Cboe Global Markets, Inc. (NASDAQ:CBOE) Q1 2018 Earnings Conference Call May 4, 2018 8:30 AM ET
Debbie Koopman - IR
Ed Tilly - Chairman and CEO
Brian Schell - EVP and CFO
Chris Concannon - President and COO
John Deters - Chief Strategy Officer
Richard Repetto - Sandler O'Neill
Ken Worthington - JPMorgan
Sameer Murukutla - Bank of America Merrill Lynch
Brian Bedell - Deutsche Bank
Ben Herbert - Citigroup
Kyle Voigt - KBW
Chris Harris - Wells Fargo
Chris Allen - Rosenblatt
Good morning, and welcome to Cboe Global Market's 2018 First Quarter Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I'd now like to turn the conference over to Debbie Koopman. Ms. Koopman, please go ahead.
Thank you. Good morning. Thank You for joining us for our first 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 first quarter 2018 financial results and guidance for certain financial metrics. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our 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. Also note that references made to the planned migration of C2 Option Exchange and the Cboe options exchange are subject to regulatory review.
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 2017, 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.
Thank you, Debbie. Good morning and thank you for joining us today. I am pleased to report that first quarter 2018 was our best quarter ever, and that we raised our expected run rate expense synergy target to $85 million at the end of 2020, up $20 million, and a year ahead of our initial projections. Brian will discuss that more in detail later.
Cboe Global Markets reported adjusted earnings per share of $1.38 on net revenue of $329 million led by double-digit year-over-year gains across each of our business lines and new trading highs in our proprietary products. Our record results underscore the utility of our products and the strengths of our diversified portfolio of exchanges, particularly in times of heightened market volatility, which we saw during the first quarter.
As we shared in previous calls, we expected that the ongoing growth we saw in VIX and SPX Options and VIX Futures during sustained periods of low volatility, which spiked when volatility returned to the market. This expectation played out in the first quarter in the form of new quarterly volume records in VIX Futures and options and SPX Options, as well as a lift to our equities and FX businesses.
Following the sustained period of record low volatility in 2017 in which the VIX Index averaged just over 11 compared to its long-term average of 19, investor perceptions of risk changed dramatically in Q1 marked by large spikes in both implied and realized volatility. The new normal appears to be a VIX level ranging between 15 and 25, which is more in line with historical levels that we saw throughout 2017.
Historically, transitions from low to high volatility regimes result in traders reassessing the products they use, and shifting to products that are best suited to a new market environment. We believe that small differences between front month and longer dated VIX futures that is a flat VIX term structure is signaling that the market is still adjusting to the new volatility regime.
We view shifts in product usage as normal during these transition periods, and we believe we are seeing the shift play out within our proprietary index complex. While higher volatility is generally good for all of our businesses, the flat VIX term structure has been a headwind for VIX trades that seek to capture price differences across the VIX Futures curve.
At the same time, large daily moves in the S&P 500 have created new opportunities for VIX option users who can capitalize on daily trading ranges that are three times greater than in Q4 2017. As such, average daily volume in SPX Options, in April, was up 20% year-over-year compared to April 2017, and largely offset declines in VIX Futures and options volume relative to last year's solid April trading.
Furthermore, SPX average daily volume in April was 15% above SPX Options activity for the full year 2017. Since early February, the VIX Futures term structure has been flat or downward sloping 55 of 61 days, an unusually long period not seen since 2011. However, we expect that VIX Futures prices will eventually return to a more familiar upward sloping pattern, as it has done in the past, regardless of where the market sets the new floor for equity volatility.
Let me be clear, volatility is alive and well, and we are confident that our SPX Index products offer the trading tools to manage risk in any market environment. Regardless of market conditions, we remain intensely focused on our commitments to product innovation, leading edge technology, and seamless trading solutions.
I'll take a few moments here to provide an update and key strategic initiatives supporting those commitments. Our legacy of driving growth through product innovation was highlighted throughout the month of April, which we proclaimed VIX Month in commemoration of the 25th anniversary of the dissemination of the VIX. The month featured a daily VIX social media campaign, the launch of a new VIX Web site, and a VIX symposium held for press and customers. Perhaps most fitting, we also announced a new VIX product. On April 17th, we launched the dissemination of the Cboe One-Year Volatility Index which provides up-to-the-minute market estimates of one-year volatility.
