commoditized products, we achieved considerable market share gains in the first quarter as a result of the January implementation of our new Volume Incentive Program VIP at CBOE. So volume gains are afforded by VIP were supplemented by incremental order flows, where is our marketplace we see still are fully electronic make or taker model.

We’ve seen a very positive customer response to VIP, which pays credits to permit – to – excuse me to permit holders for executing certain types and levels of business at CBOE. Alan will discuss the results in greater detail, but I am pleased to report that CBOE’s market share in multi list options excluding dividend trade increased by 3.9 percentage points to 22% in March compared to 19.1% in December of 2011.

Moving on now to our third strategic initiative to expand our customer base through targeted business development programs. The OTC opportunity is significant for CBOE Holdings, given that we offer many proprietary products that are well suited for this market. We see current OTC market participants increasingly turn to exchange trading alternatives both in response to a post crisis focus on systemic risk management to anticipate a change in OTC trading likely to result from the implementation of Dodd-Frank.

FLEX trading and CBOE’s proprietary products for instance grew 21% in 2011 and increased 24% in the first quarter of 2012. This increase was driven in part by dealer bank facilitating customer orders, as well as insurance companies and created this structure products that have begun using flex options and loads of OTC trading. With this terrific growth in mind and with the potential from greater growth in the horizon, we developed customized trading technology called CFLEX 2.0 to better serve the market.

CFLEX 2.0 will enable our customers to conveniently access flex options with the same CBOE interface that they use for regular options trading, built entirely in-house. The new CFLEX technology will feature CBOEs automated improvement mechanism, which we call AIM, which we expect will be enthusiastically embraced by FLEX and OTC users. We began a gradual roll of CFLEX 2.0 last week and we expected to be fully functional by the end of the quarter.

CFLEX 2.0 is a major systems enhancement. We expect to delve in and at itself attract additional trading for the CBOE marketplace, but it’s also the centre piece of the major technology initiative that I referred at the beginning of this call.

I’m very pleased to announce that CFLEX 2.0 marks the beginning of the rollout of our company’s new trade engine technology called CBOE Command, which will accommodate in the anticipated fourth quarter move of our CBOE and CFE service from Chicago to Secaucus, New Jersey, where C2 and CBOE stock change data centers are already located. CBOE Command and then you will be hearing frequently in the months ahead and I would like to take a moment to buy some context and what it means for company and our customers.

It is important to know that system development is deeply embedded in our value proposition, while every exchange aims to provide fast and more efficient trading technology. CBOE systems are also uniquely developed the power innovation. Our systems are designed in-house and engineered for maximum flexibility and scalability, enabling us to cost effectively launch new products and when appropriate new exchanges to trade those products. Our bench trading technology is in fact the unsung hero that has enabled us to successfully launch and trade our premium products such as S&P 500 Options and VIX Options in Futures.

When we set up to introduce our volatility products for instance, we determined that the optimal path to market with the level of futures products, while partnering with the futures exchange might have been the obvious next step we were able instead to leverage our systems expertise and scalable technology to efficiently, cost effectively, and independently rollout the CBOE futures exchange. We later followed with VIX options and the rest of its history.

Our SEC options complex illustrates a similar union of products and systems innovation. Each of our SPX products is supported by customized trading technology, tell us a specific trading need. SPX, the index option of choice for large institutional orders is supported by the tremendous liquidity on CBOE trading floor. SPXpm, which trades electronically on C2 guide us to the point and quick customer and SPXpm weekly blend both open outside and electronic trading.

To our 2012 rollout, CBOE commend will add significant system upgrades, resulting in an even more robust trading platform. Our expanded platform will provide customers with the most comprehensive array of options and volatility products in the world but it will also place at their command, newly customized ways to access and trade those products.

The fourth quarter of our – fourth quarter move of our service to the east coast will provide customers with more features and even faster access to CBOE options and futures data than ever before. It is a pleasure to announce that the next-generation of trade engine technology of CBOE Holdings. And with that I will now turn it over to Alan Dean to give you the financial report.

Alan Dean

Thank you, Bill, and good afternoon, everyone. As Bill mentioned, we delivered solid first quarter results despite lower trading volume, industry wise. Our ability to delve our bottom line consistently even in challenging market conditions highlight the underlying strength of our products offerings and are focused on managing costs while investing in long-term growth.

