Cboe Global Markets' (CBOE) CEO Ed Tilly on Q4 2017 Results - Earnings Call Transcript

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About: CBOE Holdings (CBOE)
by: SA Transcripts

Cboe Global Markets, Inc. (NASDAQ:CBOE) Q4 2017 Earnings Conference Call February 9, 2018 8:30 AM ET

Executives

Ed Tilly - Chairman and CEO

Brian Schell - EVP, Treasurer and CFO

Chris Concannon - President and COO

John Deters - Chief Strategy Officer

Debbie Koopman - VP, IR

Analysts

Richard Repetto - Sandler O'Neill

Sameer Murukutla - Bank of America Merrill Lynch

Ken Worthington - JPMorgan

Alex Kramm - UBS

Alex Blostein – Goldman Sachs

Brian Bedell - Deutsche Bank

Ben Herbert - Citi

Chris Harris - Wells Fargo

Chris Allen - Rosenblatt Securities

Kyle Voigt - KBW

Operator

Good morning and welcome to the Cboe 2017 Fourth Quarter Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded.

I'd now would like to turn over the call over to Debbie Koopman. Ms. Koopman, please go ahead.

Debbie Koopman

Good morning and thank you for joining us for our fourth quarter earnings conference call. On the call today, Ed Tilly, our Chairman and CEO, will discuss the quarter and provide an update on our strategic initiatives. Then, Brian Schell, our Executive Vice President and CFO, will provide an overview of our fourth quarter 2017 financial results and guidance for certain financial metrics for 2018. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our President and COO, Chris Concannon and our Chief Strategy Officer, John Deters.

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 web site.

During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold, and while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, after this conference call.

During the course of the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. We will also refer to non-GAAP adjusted combined results, which are also reconciled in our earnings materials. As you know, we completed our acquisition of Bats Global Markets on February 28, 2017. The combined results present information regarding the combined operations, as if the Bats acquisition had closed at the beginning of 2016, in order to provide a supplemental discussion of our results and review of our business.

Now, I'd like to turn the call over to Ed Tilly.

Ed Tilly

Thank you, Debbie, and good morning. I know many of you joined us for our call on Wednesday, thank you, and thank you again for joining us today.

I am pleased to report on a strong fourth quarter 2017 at Cboe Global Markets. As we approach the one year anniversary of our acquisition of Bats Global Markets, I am gratified to report, that we accomplished what we set out to do within the first year. Chiefly, to integrate two great teams, while continuing to serve our customers with superior products and services, and to grow our respective business lines.

A strong fourth quarter capped off a year of tremendous growth, including an increase in total options average daily volume of 11% on a combined company basis, outpacing the 4% gain made by the industry overall. New record trading volume in VIX options and futures, with each increasing 23% over the previous year. An all time high in SPX Weekly's trading, which drove another record year in SPX trading. An 82% increase in ETP listings, bringing our total number to 250 at year's end, with a market share of 12%.

Record trading in our Large in Scale platform, now one of the largest block trading facilities in Europe. Record Cboe FX market share and average daily notional volume, fueled by increased use of our London Matching Engine.

Our ability to deliver superior results across key business lines in 2017, while making great strides in our integration with Bats, positions us to more fully leverage our increased global reach and expanded product line.

Our mission to power potential, to stay ahead of an evolving marketplace is fueled by our commitment to relentless product innovation, leading edge technology and seamless trading solutions. I will take a minute here to look at our recent progress in those three key areas.

Our commitment to drive growth through product innovation, was evidenced by our December 10th launch of Cboe Bitcoin Futures, XBT. The world's first exchange listed regulated bitcoin futures product. We are encouraged by the early trading in XBT futures, which continues to steadily build in an efficient, transparent and orderly marketplace.

At the time of our first XBT settlement auction on January 17, over 124,000 contracts had traded, representing a notional value of over $1.5 billion. Moreover, the successful settlement process worked exactly as designed. The migration of the Cboe exchanges on to Bats proprietary technology is central to our commitment to providing customers with superior trading technology. We expect the migration to maximize our value proposition and to power our company's ongoing growth. Working closely with our customers is key. We held our fourth conference call with customers in December, and their feedback remains positive.

The migration of the Cboe Futures Exchange to Bats technology remains on track for February 25, 2018. We are simultaneously preparing for the migration of C2 options exchange planned for May 14, 2018.

I am pleased to add that we successfully launched our new index platform on January 22nd. The new platform serves as the foundation for our growing index business, and enables us to better calculate and disseminate data for new and existing indices.

We are committed to enhancing the customer's trading experience, through regulatory advocacy, new technologies, and education. We continue to work on behalf of our customers, by vigorously advocating for the SEC's approval of the Cboe Market Close auction, a closing match process for non-Cboe securities. We created CMC as a competitive alternative, and were encouraged by the approval of our proposal by the SEC staff on January 17th. The subsequent appeals by competitors will delay the benefits we believe CMC can deliver to investors in U.S. equity markets, but we continue to work proactively with the SEC on a favorable resolution.

We made inroads recently on behalf of our customers, by seeking and receiving permission from Japan and Hong Kong regulators, to add Cboe Global Markets U.S. Equities to the respective lists of approved exchanges. These designations are expected to increase global access to our growing ETF listing business.

We viewed our preparations for MiFID II as an opportunity to help customers navigate the changing regulatory environment in Europe, with value added products and services. We have already seen an uptick in volume in our new product offerings, that while still a small piece of our overall European business is encouraging, given these are very early days.