The one-year index was designed to monitor the market's expectation for longer-term volatility which we expect will be especially useful for investors with longer duration liabilities such as insurance companies and pension funds. We are exploring the development of a futures contract on the index subject to regulatory view, and look forward to reporting on that going forward.
Turning now to the migration of Cboe exchanges onto Bats proprietary technology, which we believe will maximize our value proposition for customers and shareholders and power our company's growth going forward. We completed a major milestone in the integration with a flawless migration of Cboe Futures Exchange to the Bats technology as scheduled on February 25. The migration provides our futures customers with a more efficient and user-friendly trading experience that includes greater bandwidth, significant latency reduction, and enhanced risk controls and improved complex order handling.
We remain laser-focused on executing a seamless technical and operational integration for all of our exchange platforms. We are well on track for a planned C2 options exchange migration on May 14, 2018. And as announced last month, we have targeted October 7, 2019, for the migration of Cboe Options Exchange. We are modifying Bats technology to incorporate both electronic and open outcry trading for Cboe Options Exchange, which includes SPX and VIX Options Trading. We targeted two technology enchantments for 2018 in advance of migrating Cboe Options Exchange. The immigration of S&P 500 index options to hybrid trading, which we successfully completed last week, and the introduction of new trading floor terminals, which we plan to begin rolling out on November 5, 2018, subject to regulatory review. We are encouraged by the initial response to SPX and hybrid and are very pleased with the conversion itself is flawless.
The completion of the CFE migration and significant steps taken to prepare for the C2 and Cboe options migrations leave us well-positioned to achieve our ultimate goal of providing our customers with a unified world-class experience on Bats leading-edge across all of our equities, options, and futures markets. As noted in our last call, our preparations ahead of MiFID II, which came into affect on January 3rd, have enabled us grow our European business in the midst of a changing regulatory landscape. The rapid adoption of our periodic options book this quarter, which is a MiFID II compliant lit order book operating auctions throughout the day, demonstrates that market participants are finding value in executing their trades in a venue designed to provide minimum market impact.
Our Large in Scale block trading platform also continues attracting customers and increase volume with average trade sizes in excess of a million euro. Additionally, we have continued to grow our Systematic Internaliser technology services business further diversifying our European business model. While the liquidity landscape will continue to evolve under MiFID II, we believe our seamless rollout of new technology and services ahead of the new regulation leave us well-positioned to continue to adapt and grow.
In closing, I would like to thank our team for truly tremendous quarter. While the return of volatility to the marketplace provided great headwinds, the collective work of our team helped position each of our exchanges to benefit with double-digit volume increases. Further, throughout what proved to be our company's busiest quarter on record, we continue to lay the groundwork for future growth by rolling out new products and services while advancing our technology integration. As a result, I look forward to all that we can accomplish to power the potential of our customers and shareholders in the months and years ahead.
With that, I will now turn it over to Brian.
Thanks, Ed, and good morning everyone. Before I begin, I want to remind everyone that unless specifically noted my comments relate to 1Q '18 as compared to 1Q '17 and are based on our non-GAAP adjusted combined results including Bats. Building on 2017 positive momentum as Ed already noted, we reported record financial results for the quarter. In summary, our net revenue grew 24% with net transaction fees up 36%, non-transaction revenue up 7%, and organic net revenue growth of 28% for the quarter.
Adjusted operating expenses increased 3%, which combined with our strong revenue growth, produced 560 basis point lift and our adjusted EBITDA margin of 70.4% demonstrating a strong operating leverage. And finally, our adjusted diluted earnings per share grew 47% to $1.38. The press release we issued this morning and our slide deck provide the key operating metrics on volume and revenue capture for each of our segments as well as an overview of key revenue variances.
Additional disclosures can also be found in our Form 10-Q filed this morning. At this point, I would like to briefly highlight some of the key drivers influencing our performance in each segment. In our options segment, the 24% net revenue growth was primarily driven by a higher net transaction fees reflecting the record volumes previously noted.
Turning to futures, the 47% increase in net revenue resulted from a 44% increase in average daily volume, offset by a 5% decline in revenue per contract, with the latter reflecting higher rebates related to elevated VIX futures trading volume.