Adjusted net income allocated to common stockholders were $33 million up 2% from one year ago. Adjusted diluted earnings per share has reached 3% from one year ago to $0.37. While operating revenues of $121.4 million declined 2% from one year ago, adjusted operating expenses were down 3% and adjusted operating margins increased by 80 basis points to 47.5%.

Before I continue, let me point out that our GAAP results reported for the first quarter of 2012 and 2011 include certain unusual items that impact the comparison of our operating performance. These items are detailed in our non-GAAP information provided in the press release and in the appendix of our slide back.

To gain a better understanding of the key drivers during the quarter, let me begin with the operating revenues. As shown on this slide, operating revenues decreased by $2.6 million or 2% in the first quarter from one year ago. The decrease reflects declines in transaction fees and access fees offset significantly by strong growth in exchange services and other fees and market data fees.

Bill (inaudible) January 3, fee changes which included the introduction of a new volume of incentive program and revamping our liquidity provider sliding fee scale to exclude our proprietary products. These changes were designed to drive incremental volume to our exchanges, leverage the strength of our proprietary products and maintain competitive pricing across all of our service areas.

We realized significant gains in market share as a result of the changes and subsequently made additional adjustments to fine tune and optimize our revenues and expenses given our increasingly competitive position. As always, we will continue to monitor our fees to ensure that we are competitive and make prudent adjustments accordingly.

Turning to the next slide, you will see that the $5.1 million or 6% decrease in transaction fees was primarily driven by a 4% decline in trading volume combined with a 2% decrease in the average revenue per contract, or RPC. RPC decreased to $0.28 compared with $0.285 in the first quarter of 2011.

On our last call, we said that we expected the fee changes to decrease the RPC in equity options, increase the RPC for index options, and index futures and result in little or no change in the RPC for ETF options. For the most part that is what occurred during the first quarter. The lower RPC and equity and ETF options was due to the credit paid (inaudible) program and higher volume discount for liquidity providers for short sliding fee scale which we set at the beginning of each year.

Volume discounts for liquidity providers a multiple list of products were up as liquidity providers traded more as a result of the increased market share brought to CBOE through VIP. Conversely we saw the RPC for index options and futures products increased as a result of other fee adjustments made at the beginning of the year significantly offsetting the RPC defined and multiply listed option.

Looking at the mix of contracts traded index options accounted for 24% of total contracts traded in the first quarter of this year in comparison with 28% in the previous quarter and 23.1% in last year’s first quarter. Futures contracts our highest margin product accounted for 1.4% of our total volumes versus just less than 1% in the fourth quarter of 2011 and last year’s first quarter. Trading and equity options increased to 47.5% of the total, compared with 39.4% in the fourth quarter of 2011 and 31.3% in last year’s first quarter. Excess fees in the first quarter were down year-over-year and sequentially primarily as a result of our 2012 results.

The number of trading permits held steady during the quarter. We also saw an increase in the number of pulmonologists taking advantage of our exciting skilled pricing. As a reminder and return for their discount, we get a full year commitment to those trading permits. Exchange services and other fees increased by $2.7 million, up 57% over one year ago, again reflecting pre-modifications.

If you annualize the first quarter revenue of $7.4 million, it does exceed our full year guidance of $24 million to $26 million. However I’m maintaining the guidance because there is often a lag in customer response to these types of changes.

Market data fees were $1.3 million or 25% primary as a result of higher op revenue allocated to CBOE and increased revenue from CBOE’s market data services. CBOE’s market share gains resulted in a higher share total of total options transactions cleared which is the basis for allocating op income.

Moving to expenses, this next slide show our adjusted operating expenses of $63.8, which were down 3% compared with last year’s first quarter and relatively flat compared with the fourth quarter. Adjusted operating expenses exclude accelerated stock-based compensation.

As we expected first quarter, core operating expenses were up 3% to $41.6 million from $40.6 million in the first quarter of 2011 due to increases in outside services, travel and promotional expense and data processing.

Outside services were up due to the higher expenditures for contract programmers. The increase in travel and promotional expenses occurred due to our ongoing advertising campaign to build awareness for VIX product and SPXpm. The higher data processing expenses primarily resulted from costs associated with moving our systems to the east coast and with related enhancements.