It is a credit to our entire team, that were able to deliver superior results throughout the year, while also successfully combining two strong companies into even one greater company. As a result, we are well positioned to continue to execute on our growth initiatives, including growing our proprietary products, expanding our global reach across asset classes, migrating our exchanges to Bats technology, and achieving our acquisition synergy targets.

With that, I will now turn it over to Brian.

Brian Schell

Thanks Ed and good morning to everyone. Before I begin, I want to remind everyone, that unless specifically noted, my comments relate to fourth quarter 2017, as compared to the prior year period and are based on our non-GAAP adjusted combined results, including Bats.

On that basis, our fourth quarter results follow the same general theme you have heard from us throughout 2017, with solid financial results, primarily driven by the continued strength of our proprietary indexed products, against the backdrop of low market volatility, growth in non-transaction revenue, expense discipline coupled with the overachievement of expense synergies, and all of that leading to margin expansion and earnings growth.

Summarizing our combined results for fourth quarter 2017 versus 2016, we continue to grow net revenue, posting a 7% increase in combined net revenue, with increases across each business segment. Our options and futures segment contributed the largest revenue gains, which drove organic growth of 8% for the quarter and 9% for the full year. We had operating expenses relatively flat for the quarter, which combined with our revenue growth, resulted in a 260 basis point improvement in our adjusted operating margin, a 90 basis point lift in our adjusted EBITDA margin.

Adjusted diluted earnings per share of $0.87, up 12% and lastly, given the tax reform legislation path in December, we revalued our deferred tax liability, and recorded a onetime tax benefit of approximately $192 million or $1.70 per diluted share in the fourth quarter, which is included in our non-GAAP adjustments. More to come later on the impact of tax reforms.

The press release we issued this morning in our slide deck, provide the key operating metrics on volume and revenue capture for each of our segments, as well as an overview of our key revenue variances.

At this point, I'd like to highlight some of the key drivers influencing our performance in each segment. In our Options segment, the 3% increase in net revenue was driven by higher net transaction fees, offset somewhat by lower regulatory fees, and an increase in royalty payments. The increase in royalties was due to higher volume in our licensed index products, as well as a mix shift between index products traded. Decline in regulatory fees primarily reflects lower regulatory costs. However this month, we lowered our options regulatory fee and expect 2018's regulatory revenue to be about 12% to 13% below 2017's full year net regulatory revenue of $32 million. However, given that revenues from regulatory fees must be used for regulatory costs, this should have no impact on our bottom line in 2018.

As Ed noted, we remain focused on growing our proprietary products, as we did in 2017, with the delivery of record volume in both SPX and VIX options. In 2018, we plan to continue to focus our efforts on growing our proprietary index products, with ongoing education, business development and various incentive programs, such as those aimed at large, over-the-counter trades and retail volumes. While the incentive programs, may put some pressure on RPC, we expect the overall impact to be net positive.

Turning to futures; we had another record year with growth in both contract volume and RPC. With the latter reflecting a modification to our day trade feed program, which had a favorable impact on RPC for the fourth quarter, and the entire year. For 2018, we continue to be optimistic about a successful technology migration later this month, which we believe will have a positive impact on trading, as we provide CFE market participants with enhanced trading tools and a better trading experience.

Turning to U.S. equities, net revenue was up slightly, driven by growth in non-transaction revenue, partially offset by lower net transaction fees. The continued low volatility levels in 4Q 2017 produced lower overall equity volumes and a higher percentage of volume traded off exchange. As this slide shows, our SIP market data revenue was flat year-over-year for the quarter and full year, Proprietary Market data accounting for nearly all of the market data revenue gain. Our Proprietary Market data revenue saw a growth of 39% in the quarter and 24% for the year, with approximately a fourth of each coming from new customers or additional sales to existing customers, and the remainder from pricing changes. While we expect continued growth in proprietary market data in 2018, we also expect to see additional downward pressure on SIP revenue, due to industry consolidation and potential of continued off exchange trading.

Net revenue for European equities increased 17% on a U.S. dollar basis, reflecting growth in net transaction fees and non-transaction revenue, as well as benefitting from the strength of the pound sterling versus the dollar. On a local currency basis, net revenue increased 10%.

As Ed noted, our focus for European equities has been to be ready, day one, with a full suite of products and services that addresses the new requirements of MiFID II. We look forward to building on the early success we are experiencing under this new regulatory regime.

Net revenue for global FX showed steady progress this year, and the fourth quarter marked a high point for the year in both market share and average daily notional volume traded on the Cboe FX platform. Much of the growth was driven by the increased volumes on our London Matching Engine and better overall fill rates. We plan to focus our efforts on continuing to grow the core spot FX offering, while also diversifying our revenues with new products, and expanding our market data offering.

Turning to expenses; total adjusted operating expenses of $105 million for the quarter were relatively flat compared with the prior year, and in line with our guidance. Looking at the key expense variances, the increase in compensation and benefits reflects higher incentive based compensation, aligned with our financial and operational performance. The decline in professional fees and outside services, primarily reflects the realization of synergies.

For the fourth quarter and full year 2017, we realized $7.5 million and $24.6 million in pre-tax expense synergies respectively, primarily from compensation and benefits and professional fees and outside services. We ended 2017 with approximately $33 million in GAAP run rate synergies.

For 2018, we are forecasting incremental run-rate expense synergies of $17 million or a total of $50 million. Most of the expense synergy relative to 2017 is expected to come from IT related expenses. And while the projected 2018 run rate is equivalent to the run rate we originally expected for 2019, reflecting an earlier realization of expense savings than planned, it is still too early to revise our long term synergy forecast. Keep in mind, the projected run rate expense synergies for our technology migration are heavily weighted toward our largest and most complex exchange, C1.