We continue to be excited about the opportunities we believe the CFE technology migration will have for our futures business and particularly allowing us to bring new products to market at a faster pace and more efficiently. Overall, the long-term growth of our proprietary products remains our primary focus, and we have a robust pipeline of new products, we are excited about launching.
Turning to U.S. equities, net revenue grew 10% with equities volume benefiting from the return of volatility to the market shifting more trading to on-exchange venues versus off-exchange. As this slide show, total market data revenue for U.S. equities is up 16% in the first quarter with SIP market data revenue up 14% and proprietary market data up 24%. The significant portion of the $3.7 million increase in SIP revenue was due to order recoveries. So the first quarter is not representative of our expectations for future quarters this year as we continue to expect downward pressure on SIP market due to industry consolidations.
Looking to growth in our proprietary market data revenue, majority came from pricing changes implemented at the beginning of the year. We expect continued growth in proprietary market data in 2018 as we benefit from pricing changes and customer response to our Cboe-1 product.
Net revenue for European equities grew 37% on a U.S. dollar basis, reflecting growth in both net transaction and non-transaction revenues following the implementation of MiFID II in January, as well as strength of the pound sterling versus the U.S. dollar. On a local currency basis, net revenue increased very healthy 18%. While we benefited from increased market volumes, realized increased revenue from higher net capture due to the later-than-planned implementation of the dark pool volume caps. We expect net capture to moderate back to historic levels through the remainder of the year.
Net revenue for global FX grew 35% this quarter, setting new highs in both market share and average daily notion of value traded on our platform. Volumes improved on both our New York and London Matching Engines, with the latter more than tripling its volumes year-over-year. Macro environmental factors have certainly contributed the overall growth in the spot effects market, but we believe our market share growth reflects the impact of technology enhancements, as well as more effective liquidity provisioning.
Turning to expenses, total adjusted operating expenses were nearly $110 million for the quarter up 3% compared with last year's first quarter. The key expense variance was in compensation and benefits resulting from one higher incentive based compensation, driven by and aligned with our financial and operational performance and to accelerate stock based compensation recognized in the first quarter up about $4 million and $2.5 million respectively.
As we pointed out in our last earnings call, there are several incremental expenses impacting our year-over-year comparability such as expenses associated with the Silexx acquisition, the increase strength of the pound sterling, and the gross up of offer-related expenses. Additionally, during the first quarter, we raised our capitalization threshold which resulted in incremental expense. In total, these items accounted for about $2.9 million in incremental expenses in the quarter with the currency impact being the largest. If you just put those items, expenses would have the up less than 1.5 of 1%.
We are reconfirming our full-year expense guidance to be in the range of $420 million to $428 million. We expect compensation and benefits to be lower in subsequent quarters, reflecting the expected realization of expense synergies as well as smoothing out the impact from the accelerated investing, which is typically related to the first quarter when new grants are issued.
For the first quarter, we realized $3 million in pre-tax synergies, primarily from compensation and benefits. As Ed mentioned, we established our technology migration date for C1, our final and most significant migration to Bats technology. With that, key date now established, we raised our expected annualized run rate expense synergy target to $85 million from $65 million. Furthermore, we now expect to reach this run rate in 2020, a year earlier than our initial projections. We still expect to exit 2018 with approximately $50 million in annual run rate expense synergies, and now expect to reach $80 million at the end of 2019.
Turning to income taxes, our effected tax rate on adjusted earnings from the quarter was approximately 26%, somewhat below our annual guidance range of 26.5% to 28.5% due to the settlement of uncertain tax positions during the quarter. The effective tax rate on combined adjusted earnings in the first quarter of 2017 was 28.1%.
The decline primarily reflects the favorable impact of corporate tax reform. We are reaffirming that we expect the annual effective tax rate on adjusted earnings to be in the range of 26.5% to 28.5% for 2018 with the tax rate for the second quarter expected to be slightly above the high end of the guidance range and the tax rate for the third and fourth quarters to be at the higher end but within our guidance range.
In addition, we are lowering our guidance for capital expenditures to be $45 million to $50 million versus our previous guidance of $50 million to $55 million. The decrease reflects more efficient spending and the adjustment of our capitalization threshold.