Volume-based expenses, which include royalty fees and trading volume incentives declined $3.1 million versus last year’s first quarter due to a decline in trading volume incentives. This increase was primarily due to the changes in criteria for contracts that quality for the quantity-based fee waivers. Our success on bringing more customer (inaudible) CBOE would allow us to make things expense reduction. Royalty fees were basically even with last year’s first quarter.

Overall, we have very successfully controlled expenses and that translates into improved margin and income. As you can see from this slide, adjusted operating income for the quarter was $57.6 million resulting in an adjusted operating margin of 47.5%, up 80 basis points compared with 46.7% in last year’s first quarter, representing our seventh consecutive quarter of year-over-year improvement. We reported an effective tax rate of 41.3% versus 42.2% in last year’s first quarter. The tax rate decreased reflects the benefit of the new Illinois a portion of factor.

Turning to the balance sheet as shown on this slide, we ended the quarter with cash and cash equivalents of $148.6 million, compared to $134.9 million at the end of 2011. Our balance sheet remains debt free and we continue to generate significant cash.

We generated nearly $63 million in cash flow from operations for the quarter and continue to return cash to stockholders through a combination of dividends and stock repurchases. At the ended of the quarter, we had $28 million remaining on our $100 million share authorization. We remain committed to returning excess capital to stockholders. And in less than two years, we have returned more than $565 million to stockholders through share repurchase, tender offers and dividend payments.

Our board will continues to consider all available alternatives as we look for the multi efficient way to enhance long returns to stockholders. Finally capital expenditures for the quarter were $7.9 million when annualized this is in line with our guidance of $30 million to $35 million for the year. As noted in our press release, we are maintaining our 2012 guidance that we provided to you on February 8, and is shown here.

I would also note that our guidance does include expenses related to the initiatives that Bill outlined today. Looking ahead, we remain extremely optimistic about our long-term growth prospects and belief we are well positioned to generate even stronger financial results as investors regain confidence in the equity markets and trading volume picks up.

With that I will hand the call over to Debbie so we can take your questions. Thank you very much.

Deborah Koopman

At this time we will be happy to take questions. We will ask that you limit your questions to one per person to allow time to get to everyone, feel free to get back in the queue and if time permits we will take a second question.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Richard Repetto with Sandler O’Neill. Please go ahead with your question.

Richard Repetto – Sandler O’Neill

Yeah, hi, Bill and Alan, and Ed and Tilly. I guess the question is you did make some aggressive moves with the volume incentive program and you’re seeing some market share shifts, but you are seeing some RPC declines as well. And I was wondering have we done the analysis or how would you evaluate the overall changes, was it beneficial we’re going through the numbers now, but how did you look at it as versus if you would have maintained just the same market share the same RPC last quarter.

Alan Dean

Yeah, hi, Rich. This is, Alan, yeah, there are so many moving parts that you have to look at doing that analysis such as product mix, pricing changes made during the quarter, changes unusual behavior as well as market conditions. You just can’t look at transaction fees as you alluded to, you have to look at the entire picture including market data fees, which are significantly up this quarter, trading volume incentive expenses, which as you saw are down, because of the changes we made during the quarter, and those changes were made possible by the increased market share coming from VIP. Demand from trading permit holders continues to stay strong and I believe that VIP was somewhat responsible for that.

Exchange services and other fees another line item that was up significantly this quarter, turned out to be really good, better than the guidance that we provided. And again I believe that VIP was helpful in allowing us to maintain the demand in that revenue line item.

And finally, the additional market share certainly added to our liquidity enhancing the quality of our markets, which helps a lot of things. So overall I feel that CBOE financially benefited from VIP and increase in the market share that resulted.

Richard Repetto – Sandler O’Neill

Great, thank you.

Operator

Our next question comes from Alex Kramm with UBS. Please go ahead with your questions.

Alexander Kramm – UBS

Hey good evening. Maybe just saying what Rich said here on the – I guess VIP experiments I think you’ve said on the prepared remarks, you made some changes following the original program. So can you just talk us a little bit how should be thinking about RPCs and overall revenue in line of those changes? Thank you.