As stated on previous calls, we plan to provide further guidance on a target date for the C1 technology migration, after we complete the CFE technology migration. And once we complete the technology migration of C2 in May, we expect to be in a better position to make any revisions to our long term expense synergy run rate forecast.

Looking at our expense guidance for the full year 2018, we expect adjusted operating expenses to be in the range of $420 million to $428 million, reflecting our expectations for expenses to be up 1% to 3% versus 2017. Note, that this guidance includes approximately $8 million or 2% of 2017 adjusted operating expenses for incremental expenses primarily associated with the recent Silexx acquisition, the increased strength of the pound sterling, and [indiscernible] related expenses, that we have an offsetting benefit in our net revenues.

Turning to depreciation and amortization expense; which is included in our total expense guidance, is expected to be $53 million to $58 million, which excludes amortization of acquired intangible assets, of about $157 million, and will be excluded from our non-GAAP results.

Lastly, capital spending in 2018 is expected to range from $50 million to $55 million, which includes our investment to migrate the Cboe Futures and Options exchanges on to proprietary Bats technology, as well as the ongoing investment in technology and software to support Cboe's current trading platform.

Now let's spend some time on income taxes; like most U.S. companies, our current and future results are impacted by the recently enacted U.S. corporate tax reform. Consequently, our fourth quarter results included a one-time benefit of $192 million, through a remeasurement of our deferred tax positions. However, our effective tax rate on adjusted earnings for the fourth quarter was approximately 37%, again within the guidance range we provided on our last call.

Looking further at the impact of tax reform on 2018, and given the predominance of our U.S. earnings contribution, we expect to see a significant reduction in our overall corporate tax rate, driven primarily by the reduction in Cboe statutory corporate tax rate from 35% to 21%. However the new tax law both repeals a number of deductions relevant to Cboe, most notably, the domestic production activities deduction, also referred to as Section 199, and the deductibility of certain other expenses and introducing incremental taxes on foreign earnings.

We expect the effective tax rate on adjusted earnings to be in a range of 26.5% to 28.5%. This tax rate guidance reflects the net impact of the corporate tax reform and a full year of the Illinois State tax increase, enacted in July of 2017, resulting in an expected total net reduction in our effective tax rate in the range of 8 to 10 percentage points.

Turning to capital allocation; we remain focused on allocating capital in the most efficient manner to create long term shareholder value. While reduction in the corporate tax rate is expected to increase our earnings and provide additional cash, our capital allocation priorities have not changed. We plan to continue to invest in the growth of our business, return capital through dividends, with a goal of steady annual increases, pay down our debt and evaluate share repurchases. Our quarterly results once again generated strong cash flows, which enabled us to reduce our debt by additional $75 million, and pay out dividends of nearly $31 million, while still ending the year with adjusted cash and investments of $120 million and a leverage ratio of 1.8 times.

To summarize, during the fourth quarter, we built on a strong momentum we experienced throughout 2017, and continued to demonstrate our focus on and strength of our proprietary index products, resulting in strong organic growth. Diversifying and stabilizing our revenue streams, with a growing base of non-transaction revenue, disciplined expense management, leveraging the scale of our business model, producing higher profitability margins, and integration plan on track, with improved expense synergy realization, and ongoing focus on capital allocation by reducing debt, while continuing to return capital to shareholders through quarterly dividends.

With that, I will turn the call back over to Ed.

Ed Tilly

Thank you, Brian. Before opening up for Q&A, I'd like to take a moment to provide follow-up on the two areas of most interest to you on our call at Wednesday. The percentage of VIX futures tied to ETP trading, both long and short, and who is trading VIX futures. This first slide shows average AUM on a quarterly basis, for the top, long and short VIX linked ETPs, which represent roughly 90% of VIX ETP assets, as relatively flat between Q4 2015 and January of 2018. During the same period, overall VIX futures ADV increased by 82%. So while ETP assets continue to be important, the growth in VIX futures trading is no longer reliant on ETP activity.

This next slide demonstrates how our efforts to educate and grow our user base, have increased the number of unique user accounts, associated with trading in CFE, from 4,495 in Q4 2015 to 5,706 in Q4 2017, representing an increase of 27%.

Unique accounts encompassed a broad range of market participants, including asset managers, dealers, market makers, proprietary traders and brokerage execution professionals. During this period, growth from overseas users, interested in accessing our global trading hour session, has been particularly strong with these user accounts, up 57%.

As we mentioned Wednesday, the activity we see from issuers of XIV and SPXC is less than 5% of all VIX futures trading, representing average daily volume of about 12,000 contracts. It's important to note, that non-institutional holders of these ETPs in the last reported period, represented approximately just 21% of total holdings, with the remainder consisting of sophisticated institutional users, who employ inverse VIX ETPs, as part of a diverse mix of trading and investing strategies.

I thank you again for your time, both today and Wednesday. We continue to make volatility trading a primary educational focus. The growth in VIX futures and options trading is a result of the utility of these products under virtually any market condition. We see every change in market conditions as an opportunity to redouble our educational efforts.

With that, I will turn it over to Debbie, for instructions on the Q&A portion of the call.

Debbie Koopman

Thanks Ed. At this point, we would be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue, and if time permits, we will take a second question. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question comes from Richard Repetto with Sandler O'Neill.