Moving to capital allocation, we are maintaining our unwavering focus on effective capital deployment to drive shareholder value by prioritizing the investment and our business to support our growth strategies. And then returning excess free cash flow to shareholders via a combination of dividends and share repurchases while continuing to de-lever to maintain a strong balance sheet and longer term financial flexibility.
Our quarterly results, once again generates strong cash flows, which enabled us to pay out dividends of $31 million, use $44 million to repurchase shares and reduce our debt by an additional $25 million. Year-to-date through April 30th, we have repurchased approximately 451,000 shares of Cboe common stock for about $51 million or about $112 per share.
We ended the quarter with adjusted cash and investments of $166 million and a leverage ratio of 1.6x. The adjusted cash balance was higher than normal due to a number of significant tax related liabilities due in April.
In summary, Cboe delivered outstanding quarterly results and continue to demonstrate our focus on and the strength of our proprietary index products reflecting industry leading organic growth, strong growth in a diverse set of revenue streams, disciplined expense management, leveraging the scale of our business producing higher profit margins and integration plans on track with our higher run rate expense synergy target expected to be achieved a year earlier and ongoing focus on capital allocation by reducing debt while continuing to return capital to shareholders through quarterly dividends and share repurchases.
With that, I'll turn it over to Debbie for instructions on the Q&A of the call.
Thanks, Brian. 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'll take a second question. Keith?
Yes, thank you. [Operator Instructions] And today's first question comes from the line of Richard Repetto with Sandler O'Neill.
Yes, good morning, Ed, Chris, and Brian.
Good morning, Rich.
So I guess, Ed, you talked about the topic of my question today, and you've talked about this in the past that traders can express their views on volatility in a number of products whether it be just VIX Options, VIX Futures or SPX, so -- and SPX has been strong. When you adjust for the RPCs or what we think the RPCs are even if you ran out April for the rest of the year, VIX coming up you'd still be 9%-10% up in revenue in these products. So I guess, the question is can you get more into why people choose SPX in an environment right now, and then how long -- it sounds like, at least to me, you have some time for the VIX complex to convert to the new volatility sort of regime, and could you sort of give us some color on where we are on that? And whether this analysis is the way you think about it as well, like the bundle revenue perspective is what I'm calling it?
Well, Rich, I think you've nailed it from our perspective, and I appreciate the way you framed that, because it's the way the entire organization looks at the index complex. So I'll borrow on a few of the words that were in the prepared statement. But really, if you look past the incredible records of the first quarter and look at April, you're right on the way we view the complex in the shift in products -- product and its utility. So, if we figure last year we averaged 2.2 million to 2.3 million contracts in that complex, that's where April is.
The difference is really to your point in the shift. So what causes that? VIX products and their utility are great hedging tools early in the change of perceived risk. The vol spikes, so think January where the market peaks, two weeks later the market is down 10%. That is an incredibly powerful vehicle using VIX products to hedge in that case. The market then heats up, and that's the market that we're in today vol service is flat, which means we still think we're in transition. The market hasn't said what it perceives risk over time yet. That's that flat volatility surface.
Well, what suffers? VIX Futures. It's hard to express a difference or said differently, it's hard to capture the difference in the price of future risk versus today's risk because the market has said, "We don't see a big difference now." That's very, very unusual, but what's happened in the meantime, yesterday, no better example of how traders have shifted in the S&P 500 complex. From the prepared remarks you'll recall we said the S&P 500, those intraday moves, 3x greater than we saw in the fourth quarter 2017. So, by using the S&P 500 as your hedging vehicle, those intraday moves like yesterday allow you to take advantage of a move that's really unusual if you look out over time and monetize the hedges that you're putting on by using the S&P 500 instead of VIX Futures.
Now, that scenario of flat volatility doesn't last long historically. It's unusual in this instance, but we believe history is what we look back to and we'll go to a normal upward sloping curve in vol, which then reignites the volatility strategies that allow you to trade up and down the volatility surface. The punch line is that we have a product that serves our users in any market environment if you can interchangeably understand the utility of VIX futures, VIX options and the SPX complex.
That's the way we see it.
That's great. Thanks. That's a good answer, and I know Chris agrees 100% with that too.
Thank you. And the next question comes from Ken Worthington with JPMorgan.