Alan Dean

This is Alan; we did make some changes, even recently, effective today that we made another change in the VIP program. I think you should look at our revenue per contract similar to the way I tried to frame it, after our fourth quarter earnings call, which is that – more market share would probably result in a declining RPC for equity options and maybe ETF options, which is a good thing because you see so many other line items are positively affected by that.

And if you saw market share hold steady then I think it would be reasonable to assume that RPC also would hold steady and the (inaudible) classes specifically equity options and ETF options.

Alexander Kramm – UBS

All right, thanks.

Operator

Our next question comes from Jillian Miller with BMO Capital Markets. Please go ahead with your question.

Jillian Miller – BMO Capital Markets

Thanks guys. Before getting towards the end of your buyback authorization, just wondering, the intent is going forward is a further authorization something you’ve already been in dialog with the board about – and I guess there is more generally, how you’re thinking about capital returns strategy going forward because they are building out some cash in the balance sheet maybe if you can give us a sense for whether you’d be more likely to raise the dividend or increase fee buyback pays with excess capital? Thanks.

Alan Dean

Yes, Alan Dean again. Let me first remind you that since our IPO barely two years ago and this was in my prepared remarks. We have returned over $565 million to our shareholders to stack repurchases, buybacks, dividends. And our policy hasn’t changed the policy of the board. First we look to reinvest in our business and after that we’ll look to return all excess capital to our shareholders to enhance the long-term return in the value of their holdings in CBOE.

Now as far as our current stock repurchase program all I can say at this point is that we intend to continue, complete the problem and just as we were before, we intend to be opportunistic on how we do that.

Jillian Miller – BMO Capital Markets

Okay, thank you.

Operator

Our next question comes from Michael Carrier with Deutsche Bank. Please go ahead with your question.

Michael Carrier – Deutsche Bank

Thanks guys. Maybe just a question on expenses, it looks like, the run rate as far has been on the low end or even better, in low end of the guidance for the full year. So, I guess first is there somebody’s new initiatives that you discussed, at the beginning to some of these kick in and so we would expect the expense run rate to start the ramp up, or is it maybe just more likely to be at the lower end of that guidance range?

Alan Dean

Alan Dean again, if you take our core expenses for the quarter and multiple then by them by four certainly, we are under our – the annual guidance that we gave you. However, if you take the same core operating expenses for the quarter and compare them to the core expenses for the first quarter of last year, they are actually up 3%, which is a lot closer in line with the guidance that we gave to you three months ago, which is an increase of 4% to 7% over the last year.

And also, I do expect some expenses to ramp up as we go through the year. So consequently, we’re maintaining in our expense guidance of $173 million to $178 million for 2012 and that does represent a 47% increase over 2011, which all by itself was kind of depressed because we did – we were tight with our expense recall, expense control last year.

Michael Carrier – Deutsche Bank

Okay, thanks a lot.

Operator

Our next question comes from Nim Alexander with KBW. Please go ahead with your question.

Niamh Alexander – KBW

Hi, thanks for taking my question. On the technology initiatives and is there ways to quantity maybe the spend, or is it most of the spends behind you kind of in the CapEx. And then what is the revenue opportunity from this are maybe new co-location fees, that you could start charging is there – is it maybe higher volume from improved latency. Could you expand a little bit more on that?

Alan Dean

Alan Dean again. The cost of CBOE command, mostly the move out to the East Coast and the functionality changes like CFLEX 2.0, they are all included within the guidance that we gave you both CapEx and our core operating expenses. We are breaking them of any further than that at this point in time.

The co-location revenue that is in that line item exchange services and other fees and co-location is one of the items that one of the fee increases that we put in at the beginning of this year and has included in that line item and partially accounts for the increase in that revenue. So beyond what we’ve already done, I don’t think I could count on anymore incremental revenue from co-location because of CBOE command, the changes that we’re making to the functionality or to move out to the East Coast.

William Brodsky

(inaudible) what Alan saying, this Bill Brodsky, this initiative gives us additional flexibility, it does reduce the latency and it gives us tremendous advantages in terms of anything that relate to over-the-counter initiative. So it really is following through on initiatives that we had established, but the CFLEX 2.0 is something that we believe is quite significant.

Niamh Alexander – KBW

Okay. Thanks.