Richard Repetto

Yeah. Good morning Ed, Brian and Chris. I guess my question -- and I will try to stay broad, because I only got one question. Thank you for the call on Wednesday and the follow-up Ed, with the slides here this morning on the ETPs. I guess the broad question is, the stock has been down, significantly in February, and if you look at the overall growth of the Cboe complex, what do you think people are missing? You think they are overwaiting -- certainly, there has been concern from the inverse ETF debacle, but what do you think investors are -- what one thing would you highlight or a few things you would highlight, that you think are either more important, or maybe this inverse ETF thing is not of concern to you?

Ed Tilly

Well Rich, that is a terrific question. VIX has been incredibly difficult to understand and therefore to model. The growth rate, the adoption rate, the evolving utility and application make it so. And as a result - and so too is Cboe. So we enjoy, as you know, incredible growth and profit tremendously when the world markets go sideways, and we enjoy in the industry, envious position in growth, when the world markets are calm.

So those that continue to view our proprietary products like stocks, the attempt to fit them into equity buckets, will at times and have in the past, kind of missed the growth potential, and as a result, missed the Cboe story.

So we had one key -- from my perspective, missing piece on the story that we have been telling you throughout the years from our IPO and leading into 2016, and that was, how do you supplement this unique product mix with world class technology platforms. So we remedy that, with the vast acquisition that we are coming up on our one year anniversary.

So if you look at the combination now of the most widely followed volatility benchmark in the world, dollar denominated U.S. benchmarks, there is just an opportunity to express any view of the U.S. market, European and U.S. equities, and a growing FX platform. The combination, coupled now with Bats technology, is an absolutely incredible story.

But this market, as it has in the past; we have seen corrections in the past, we have talked about it. Quarterly calls have reflected on them. The incredible record setting volumes that we have had over the past week or two. We have seen those in the past. These are teaching opportunities. We get to go back to the street. We have people near conversion. You all know the leadtime for a conversion into trading is long. These are those events in the market, that make this story that we have been telling in call markets resonate. That turns into volume over the years. It may not be tomorrow, but that is the story we are able to tell, is unique to Cboe.

So sorry for the little rant there, Rich. But I certainly appreciate the question, because, we do scratch our heads here when we look at the utility and what we have built here and how we have set the marketplace and continue to educate the marketplace to take advantage of these moves. Chris, something to add?

Chris Concannon

Yeah Ed. Rich, I will just add that, as a fairly new player to the VIX complex and the SPX complex, what I have seen over the last year, is an educational effort around how to protect your portfolio from an event like Monday, and that is the primary tool that is being used, whether it's an SPX package or it's a VIX package, that the large institutional players are using. This is then -- is one of the most successful selling items for us and for our complex, because of the protection, if you were along VIX or if you were using SPX to protect your portfolio, these events are wonderful events for us and our selling efforts to add our products into people's portfolios.

So I look at -- look, I am concerned about the damage caused in two funds, but when I look at the institutional holdings of those funds, these are professionals that know what they are doing, and certainly benefitted from being short in 2017, in those funds. But when you look at what we have been selling and how we have been selling it, portfolio protection is at an all time high right now, in terms of need and exposure. So that's the story that I think is missed in this.

The other story is, on markets, the U.S. equity markets, the U.S. options markets and the U.S. futures markets, performed exactly as designed, and under tremendous stress, not only on Monday, but again yesterday, and unfortunately, the media doesn't print stories that we all worked exceptionally well. They only print stories when something breaks.

John Deters

Rich, this is John. Further to Chris' point about really institutional players being largely in these strategies. The short VIX strategy is not going away, we have told you that. We showed you how our exposure, our direct exposure is limited. But I think it's important to point out, that already in the days since the rapid increase in VIX, we have seen AUM in the open SPXC short ETF increase from under $100 million in assets to almost $700 million -- $670 million as of yesterday.

So people are rotating back into that strategy. We saw this at the end of 2015 and 2016, where the short VIX strategy increased from its low by 400% within the following year, and we are seeing it again now. What happened, is a couple issuers made a self-interested decision to redeem their notes. But what did not happen, is that people did not flee the short VIX strategy.

Richard Repetto

Great. Thanks guys for the color and the feedback.

Ed Tilly

You could tell we love the business Rich. Sorry for all that bashing right out of the gate.

Richard Repetto

I get it. Thank you.

Operator

Thank you. And the next question comes from Michael Carrier of Bank of America Merrill Lynch.

Sameer Murukutla

Hey, good morning guys. This Sameer Murukutla on for Mike Carrier. Just a few questions wrapped in one on capital management for Brian. Given the new lower tax rate, I guess, you know the somewhat decent leverage; can you give us more details on how you are going to valuate share repurchases going forward? And I guess Brian, has your view on leverage changed since Alan has retired, and can you give us an update on what your minimum cash needs are?

Ed Tilly

Who's Alan?

Brian Schell

Alan, if you are listening, that was Ed. So let's talk about share repurchases, I think just to make sure I got this. The share repurchase opportunity leverage and then the minimum cash balance. So if we address the share repurchase -- so, as we previously indicated, we have approximately $100 million of capacity left under our current authorization. And capital allocation is a topic we regularly discuss with our board, and the $400 million of debt reduction in 2017, really put us in a great position to continue to evaluate all of our capital allocation alternatives in 2018, including share repurchases, which is, I think more directly, your question there. And as such, with strong cash flows from 2017, our current year-to-date volumes and the incremental cash expected from the lower tax rate. Again, your capacity to deploy capital towards debt reduction, which continues to be a focus and share repurchases or incremental dividends.