Hi, good morning, and thank you for taking my question. So just on the Bloomberg reports, this keeps popping up, SEC and CFTC have opened investigations on VIX. I know you guys have reportedly said that there's no evidence of any manipulation. But again, it keeps coming up. So my question is how easy would it be for Cboe to address the allegations by making changes to product structure either on settlement or the expiration process if needed? And how do you think any changes you make how would that likely impact activity levels if you could speculate? Thanks.
Sure. Well, we'll leave manipulation to the prepared comments that we made in the past. We are sure and certain that both our regulatory department, the first line of defense here on any market activity, and then ultimately, obviously, in cooperation with the regulators, that is a pass and that is -- precedes, I think, each and every day. And it's not just in the VIX complex, it's in everything that we trade across all of our exchanges. So if we put that aside and address specifically, I think, what you're asking our question is and recognize that each and every day, VIX trades throughout the day almost 24 hours a day, VIX futures and that there is this moment in time that we're always and constantly looking at how do we make better this settlement moment.
If we could focus on that, I think it's exactly what Chris would like to tee up for you this morning. But again, I want to stress, let's concentrate on that settlement. The intraday trade and the measure of volatility and the perceived risk in the market, this measure is working beautifully throughout the day and almost around the clock. So let's focus if you like right at the moment of time of settlement.
Yes, thanks, Ed, and Kenny, great question with regard to the VIX settlement auction. Obviously, this is a moment in time auction. It's not much different than the auctions we run every day in equities at the open and at the close. And I've spent my career around auctions, so as I look at this auction, there are things that we can attack in this VIX settlement auction. And we have a variety of approaches that we're using all with the sole goal of enhancing liquidity in the auction.
As I think about it, it's really three areas of attack. First, we're enhancing the technology that we use for the auction. We're improving the distribution of the imbalance messages. Those are the messages that send out the imbalances that are formed in the auction. And then we're taking steps -- active steps to increase liquidity in the auction. Returning back to how we are enhancing the technology, just this week as you know, we rolled the hybrid platform for SPX. Now this platform allows market makers to have a more enhanced interaction with SPX all day long, but more importantly around the auction moment in time.
We also plan to increase the speed of the opening process during the auction itself. With regard to the distribution of imbalance messages, as you think about it in the most recent auction we had, we had a large order imbalance. Now it is our job to market those imbalances to the market -- to the widest distribution that we can possibly do -- do that distribution. And those -- what we did see on that day was those imbalances message were being read and received and orders were filing in most of that large order imbalance but not all of it.
So it's not the trader that submitted the order. It's not his job to market the imbalance. It's our job as a market. So, some of the steps we are taking to improve that. We plan to enhance the imbalance speed by increasing the speed of its dissemination. We are actively pursuing ways to improve the distribution of our imbalance information. We plan on making available to a wider audience through a variety of means.
Now turning to liquidity, that's the most critical part of this. We are actively talking to our current market makers and new market makers to join not only the VIX complex but the auction itself. We have been fielding inbound calls from our market makers and our end users that want to participate in those imbalance orders because those are money making opportunities for all market participants to offset. So, we have a three-prong attack that we are taking in the auction. These are short term and long term plan. We ultimately will be rewriting the auction when we migrate to the Bats technology, when we migrate the C1 platform in 2019. Hopefully, that answers your question, Kenny?
Yes. It sounds like I caught you completely off guard by the question. Thank you so much for the response.
Yes, I have not answered the question on the VIX settlement auction, but I appreciate it.
Thank you. And the next question comes from Michael Carrier with Bank of America Merrill Lynch.
Hey, good morning guys. This is Sameer Murukutla on for Michael Carrier. Thanks for taking my question. Another related with the VIX. I know you -- thanks for providing the CFE user detail on the slide. I guess can you just give us more detail on what type of users are driving this growth? And maybe if the mix of users in changing how this effects RPC going forward? And I guess I know you provided the 1Q number, but can you give us anymore detail on the growth in users I guess after the meltdown of some of the fix strategies let's say from beginning of February to now?
Sure. Well, most importantly on February 25, so post February 5, we migrated the futures platform for CFE. And that was a -- what I call, "Wildly successful migration," not only because it was perfectly executed but it enhanced the liquidity pool of our platform. And since that migration, we have been monitoring closely our user traffic, both in terms of the number of market participants and market makers joining the platform post migration as well as the as you mentioned the user account level.