Operator

Our next question comes from Howard Chen of Credit Suisse. Please go ahead with your question.

Howard Chen – Credit Suisse

Alan, I wanted to follow-up on your comments on the exchange fees, on that you could see some delayed impact from clients. Does that mean clients what actually have to come in pull additional lines and have you seen any of that post adjusting the fee schedules on the recent months?

Alan Dean

We have seen some pullback early on, if sometimes the reaction is not immediate and it is in pulling lines, it could be something as simple as reducing their logins that you have with the CBOE command or trade engine. So, it’s a fairly easy thing to do, but you don’t want to do it in an environment where volume or market share is growing and volume is there. And so, I really do believe that VIP and the increase in the market share helped mitigate the lost of the bleeding (inaudible).

Howard Chen – Credit Suisse

Okay, thanks. I mean just a quick clarification, and Alan on your commentary about, is it more based on conservatism or do you see like a pipeline of people who are collapsing log-ins and doing things like that?

Alan Dean

At this point in time, no, I don’t see a line of people looking to get out or dramatically change what they are doing, but even one or two large users making a large move could dramatically impact this line items. And so it wouldn’t be prudent for me to count on that revenue for the remainder of the year given that we are still so early in the year.

Howard Chen – Credit Suisse

It makes sense. Thanks a lot, Al.

Operator

Your next question comes from Patrick O’Shaughnessy with Raymond James. Please go ahead with your question.

Patrick O’Shaughnessy – Raymond James

Hey, good afternoon.

William Brodsky

Hey, Pat, how are you?

Patrick O’Shaughnessy – Raymond James

Good, good. So the – your volatility franchise is obviously very important to you. How careful do you guys have to be or how much do you monitor the indexes that are tied to the VIX, obviously, there is a well published kind of disconnect this past quarter between, I think of the three VIX and the underlying VIX and how much do you worry about the harming the brand of your volatility franchise?

William Brodsky

This Will Brodsky. I think what’s before I can hear is that, the index that you’ve talked about really related to the use of leverage on the ETF. And I think what – the most important area is customer education, and the unique feature of leverage products, but from what we can see it appears the issuer who had the problem has addressed it, and it was a unique situation and didn’t have any connection to any of the other 45 ETPs that are currently tied to our VIX.

Patrick O’Shaughnessy – Raymond James

Thank you.

Operator

Our next question comes from Dan Fannon with Jefferies. Please go ahead with your question.

Daniel Fannon – Jefferies

Hi, good afternoon. I guess if you could just discuss kind of the competitive framework generally in the options market today and kind of how you see the potentially intensifying as the year progresses and then with that as you’ve been kind of tweaking prices all we have still to date is that something we should expect you know continue based on the changes in volume?

William Brodsky

This is Will Brodsky. I will take the first crack at this. We operate in my view in the most competitive segments of exchange markets in the United States. And as a result, it is very dynamic and it is a day by day competition, so we monitor this daily and we will continue to do it. And it is the way we are operating and happily I think we’ve done pretty as well.

Operator

The next question comes from Justin Schack with Rosenblatt Securities. Please go ahead with your question.

Justin Schack – Rosenblatt Securities

Hi, I’ll start the question on may be different angle on the best question that Patrick asked. Can you guys breakdown how much of the VIX options for the futures volume comes from or it’s related to you PTPs based on that. How I know you partially answered this when Patrick asked, but how are going about, I think it was the public size the regulator, regulators are looking at what happens with (inaudible) some speculation about the potential changes to you the structure of that market and respected relations and redemptions and what’s that could have over long-term on that volume that we getting those ETPs.

William Brodsky

One of things, this is Bill again and one of things I said earlier is that there continues to growth in not only in the products, but the assets under management in these exchange traded products. And there is no doubt that as more assets are deployed in to different products, there is a clear correlation between the amount of products, the assets under management and the volume that we are seeing particularly in the VIX futures. It is just a natural thing, they’re going to balance off every day and we look that as very constructive. But I just go back to what I’ve said earlier and that is that there are unique features to leverage products that need not to be related to VIX there are other leveraged exchange traded products out there I think what is very important is that people need to understand about the suitability issue and they’re not designed for buy and hold investors, these are unique tactical instruments.

Justin Schack – Rosenblatt Securities

Okay, thanks Bill.