So like I said, it's all there on the table. As I mentioned, 2017 just put us in a great environment to evaluate it, open up all the options, and looking as a roll-in to kind of the next question about the leverage, we never -- we don't have at targeted leverage ratio, and -- but our objective was always to achieve that long term balance sheet flexibility. And so that's what -- we have always been working towards for that capital allocation of what you saw was due during 2017.

And for as far as the minimum cash number, there is kind of a minimum cash, that I would say, from an operating standpoint, on the balance sheet, we tried to target, call it roughly about $80 million to $100 million at the end of the quarter, or kind of throughout the period, as we had looked for various working capital needs or any type that might happen for kind of inflows and outflows. So that's kind of a range that we kind of ballpark, as far as any incremental needs we might have during the quarter.

Sameer Murukutla

Perfect. Thanks for answering all those questions.

Operator

Thank you. And the next question comes from Ken Worthington with JPMorgan.

Ken Worthington

Hi, good morning. Thanks for taking my question. You and CME both have tax rates in the 36% to 37% range in 2017. Your guidance is 26.5% to 28.5%, CME's falls to 24%. Can you speculate maybe on the more modest tax benefit here? What I am trying to figure out is just maybe, how conservative you are being in your assumptions? And I think you mentioned in the prepared remarks, incremental taxes on foreign earnings, can you maybe flush this out to me, because that's -- your foreign business is still pretty small from an earnings perspective. Thanks.

Brian Schell

Sure. So a couple of things; and so I don't have the detailed reconciliation from a -- we had talked about earlier. John and I talk regularly, but that's not something that we have compared tax rates on all of those items. So I can only speak more specifically to the Cboe tax rate, and as you look at kind of the corporate tax reduction of that 14% and I appreciate the 8% to 10% being more modest, I will take it every quarter, that's pretty awesome, as far as the impact on cash flows. But as I break it down at a high level, the 8% to 10% reduction, we would say that -- if we talk about the 2% to 3% bucketed towards the state impact, from both Illinois, as well as the losses from the federal benefit, you lose that, because your state rate actually goes up a little bit of how much you can actually deduct, and then section 199. And whether that was a bigger or smaller benefit to us versus anyone else, obviously, I don't know. So that's one area of potential speculation is, is how that lays out, because as you know, this is a very complex area, and it's very unique to jurisdictions and where they are reporting the income.

The other -- I would put it in other bucket of a bunch of miscellaneous items, which again, will be very-very unique to each institution and each company, whether it be $162 million and whether those expenses were relative to a larger or smaller expense base or earnings base, could have a different impact. The foreign tax that I mentioned is, it could be both a mix shift, because of the different rates now. You have the new tax that was introduced, on kind of the high -- basically kind of high yield on the assets. And so that does have an impact, and I would say, that kind of makes up the remaining change of the overall tax rate impact, that gets us down to that 8 to 10 percentage points reduction.

Ken Worthington

Okay. Thank you very much.

Operator

Thank you. And the next question comes from Alex Kramm with UBS.

Alex Kramm

Hey good morning everyone. I kind of wanted to just come back to the first two questions that were asked, and kind of combine them for Ed, meaning -- you know, I guess, you guys couldn't be more optimistic that this is a non-event. But obviously, as Rich pointed out, the stock has come off, so it's off 20% or so from the high. So I hear Brian's comments on capital allocation, but like, when it comes to senior management, how opportunistic do you think you should be right now, in terms of buying back the stock, and maybe push some delevering out a little bit, considering your confidence level here?

Ed Tilly

I think it's a good question, and maybe a little bit more specific to what Brian said. Our goal and what we shared with you last year, was delevering. That was the number one goal of the board and it was on the advice of the senior management team. What Brian is saying, is we believe the balance sheet is at a very nice place for us. And as far as flexibility, we are free, we think to look at the world differently than we would have been a year ago at the closing of this deal. We are in the middle of an integration and the platform migration. So that's kind of the timing of how we see deals going forward. This is the one we continue to be focused on.

You are asking, and the question is exactly what the board is going to ask senior management next week is, is this the right time to get back into -- and opportunistically repurchase our shares. We are telling you, that our recommendation to the board is, we like the flexibility of the balance sheet, and we should be entertaining all methods and modes to return cash back to our shareholders, whether it's the continuation of deleveraging and adding share repurchases, and considering a change in the regular dividend. So everything on the table, but your timing, and painfully pointing out Alex, I appreciate that, what the stock has done over the past three days, is we will make this even more of a focus next week, I can assure you.

Alex Kramm

All right. Thank you for your personal comment.

Operator

Thank you. And the next question comes from Alex Blostein with Goldman Sachs.

Alex Blostein

Hey guys. Good morning. Thanks for taking the question. I wanted to go back to slide 26, and I appreciate all the difficulty gathering this information, obviously on a short period of time, so thank you for that. When you guys talk about unique users, what's the makeup of that growth in customer types that you highlight on the page, the 27% growth. And I guess, any sense you guys can give us, what percentage of this new user growth has been by participants deploying a short volatility strategy. Other than the market makers, I guess, because that would [indiscernible]?

John Deters

Yeah Alex, this is John. So I think he perspective we can give -- I'd start with saying that the user growth has been -- apart from the outsized growth we have seen in participants in our global trading hours, otherwise I think the user base has been pretty well distributed across those categories, the market participants that Ed described in his comments. So it's very broad based. I think and this is somewhat of a guess, but I think that the percentage of those new users employing short strategies, would be just about consistent with what the short strategy employment has been in the past. And you can see this in the ebb and flow, it's just one indicator. But you see this in the ebb and flow of assets and the two strategies, long and short.