We are now -- we've grown since migration to somewhere just over 6000 active user accounts at the customer level. The majority of that growth ironically is in active and VIX contracts. While we have a very successful launch of Bitcoin future, we have seen some growth in the Bitcoin -- active accounts in Bitcoin, but the majority of the growth since the migration has been in VIX user account. So, we are pretty excited about that.
More importantly, the performance of that platform since the migration, we have seen our displayed liquidity has obviously increased during both regular and overnight trading hours. That's important when you think about Asia trading in the VIX complex. It has actually doubled since the migration. That's an impressive stat. The spread has narrowed to our fix spread in -- in VIX in particular the spread has narrowed down to the actual nickel increment that we have minimum spreads on. So, really in some wildly successful migration, we are very positive about the active user accounts since that migration on February 25. And we like the performance of our market makers since that migration.
Yes, I think the other potential is the amount of new eyeballs on a one-year VIX contract in the current index form. It will be interesting as we work through what it takes to make that a tradable contract in the future. What interest we will see as a result for a new user base who is more interested in longer dated vol. So, in the preparatory remarks we pulled out insurance companies and pension funds. So, I think there is -- I would think there is more to come that short dated vol exposure is not as interesting to that group as longer dated vol is. So, I think there's -- I am hopeful that there is more interest as more eyes are looking at that one-year vol number.
Thanks for that. Love the details guys.
Thank you. And the next question comes from Brian Bedell with Deutsche Bank.
Great. Thanks. Good morning, guys.
And thanks for -- yes, same thing. Thanks a lot Chris for that detailed auction answer. The -- maybe just another one on VIX, with the [indiscernible] being flat, I mean we still have a pretty decent base of underlying VIX futures issues. April was about 255. So maybe either Ed or Chris, can you characterize what people are doing now with the futures despite the curve being flat? And then, Chris you mentioned the 6000 new user accounts given the new -- given switchover on the C2. So -- I am sorry CFE. How should we think about that in potentially developing the percentage increase in VIX futures attributable to the new functionality on the platform?
So first the trade that we said is, is really facing the greatest amount of headwinds is capturing the difference over time in the vol surface. So you've nailed it. So if we are used to in 2017 looking at vol over time starting at 10 or 11 in the front month and moving up to 18 six or nine months out. That's a huge spread and that was a very very big trade. But to your point, a day like yesterday, we traded over 300,000 VIX futures contracts that day trader is still very very active.
There is still movement around in that front month of vol. If you look at move yesterday when you move 35 points in S&P500, there are still a great number of trading opportunities. And we see those day traders still in the market. I talked to one of most active traders a couple of days ago and I said, what are you doing differently? He said, well, I am learning some different strategies that I couldn't employ last year with a steep curve and I am trading differently today. And market is still in adjustment mode or flat.
We don't expect that to proceed for a long period time, it just will not last. We expect more historical shape to the curves. We think those strategies will come back. What is also relatively inexpensive is maintaining a constant position in volatility when the surface is flat. It was expensive in 2017 to maintain a constant exposure with VIX futures because of the roll down cost. You would be replacing front month 11 vol for example with a couple months out at 14 or 15 vol. That's an expensive roll down cost.
Today, you are replacing 17 vol contracts with a 17.2 vol contracts, so relatively inexpensive to maintain constant exposure of volatility. So just again it's the utilization. It's different use case. All good, we think with more users coming back when the surface changes -- back to Chris' point and he'll pick up on those new users, there is more users ready when we get to a normal stay.
Thanks, Ed. And with respect to users let's be clear, we grew our user base since the migration. That's something we were looking for and we are excited about over 6000. We didn't grow by 6000. I just want to make sure we are clear. But what that base gives us and you really can't convert users to a formula of new contracts. It's actually it's very positive post-migration. It's a very positive statistic. But, I look at yesterday where we traded over 300,000 VIX contracts in our complex. What those users really reflect we are primed for the environment that Ed is talking about when the curve started to shift, so having those user base is there, those users create the 300,000 day trade in the complex. So can't drill the formula from the number of users, anyone user can be a dramatic user of VIX and we've seen some accounts have exceptional volume in the VIX complex. So it's hard to draw any formulas from new users to total volume.