Operator

Your next question comes from Ken Worthington of JP Morgan. Please go ahead with your question.

Kenneth Worthington – JP Morgan

Hi good evening. Just (inaudible) to VIP program a little bit more finally. You’ve obviously made some changes and there is a reasonably big reaction in terms of market share, you’re on the winning side, others are on the losing side. Why don’t you think we’ve seen bigger pricing changes, priced some of your competitors to try to neutralize the benefit that you’ve seen thus far, or is it you have been making so many moves that can’t quite catch up and if you look out six months I know Bill you said you are in the one of the most competitive markets, but to what extent our concerns about the stadium scenario where everybody stands up and no one can see a apply pricing here?

Alan Dean

This is Alan Dean, I think that we are in a unique position in the options industry, different from anyone else because of our proprietary products. And the SPX and VIX specifically. And having those two products allows us flexibility, I think it gives us a competitive advantage that others don’t have. So there could be a reason why others have not responded as aggressively, Ed Tilly do you have anything?

Edward Tilly

Yeah, I think as we stated when we announced the VIP program early on the beginning in the year that we concentrated on a very largest consolidators of liquidity. And I think the immediate response that we are seeing most active is Philadelphia trying to go after the smaller consolidator. And with that obviously, the impact on share will be different, but it’s a different targeted market. It actually circles back to a couple of questions earlier, when we continue to see pricing tweaks, we will see, we will continue to change its pricing.

Of course, it’s what we do and we look at the competitive landscape and the changes even in VIP month in, month out as from our entire team that’s what these guys do. So I think we will see changes going forward, we’ve seen Philadelphia change, CBOE will continue to change. We will look to see to and continue to change, this is part of the business and we will continue to do that moving forward.

Kenneth Worthington – JP Morgan

Thank you.

Operator

Your next question comes from Chris Allen of Evercore. Please go ahead with your question.

Christopher Allen – Evercore

Good afternoon, guys.

William Brodsky

Good afternoon, Chris.

Alan Dean

Hi.

Christopher Allen – Evercore

I might have missed this, but can you just give us a little more color just to what’s driving incremental increase and expenses moving forward. And you’ve already made some hires to address some of the SEC related issues, it looks like are there more – you said there is going to be more to come, or have you all been spending on some of the seminars and kind of what else we drive – expect to drive moving forward?

Alan Dean

Well, the – let me go back to the analysis that I cannot – that I laid out and when I answered the question before. If you compare the first quarter core operating expenses of 2012, compared to the first quarter of 2011, we are up 3%. And I expect that our expenses will grow during the year even if we don’t complete our move out to the East Coast. Even if we don’t continue to enhance CBOE Command, and when you add all those things into the natural growth rate of expenses, that’s why I believe that to expect an increase in expenses of 4% in 2012 at a minimum of over 2011 is a reasonable thing to expect.

Christopher Allen – Evercore

Good. Thanks, guys.

Operator

Your next question comes from Justin Cressall with Morningstar Equity. Please go ahead with your question.

Gaston Ceron – Morningstar Equity

Hi, good afternoon, it’s Gaston Ceron with Morningstar Equity Research. Thanks for taking my question. Just a real quick, Bill I wanted to go back to something you’ve said, got to believe the sort of – I actually I am not sort of the call, and I might have heard all of that you said. But I think you’re addressing some of these recent regulatory issues that are out there, and I thought you said something about possibly higher kind of expenses going forward on the regulatory front, I’m curious if you have at this early stage sort of any sort of estimate of what the current run rate impact of that might be or what we should we expect sort of a modeling – for a modeling purpose for by the way cost going forward?

William Brodsky

Yeah, actually I didn’t address any expenses in that regard, but Alan just did, but I will ask him to just kind of reiterate what he just said. Alan?

Gaston Ceron – Morningstar Equity

I’m sorry, I’m also missed that, I apologize.

Alan Dean

That’s okay Gaston. What I said is that, the expenses related to CFLEX related to moving out to the East Coast any other functional enhancements that we make to our trade engine CBOE Command related to regulatory enhancements, that’s all included in our guidance and not incremental and that’s why we see the year right now. And we are being specific about what each of those items costs.