The application of the two strategies changes with market environment, and so, most of these new users are institutional representatives, and they will appreciate that fact.

Let me give you just a little more color on the changing composition of our market participants, particularly in the VIX futures complex. So from that same period, Q4 2015 to Q4 2017, we have seen -- if you look at the kind of ADV by origin, we split the origin into three broad buckets, customer, firm and market maker, and I am happy to explain, some of the color on what each of those mean. Firm being classic sell side, customer being sort of classic non-member buy side, and market maker being more member buy side, so think real market makers in the market, proprietary trading firms and that type.

We have seen a growth of about 67% in customers, so classic buy side, really growing strongly. And then, we see growth that's similar, about 60%, a little bit less in market makers. And then firms have been fairly stable, if there is the representation from firms is just a smaller cohort of market participants.

So what this all means, is that new customers, new real end users, buy side users, are coming into the VIX market. That generates activity from the market maker community, in the ratio of about three to one, so every new contract that comes in from a customer, spins out three new contracts from market makers approximately, and that's the kind of benefit of having more participants doing more business in the VIX futures market.

Ed Tilly

Let me just add Alex, because it's kind of lost when look at markets like this. But all of this growth is before the migration to Bats tech. So the excitement around that globally and domestically about the enhancements and the upgrade in the performance that's expected, and the order types and order handling, we can't be more excited to introduce all of these users to new tech, and then being able to go out and appeal to those that have been waiting for our technology migration. So we think the timing, moving into the February 25th date, really couldn't be better. So with all of the eyes around the world on our VIX futures contract, and looking forward to a migration, we think the timing is great.

Alex Blostein

Got it. Great. Thanks guys.

Operator

Thank you. And the next question comes from Brian Bedell with Deutsche Bank.

Brian Bedell

Great. Thanks for [indiscernible]. Good morning folks. Maybe just to come back, I mean I guess it's sort of a number one question. And totally appreciate everything you have been saying about the shortfall, especially on Wednesday's call. But maybe if you -- for say, slide 27, any sense of what those numbers would be pro forma for the entire VIX ETP usage, and then if you were to expand that to, what you think the portion is to short vol strategy, even if we think that that's going to continue, we just -- if you go out, people just want to try to get a sense of sort of your exposure there. And then if I can just sneak one more in, Chris, if you can talk about hotspot, FX and then the volumes there increasing pretty dramatically this year, and maybe if you could talk about what's driving that for you guys?

Chris Concannon

Sure. It's Chris, I will start with hotspot, and then we can talk about the VIX complex. The hotspot has been growing, it has been a very exciting 2017. The FX business is up 13% in revenue, in a market, that was by most measures, down the overall FX spot market, by some measures is flat to down. So we are growing in our market share, as well as in our overall notional volumes.

Really, what we spent the last year working on, and it was really under Bryan Harkins efforts was, looking inside our liquidity pool and really mastering -- matching the right liquidity with the right takers, and the FX market is a lot more complicated than a straight equity market. So we have deployed a great deal of data analysis, execution quality measures, pushing them out to our clients, and the clients are really reacting to them. Only the market makers having better experience, but really the takers are finding the right liquidity in the right pair.

So it's -- I would say it's the service level that we delivered, combined with upgrades in our technology. The FX technology has been upgraded from London to the New York platform, so it's running at much higher speeds with much higher turnover.

I would add that the London Matching Engine has been really a driver of growth. We have always planned that the London Matching Engine would be an opportunity for growth and now we are seeing it firsthand. That was the fastest growing match for us, as it should, as we took on the competition in London. Again Reuters is only matching in the London area, so we are really attacking that London FX spot business.

Ed Tilly

On Cboe FX, Chris.

Chris Concannon

On Cboe FX.

John Deters

This is John, I will speak to the first question on slide 27 and drilling down a little bit more. So the first part of the question was, if you could sort of expand from the short ETPs to the direct volume from short and long ETPs. The total direct volume from short and long would be more like 7%. So it's not double the percentage, the 4.4% that we showed you for the short. And in terms of the -- outside of short ETPs, the overall VIX futures volume from short strategies -- for those employing short strategies. Can't give you a precise number there. What we can say is that, there are literally a dozen or more volatility trading strategies that our market participants employ, all the way from calendar spreads and rope [ph] strategies to ARB strategies to long and short of a variety of stripes; short term short, long term short, long term long, short term long.

So this is a strategy of many, and outside the ETPs, those who employ the short VIX strategy are true, true professionals. So this gets back to the point we made earlier that, the short VIX strategy is not going away. In particular, for those market participants. We have seen it already in the last couple of days since the volatility spike, and we have an event like we had earlier this week, in terms of the short VIX strategy performance. When the volatility level, when the level of VIX doubles, increases by 100%, once you increase by 100%, and you reset to historic norms, you don't increase by 100% again. So it's really an exceptional event, when the level of VIX increases doubles in a matter of just a handful of days. That's occurred, and now we are at a point where -- and professionals know this, we are at a point where the short VIX strategy tends to work quite well.

Brian Bedell

Okay. That's great color. Thank you.

Operator

Thank you. And the next question comes from Ben Herbert with Citi.

Ben Herbert

Hey, good morning. Thanks for taking the question. Just wanted to shift gears maybe into the OpEx guide, and how you see really kind of run rate organic growth there, versus what you might be spending on, integrating the platforms this year?