Great, that makes sense. What was the user base before the conversion?
There is a chart.
Yes, we have a chart in that.
Yes, we're up about, this is John, we're up about 11% quarter-on-quarter, and you should be mindful what this chart is saying. Prior to that, we had a growth rate of 25% over a two-year period. So it's really just a tremendous up tick we've had since the re-platforming.
Yes, okay, great. Thank you so much.
Thank you. And the next question comes from Ben Herbert with Citigroup.
Hey, good morning. Thanks for taking my questions. Just maybe -- I know four days in here, but SPX's migration to hybrid platform and just maybe how or if you're seeing anything yet -- on the plant strategy while just how that customer mix might be shifting or how we could look forward to shift? Thank you.
Sure. Great question and as you mentioned it's just been a week but it's been a very successful week, just some stats on the migration to the hybrid system. Spreads in SPX and again this is one week of data but spreads in SPX have tightened by 50%. That's an impressive stat. Display size has increased by approximately 90%. So that allows the external all automated electronic execution in the SPX to see a greater size that is available on the screen. The electronic versus open continues to maintain about the same level pre-migration but we would expect there to be some time before that starts to shift upwards towards the electronic side.
Most importantly what we have seen and we structured this very carefully to make sure that the spread was going to narrow but not impact the open outcry liquidity, so we continue to see large trades being satisfied in the open outcry pit to stop solve for very complex positions and again it's critical that they are able to get those trades off in what is already a narrow SPX spread. So, very successful migration it's only been a week as you mentioned but the stats are pretty impressive for we.
I think yesterday, Chris has a really good view into unusually wild day in the market as far as a move from open to close and being able to satisfy a roughly $1.6 million contracts and four day platform from a market makes perspective, so good view into busy day, yesterday.
Great, thank you.
Thank you and the next question comes from Alex Blostein with Goldman Sachs.
Hi this is [indiscernible] filling in for Alex. Can you talk about the recent news around the FCC block in the market data see increase and what sort of conversations are you having with the regulators and the next course of action from you?
Sure. Just to be clear, the FCCs focus was on the consolidated step fee change that was filed earlier in the year. So it's all of the S rows [ph] that participate in the SIP, and that filing was -- if filing needs to be re-filed with clarity around rationale for the pricing. So it doesn't mean that pricing can't be changed; it just means the filing has to be enhanced that is made before the FCC. So it's still early in the process and the exchanges are working with the FCC on the SIP finally. Hopefully that answers your question.
Thank you. And the next question comes from Kyle Voigt with KBW.
Hi, good morning. Thanks for taking my question. I guess just a follow-up question just around the customer letter they sent out regarding the VIX settlement process. I think in that letter you addressed some of the concerns that were asked earlier in the call just around the potential manipulation of the settlement process. Just given that you self would need to issue this letter to your customer, is it fair to think that the letter was in response to more inbound inquiries from your customers in this topic or was this more of a proactive move. And I'm just really trying to understand the level of concern from your customer base regarding what has been in the media more recently. Thank you.
Yes, I think Chris can speak to the direct feedback from the customers and whether or not they see a concern from the media. My comments and views from the customer are that we're trading day in and day out because this is the vehicle we used to hedge vol exposure. And we do it 24-hours a day. That's the first inbound I received. As far as communicating with our customers that is, from our perspective, proactive. That we want to tell our story every chance we get. We've done that with all of you when we think there's something to tell you that doesn't fit a normal cycle. So proactive communication and transparency is really what we've always been about. So I would expect you should see us doing that at any occasion when we think there's something to be told.
As for Chris, the feedback you're getting on the liquidity and trading in and around that settlement, I think you should share your views as well.
Yes, one of the -- obviously quickly issued the letter proactively because we wanted complete transparency around what our visual into that event was. And we wanted to share that with our trading community. More importantly the inbound has been from many clients, how do I trade with that imbalance. They see that as a trading opportunity, and the inbound has been consistently from both market markers and end users are very interested in trading with those imbalances that they actually miss that morning, so very positive from the trading community. Remember, not all of our end-user clients trade in to the settlement. Many of our clients are rolling their contracts into the following month. So they don't experience the settlement, they are rolling their positions on a regular basis. But, look, we wanted to be clear that we were disappointed with the 18th, and we saw it as a liquidity challenge and nothing more. And we're out now trying to enhance that liquidity as I spelled out earlier in the call.