Gaston Ceron – Morningstar Equity

All right. And anything that might come from any conversation we have regulators that’s not something or especially commenting on right now or?

William Brodsky

Well, certainly we are not commenting on conversations with regulators, but I’m quite frankly, I look at the whole regulatory matters an opportunity to just to take a fresh look at things. As I said in my prepared remarks, we’ve gone through dramatic changes in our whole operations in the last three to five years. And this is an opportunity to take a fresh look in the environment we are in and just do things that we think are right to do. But as Alan said, we think we can do this within the contract that the expense guidance in given.

Gaston Ceron – Morningstar Equity

Understood. Thank you very much.

Operator

Our next question comes from Matthew Heinz with Stifel Nicolaus. Please go ahead with your questions.

Matthew Heinz – Stifel Nicolaus

Hi, Good afternoon.

William Brodsky

Hi, Heinz.

Matthew Heinz – Stifel Nicolaus

So we’re continuing to see kind of a broad market shift towards ETF products, I guess TY and IWM relative to from your higher margin index products. Just incremental share gains, but I’m wondering and how you are thinking about that trend and whether you view those products as a competitive threat or nearly just kind of complimentary to your index product suite?

William Brodsky

Yeah. Well, I’m not sure I either understand or agree with your permits. The market will choose products based on what’s going on when markets are not as volatile, they go to indexes when it’s more volatile, they may go to individual stocks. But that certainly now – what we’re seeing now, I mean you look at our VIX product lines and there is dramatic growth there, which have nothing to do with what’s going on in IWM or other things.

And the other thing that we’re seeing is the increased growth in our XPS line which is really attributable to whole variety of things the weeklies the fact that as VIX grows there is more volume in SPX. And this is a whole host of things that are different and as more business is done by institutions we’re going to see more business in SPX. So I think these are kind of very unique products that are not necessarily related to what I’ll call broader customer interest in traditional ETFs or individual equity options.

Matthew Heinz – Stifel Nicolaus

Okay, let’s stripping out the VIX and just how looking apples-to-apples that SPX versus FTY I mean do you think that in terms of contract count you think that’s attributable to less institutional activity?

Alan Dean

Just remember that the SPX is 10 times the size of the spider and I looked at the open interest from April to – from March to April. And the decline overall in SPY and open interest with dramatically greater than the decline in SPX, I think it was 4% decline in open interest in SPX versus 16% decline in SPY. So these are numbers that we watched very carefully and I just think that you got to look at them and try to make your own analysis.

Matthew Heinz – Stifel Nicolaus

Okay. I appreciate that. Thank you.

Operator

Our next question comes from Ed Ditmire with Macquarie. Please go ahead with your question.

Edward Ditmire – Macquarie

Most my questions has been answered, but just I had a quick housekeeping and can you tell us how much of the long LTIP award component is embedded in the comp expense in the quarter?

Alan Dean

Yeah, I think it’s in the press release. And don’t get it pull that out.

Deborah Koopman

2.7.

Alan Dean

Debby has got correct answer (inaudible).

Deborah Koopman

2.7 million.

Edward Ditmire – Macquarie

Okay.

Alan Dean

The $3.7 million.

Edward Ditmire – Macquarie

Okay, thank you.

Operator

Our next question comes from Roger Freeman with Barclays Capital. Please go ahead with your questions.

Roger Freeman – Barclays Capital

Hi, good evening.

William Brodsky

Hey, Roger.

Roger Freeman – Barclays Capital

Hi. Yes on SPX scale I know you’ve talked about this in the past in the last quarter about just being a sort of a long term build. I think last quarter you said you hired sales person to which for the New York area they try promote the usage of it, can you just talk to maybe what feedback has been and what where it hasn’t – haven’t made the penetration here I yet or where you’re thinking up further tailoring in the selling efforts to drive penetration on it.

Edward Provost

Hi, Roger Ed Provo.

Roger Freeman – Barclays Capital

Hi.

Edward Provost

So we have brought on the physicians that we described in the last earnings call everybody’s on board both in the New York office and in Chicago our program is not materially changed from what we have been doing since we launched the product, primary focus being active, retail, and the hedge fund community one of the people we brought in is very much in the hedge fund side of the business has tremendously strong contacts in that community and we have dialogue everyday with both current and prospective users of the product.