Brian Schell

So if you think about the -- I guess the synergy and how that's built into the overall, kind of that 1% to 3% target. I noted in my remarks about the -- or call it the, the incremental expenses, that we will see, that -- while there are associated revenue line items attached to those items I mentioned, it's not necessarily a true increase to -- or excuse me, a true -- there is an offset, excuse me, on the revenue side. We typically have targeted, as we have historically, that -- I will call it a core growth rate in expenses. We are trying to limit that, call it a 3% to 5% range, and if you look at the impact of the synergies, that are actually realized, not just the run-rate, but they actually realize, because the realized numbers obviously are going to be -- some percentage of actually the run rate element, as you saw, for example, in 2017. I mean, that number, closer to call it, 75%-ish of what the run rate was and what we realized.

When you factor that in, we think we are going to still be in that range of that -- call it that 3% to 5% kind of core expense run rate for the business as we roll forward. So we still tried to manage it within that parameters to say, how well are we doing, when we are trying to keep that expense line item in check.

Ben Herbert

Thank you.

Operator

Thank you. And the next question comes from Chris Harris with Wells Fargo.

Chris Harris

Great, thanks. So I think the point you guys made the other night, about long vol strategies coming back as vol normalizes, definitely makes a lot of sense. Just wondering if there is any way you can maybe quantify that for us? How much volume do you guys has been out of the market, over the last few years, due to the extreme low levels of vol?

John Deters

So Chris, this is John. It's a good question. I think -- because long and short strategies tend to flip back and forth a little bit over time, I think the overall volume exposure that we wanted to, sort of the 7% combined long and short, is probably a fairly consistent number. And almost more consistent in volume terms, than it is in percentage terms. So as we grow our VIX future volume, because of penetration of new customers, overseas penetration etcetera, I am not sure, that percentage will maintain. But the volumes certainly will maintain.

And I would point to -- I think, the best evidence we have, the long vol strategy returning, is the assets associated with long volatility ETPs, because that's a very transparent, and it's a daily metric.

We hit a record in assets, a couple of days ago, and it's interesting to note, the last time we hit the record, was at the beginning of 2016, during this time, when the short vol strategy was hit hard, that we mentioned before. So it's predictable, when the short vol strategy hits hard, people migrate to the long vol, and we hit records there.

So today, we are a little bit off that high that we had a couple of days ago in terms of assets in the long vol strategy, but we are kind of in the ballpark of $3.1 billion for the long strategy today. So clearly, those are -- it's a mathematical equation. There are dollars in the strategy, and the dollars in the strategies result in volume to CFE.

Ed Tilly

Chris I'd add, we referenced on the call the other day, the strategy that we have not seen wholly in the year and a half, starts in VIX options, and it's actually just the vertical trade, trading the level of VIX. And I probably didn't give a very good example the other day. But if you can imagine VIX at its historic level of 18 and the trade between 17 and 22. That's a really interesting vertical trade from an options traders perspective, it's much more so, when you are at low VIX and the options really let you trade the option change between 10 and 11 or 10 and 12. That gap becomes trading options. Those options, that gamma is [ph] hedged in VIX futures.

So we haven't seen that, because we haven't had any sustained level of volatility here. So it's a trade that we have seen in years past. I would expect, that given this environment, we will see that picking up again as well.

John Deters

And Chris, I'd just add the notion of -- professional traders love to trade velocity. They love to trade products that have volatility. Now we have -- if you look at 2017, with muted volatility, the vol-vol was also muted. In this environment, you have the velocity of the VIX has turned up another notch, and that becomes an attractive trade, in and of itself, regardless of short long, it's the -- the vol-vol is now a very attractive trade among professional users.

Chris Harris

Thank you.

Operator

Thank you. And the next question comes from Chris Allen with Rosenblatt.

Chris Allen

Good morning everyone. I just wanted to ask about non-transactional revenues? You pointed regulatory fees being down next year, some SIP pressure in cash equities? I am wondering where there is growth opportunities potentially offset within market data, access fees and exchange service and other fees?

Brian Schell

So as we kind of look over that landscape, and then obviously not going to get into a specific projection of the revenues. But we will take a couple of those items there. On market data -- and again, I think it's appropriate, and that's why we split it out, is that, yes we think there will be pressure, obviously in the equities with industry consolidation, and potentially what happens to -- at least for our share, as far as what happens to exchange trading on the equity side, as far as that kind of flowing out. That the proprietary growth, while I can't project if certainly, that's going to have the same success rate, we do see continued momentum there. We do see continued growth on the proprietary side, and as far as the access fees, that's another opportunity where we see, that that's something that -- and it continued to have some positive opportunity, as we rationalize across the exchanges, and the services that we offer.

So we do think, while it's going to come under pressure, because of just the pure size of the SIP, and that's not going to grow or -- as far as -- what it has in the past. That will have a little bit of a drag on, I will call it the non-transaction revenue category, even pulling out the regulatory fees, which I would kind of separate that out, as you look at the core, kind of non-transaction fees, as far as those -- kind of part of that offering.

So we do see some pockets of growth heading into 2018.

Chris Concannon

Chris, this is Chris. I would just add, that when I look at the proprietary data feeds, that's really where our largest opportunity is. We are continuing to see demand from overseas in our products with a great deal of success coming out of Asia, also out of Europe. There is demand for U.S. equity, real time data, at a cost that is much lower than the competition. So we are seeing that demand come in. That demand is very focused on U.S. ETFs, as the ETF market in the U.S. continues to explode and thrive, and the products continue to do the things that they are designed to do. We are seeing international demand in inbound, not only for those products as you look at the AUM growth. But as a result of that growth, they are also demanding real-time data.