Kyle, I think you should expect us also as the press is trying to understand this, this isn't easy stuff. So the misperceptions on how these processes work, we're going to be helping all along. And we think that's part of our responsibility is to continue to educate. And if we can do that with the press we're going to do it. So expect us to be engaged and trying to straighten out those misperceptions regardless of the event, the day, or the market environment, that's just what we do.
Thank you. And the next question comes from Chris Harris with Wells Fargo.
Great. Hey, guys. Appreciate all the comments around the growth in the user base. Just wondering if you could expand on that a little bit more, trying to determine if you can exactly who the new users are, if these are mostly traders or if you're seeing new users coming in that are more of the hedger variety? And then if there's any way you can maybe potentially help us out with -- we're trying to figure out how much incremental volume could these new users really bring to Cboe. I mean, are these users that really trade a lot potentially or maybe not so much?
Debbie, can I give that forward-looking. Chris is going to take this one, I have attorneys around me.
Right. So, look, I said it earlier, when you do these migrations it's critical to look at the users that come back after the migration. And obviously we had the events of February 5th before the migration, so we were able to see the users that came back after February 5th along with coming back after the migration. Both are market-maker participation and our client participation was up post migration. So those are all phenomenal statistics when you're analyzing the success of the migration. With regard to the activity levels, remember the VIX contract is a sizable contract. It's not really a retail contract today. So when we look at those users' accounts they're largely sophisticated users that are in those accounts.
We haven't tracked each account down to the level of activity and how that shifts the future volume of VIX. But I do think I was excited about yesterday's 300,000 contracts because it gives us -- we have successfully migrated a base of users that can deliver a day of over 300,000 contracts, despite very small open interests. So again, the open interest -- the correlation between open interest and volume yield of VIX, there's not a lot of correlation there when you have over 300,000 contract day like yesterday.
I would say though, in the past, we have said looking into the migration that we did not fit a global standard from a futures traders' perspective, so there were pros that weren't going to write to our old platform. We did point out that big, big trades, the most meaningful ones were really customers of ours, but there was the next layer and the layer below those that just did not find our convention -- our quoting methods meeting their global expectation. So we knew there was a queue that should be coming as far as new users. But again the big players we've had here.
Thank you. And the next question comes from Chris Allen with Rosenblatt.
Good morning, guys. Appreciate all the additional color you gave us in the settlement in VIX in general. I just wanted to follow-up a little bit on the market data. One, I think -- I'm not sure if I missed it, can you give us the magnitude of the audit -- fee audit charges this quarter that helped you? And two, maybe just a little bit more color on the SEC issue. Sounds like you're going to be refilling with more rationale on the pricing increases. Does this signal kind of a change in the SEC to the other approaching market data longer-term, this is kind of implied in the Virtue [ph] call this morning, so any thoughts in terms of how you believe the SEC is viewing market data moving forward would be helpful.
Sure. On the SEC front, probably not much change from my perspective. Over the last couple of years the SEC has been very diligent around any market data filing. Certainly we've spent a lot of time on our -- on what was originally batch one and it is now Cboe 1 working through that original filing and adding a lot more detail in the filing than traditionally in the past. So this is probably the last couple of years we've seen a great deal of focus on all market data filings, both the proprietary exchange-level market data filings, as well as SIP-related filings. With regard to the SIP pricing, the goal of that pricing was to be revenue neutral. When you declare something revenue neutral you obviously have to spend a lot of time explaining how it is actually revenue neutral.
So I think a lot of the requirements that the SEC are putting on market data filings have been going on for a couple of years. And I don't see this as any different really to enhance the description of the filing, and really talk about what the impact of those pricing changes would be.
And then, Chris, Brian. Of the 3.7, the increase we saw in that, so it's year-over-year, probably 85% or a little over $3 million is actually attributable to the audit recoveries.
Thanks a lot, guys.
Thank you. And as there are no more questions at the present time, I would like to return the call to management for any closing comments.
Thank you. That completes our call this morning. We appreciate your time and interest. And we'll be around if anybody has any follow-ups.
Thank you. That does conclude the conference call and the presentation. Thank you very much for attending. And you may now disconnect your lines.