We remain very optimistic that this product will begin to pickup volume, the users, and the people who are looking at it with the product makes sense, it works, it’s distinguishable from our SPX products and they like the market model. So we’re very committed to staying on the same path that we’ve been on.

William Brodsky

And let me add a little bit further, Roger, just to clarify, Ed hired that additional person not specifically for SPXpm, we are selling the complex and pushing our institutions into SPX whether it’s the traditional four base the weekly contracts that has enjoyed terrific growth with the PM. So we are, as far as to say we can go as far say we are agnostic as to what our institutional users pick up from that sales effort and we are just trying to drive everything back into their propitiatory complex.

Alan Dean

Just to add one more point to add in Ed’s comments and I think Bill touched on it, in his opening comments. One of the things we’ve been very encouraged is the steady growth in open interest and at expiration in both March and April it did exceed a hundred thousand contracts again those are adjusted equal to a million spider contracts and we are optimistic if trend is going to continue along with average daily volume. So again we couldn’t be more optimistic, but it is a long term process and much away we thought it would play out.

Roger Freeman – Barclays Capital

Okay. Thank you.

Operator

Our next question comes from Jillian Miller with BMO Capital Markets. Please go ahead with your question.

Jillian Miller – BMO Capital Markets

Thanks. So even the volatility haven’t been particularly high end February or March, the VIX complex is doing really well and I know that on the futures side, a lot of that’s kind of driven by the mixed incentive products. And on the option side is that also the case or there is something else that’s been driving that?

William Brodsky

I think it has to do with the – there is still the volatility space being very much at its infancy. And so volatile, low volatility environment we have lots of people who are analyzing the product coming to our seminars, learning about how volatility works and becoming new users of the products.

So that while if we saw some spec of volatility, with no doubt see an increase in volume, where we are looking at as growing the user base and in these low volatility environment these people have a lot of opportunity to focus on products like VIX that they might not be able to focus on., if there was a much more active market. I would note also that we saw a great evidence of this at our – I think with our 26th Annual Risk Management Conference in Florida, which we held in March, we had 300 buy-side institutional portfolio managers, many of them were very much concentrated in the educational seminars focused on the VIX products. So again, in this particular product, we just have a tremendous growth in the rate of new users of the product.

Jillian Miller – BMO Capital Markets

Okay, and that’s helpful. And then just quickly has there been any update on the OCC, I guess SEC approval for the clearing on the OTC, S&P options, have they gotten – I think what’s kind of the – your thought on timeline there?

Edward Tilly

This is Ed Tilly. We have not seen approval, we do expect approval – the only indication we can get is when OCC shares these things with us, so I would push that out certainly, not expecting that immediately, but maybe at the end of the quarter or early next quarter.

Again, really the information will be maybe much more public by OCC, but we are learning is that there is interest and that’s really exciting and encouraging to us, especially when we can look at a multipronged approach at moving OTC business to centrally cleared, to centrally – to being centrally cleared. And this complement CBOE’s effort in our CFLEX 2.0, so that we can go out, Ed Provost team can go out and offer more than one alternative to OTC trading.

So it really works quite well with our timing and launching CFLEX 2.0 in the OCC’s approval, pending approval to come directly to clearing. So it’s just a great opportunity for us to sell the opportunity.

Jillian Miller – BMO Capital Markets

Thank you.

Operator

Our first next question comes from Matthew Heinz of Stifel Nicolaus. Please go ahead with your question.

Matthew Heinz – Stifel Nicolaus

Hi, just a quick follow-up on the access fees, it looks like that the annualized 1Q rate is tracking slightly below the midpoint of your previous guidance? Just wondering if there are any changes there or is everything remaining the same what would the drivers be to it is kind of getting cut off?

William Brodsky

Yeah, it just tracking just a fair below the low side of our guidance. And we haven’t seen any declines in demand and we feel like that the guidance that we gave you is still important still relevant and appropriate. So we are maintaining that for the rest of the year.

Matthew Heinz – Stifel Nicolaus

Okay, thank you.

Operator

I’m not showing any other questions in the queue. I’d like to turn it back over for closing comments. Please

Deborah Koopman

Thank you all for joining us today and thank you for your interest in CBOE.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the conference. You may disconnect, good day.

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