So very excited about the growth opportunity in our proprietary data products in 2018.

Chris Allen

Thanks.

Operator

Thank you. And the next question comes from Kyle Voigt with KBW.

Kyle Voigt

Hi, good morning. Just another question on the market environment for VIX trading. Ed, I know you said earlier that VIX trading remains attractive, really in any market condition, and you gave some good examples of that in the current environment. But I also think in early 2015, you cited the flat term structure of VIX futures as a key reason why the volumes were lagging in 2015 into 2016, a bit, despite an uptick in volatility at the time. I know we have this inverted term structure, but if we move into an environment with a flat term structure, would that concern you, and if not, I guess what's changed?

Ed Tilly

Flat historically, we rarely remain flat, and as you point out, with inverted now, the trade back into inverted, you will see a great deal of volume moving into that trade. It's just not sustainable. Inverted term structure, is about 30% of the time, and it's not very long lasting.

As is flat. So again, if you just -- if you reduce down, there has been a lot written about VIX and volatility. VIX is a pure measure of the markets, expected risk and the price of insuring a portfolio of the S&P 500, can't say that enough. And rarely, I do have a flat expectation over time, it's just not natural. When we look out over time, we are usually more uncertain over time, which is why there is that normal upward sloping curve involved.

So I do think if we remain flat, some of the strategies obviously change, but they are never long lasting, from a historical perspective, and we go back into that normal shape.

So I would expect, while flat, a bit muted on some of the strategies. But the trade out of that flat, is what we see coming into the marketplace, and our participants are making trades accordingly. So I would expect a return to an upward sloping curve.

Unidentified Company Representative

And Kyle, just to support Ed, you really have to think about the different overall economic environment we are in now, versus time period late 2015, early 2016, where you have got just real significant moves in rates and uncertainty about where rates will unfold. You have got credit coming into question for the first time in many-many years, and you have got these choppiness in the equity market itself, in terms of realized volatility. All adds up to an entirely different situation from where we were in 2015 and 2016, where a flat yield curve actually reflected the sentiment.

Kyle Voigt

Thank you.

Ed Tilly

Kyle, let me give you one more just to look at. We have used it in the past, and I think it's a good one to be mindful of now, and it's the effect on realized vol on your expectations on implied volatility. So this inverted shape right now is because realized is so high, and we have always said that that is an anchor, when realized volatility is low, and it's very buoyant to volatility and perceptions, when realized vol is high. So it's that relationship that's out of whack, and that relationship that tends to be the trade. So keep an eye on realized, and that will give you some guidance as to how that curve is going to change over time.

Operator

Thank you. And the next question is a follow-up from Alex Kramm with UBS.

Alex Kramm

Hey, thanks for squeezing me in. Just wanted to come back to Chris Allen's question, for a little bit about the market data and other non-transaction fees. I think the answer was primarily around equities, but how about the futures business? You may have talked about this before, but as you do that migration in the month or so, that business will throw off a lot more market data, like proprietary data and like, depth of books, stuff like that, that didn't even exist in this whole structure. So considering the growing participation in the market that you have been pointing out, I mean, shouldn't there be a lot of more market data that you can sell? And I don't know, if there is a fee schedule yet, but can you help us at all, in terms of the opportunity there?

Ed Tilly

Yeah. Great question. Thanks for helping me answer the question better. So absolutely, we are very excited about the futures migration. Heads down here. February 5th is the migration. We are not only putting in a new platform, but we are creating the opportunity for new data products. We have a depth of book feed that will be coming off of our futures platform. We have a top of book feed, and we have a great deal of demand, and if you look at the chart that we showed you on the growth of the users of our CFE platform, that's also reflective of the growth of our data use. So every one of those users needs to have eyeballs on real-time data, both top of book, and now with the potential for a depth of book product, that is typically priced at a higher end price.

So very excited about the opportunity with the new platform. Obviously, very excited about where the data will go. Just our bitcoin futures launch put demand on our market data in our futures product. So we think with additional futures product launches over the course of 2018, the demand for that data will continue to grow.

Alex Kramm

But too early to talk about size, obviously, I guess?

Ed Tilly

Yeah. Very early to talk about size right now. But my level of excitement is high.

Alex Kramm

And then lastly, since we are in follow-up, like, the multiply listed options business doesn't come up a lot anymore, because it has become a smaller piece. But those volumes have really surprised us here too. So maybe -- any commentary in general like, what's going on in the equity options market? I know obviously there has been more volatility, but it seems like there has been more than people would have expected. So any comments would be helpful.

Ed Tilly

No. Look, in the more recent activity that we have seen, we have seen an explosion in volume in the multi-list options business. That's after several years of very muted, sometimes declined volumes. So we are excited about that recent activity. But I will tell you, in 2017, even with the platforms being worked on and a lot of focus on replatforming our futures product, we were able to deliver growth in our multi-list options.

So one of the most exciting platforms that we delivered in 2017, was the complex order book on Ajax, and we have just seen record after record in our complex order book platform since the launch. And what's great about that, is that the complex order book was delivered as a production platform for our C2 platform. So that complex order book will show itself in a slightly different form in C2, but it's very exciting to see the growth of that and the opportunity that we have, when we deliver C2 with a complex order book that looks very similar.

Alex Kramm

Alright. Thank you again.

Operator

Thank you. And at this time, we would like to return the call to management for any closing comments.

Debbie Koopman

Okay. Thank you very much for your interest today, and look forward to speaking to you. Thank you.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.