Cboe Global Markets, Inc. (CBOE) CEO Ed Tilly on Q1 2019 Results - Earnings Call Transcript

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About: Cboe Global Markets, Inc. (CBOE)
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Earning Call Audio

Cboe Global Markets, Inc. (NYSE:CBOE) Q1 2019 Earnings Conference Call May 3, 2019 8:30 AM ET

Company Participants

Debbie Koopman - Vice President, Investor Relations

Ed Tilly - Chairman, President & Chief Executive Officer

Brian Schell - Executive Vice President & Chief Financial Officer

Chris Isaacson - Chief Operating Officer

John Deters - Chief Strategy Officer

Conference Call Participants

Richard Repetto - Sandler O'Neill

Ken Worthington - JPMorgan

Alex Kramm - UBS

Michael Carrier - Bank of America Merrill Lynch

Alex Blostein - Goldman Sachs

Brian Bedell - Deutsche Bank

Chris Harris - Wells Fargo

Kyle Voigt - KBW

Chris Allen - Compass Point

Operator

Good morning, and welcome to the Cboe Global Markets 2019 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

Now, I'd like to turn the conference over to your host today, Debbie Koopman. Please go ahead.

Debbie Koopman

Thank you, Keith. Good morning and thank you for joining us for our first quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO will discuss the quarter and provide an update on our strategic initiative. Then Brian Schell, our Executive Vice President and CFO will provide an overview of our first quarter 2019 financial results and updated 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 Chief Operating Officer, Chris Isaacson 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 website.

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 Cboe Options Exchange is 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 material.

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

Ed Tilly

Thank you, Debbie. Good morning and thank you for joining us today. I'm pleased to report on the financial results for the first quarter 2019 at Cboe Global Markets. As you know, market conditions were challenging throughout the quarter, negatively impacting volume across our business lines. As we have in previous low-volume cycles, we have used this less-volatile period to seed potential future growth in our proprietary index products through increased customer outreach and education efforts. As a result, we are confident we are even better positioned to grow our business and to define markets globally to deliver value to our customers and shareholders.

I will highlight those initiatives today after touching on market volatility. In a reversal from the sharp downturn in fourth quarter 2018, the S&P 500 rallied more than 12% in the first quarter and is now up more than 16% year-to-date. We believe the rally was led by the Federal Reserve's shift away from monetary tightening, generally positive corporate earnings and growing stability in U.S.-China trade talks.

As the markets are once again hitting all-time highs implied volatility levels have fallen across all asset classes and the VIX term structure has steepened. We see that investors are looking for ways to reestablish upside positions. And with realized volatility levels back near eight-month lows, industry strategists are pointing to trades in SPX and VIX, as ways to take a position in the market.

Others are turning to VIX futures and volatility-linked ETPs to express a view on implied volatility. Volatility-linked ETP, AUM which bottomed out at the start of 2019 has been steadily building and is now back over $3.5 billion quickly approaching pre-February 5, 2018 levels.

In the last three months, the ETP complex has gained approximately $130 million of long vega exposure. This has translated to hedging in VIX futures and according to the most recent CFTC data has resulted in the largest net short position in VIX futures on record, yet another example of the utility of the VIX complex has to offer. Whether record market highs or market sell-offs, spikes in volatility or extended periods of market calm The Street continues to reference, our proprietary product set as the preferred tools for managing risk.

We remain keenly focused on the significant opportunity we see to further grow the customer base for our proprietary products. In the interest of better serving our customers, we have aligned our sales and coverage teams across regions and products to promote greater collaboration and cross-selling. Additionally, we developed a buy-side sales team focused on growing usage of our proprietary products in the insurance asset manager and pension fund communities. While we believe our greatest opportunity for growth remains in the domestic market, we also recognize that investors around the globe have U.S. exposure.

We continue to make inroads into new markets and to enhance the customer experience in regions, where we already have a greater foothold. We are exploring new markets such as the Middle East, Scandinavia and Asia while also pursuing jurisdictional approval in more established markets including Switzerland and Israel.

Turning now to the U.S. Equities market where this week we made fee changes aimed at attracting additional order flow to Cboe EDGX Exchange. We believe these changes in addition to our plans to introduce execution priority to retail limit orders on EDGX pending regulatory approval will benefit individual investors while further enhancing EDGX as a destination of choice for retail trading.

We continue to advocate for adoption of our Cboe Market Close proposal which was initially approved by the SEC in January 2018, but has been stalled by appeals. We are optimistic that the original approval order will be reaffirmed by the commissioners and are positioned to launch upon approval. You will recall that Cboe worked closely with customers to develop CMC to provide them with significant cost benefits.

Our commitment to being a leading advocate in the equities marketplace has never been stronger. We are crafting numerous other proposals and rule filings based on feedback from our customers. You'll hear more about these initiatives as they develop.

Now turning to European Equities where our market share remains strong one year into MiFID II. We continue to retain our number one position in the European Equities market as we increased our market share year-over-year to 22.1% for the quarter, up from 21.2%. Our periodic auctions book continues to receive positive feedback from both buy-side and sell-side firms and remains the leading periodic auction solution.

Cboe LIS, our block-trading platform powered by BIDS technology logged another strong quarter. Our primary focus during the first quarter was finalizing our plans to operate in a post-Brexit environment. In March, we received the authorization from the Dutch Ministry of Finance to operate a new venue in the Netherlands.

Given the recent political developments and the extension of the Brexit deadline until the end of October 2019, we now plan to launch the new venue later this year. We continue to work with our regulators and customers on launch timing.

In closing, I would like to thank our team for the progress made throughout the first quarter in laying the foundation for future growth. In addition to the initiatives outlined here, our team continues to hit key milestones on our migration of Cboe exchanges to Bats technology keeping us on track for our planned completion date of October 7.

We've seen ebbs in trading before. They come with the territory. But our experienced and disciplined team continues to execute on strategic growth initiatives, so that our company is well positioned to weather difficult trading conditions and to benefit when they change.

With that, I'll now turn it over to Brian.

Brian Schell

Thanks, Ed, and good morning everyone. Before I begin I want to remind everyone that unless specifically noted, my comments relate to 1Q 2019 as compared to 1Q 2018 and are based on our non-GAAP adjusted results. As Ed mentioned, we had difficult comparisons given the strength of the first quarter last year and weaker trading volumes this year.

Overall, our net revenue was down 15% with net transaction fees down 24%, non-transaction revenue, up 2%.; adjusted operating expenses decreased 14%; adjusted operating margin of 66.5% was unchanged; and finally our adjusted diluted earnings per share declined 20% to $1.11.

Our first quarter results reflect lower trading volume industry-wide and across each of our business segments. In addition, our results included an $8.8 million charge, the equivalent of a $0.06 EPS impact to reverse the OCC dividend we recognized in 4Q 2018 due to the SEC's rejection of the OCC capital plan.

Despite the tough environment and comparisons, our focus on disciplined expense management allowed us to achieve solid margins matching 1Q 2018's adjusted operating margin. 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.

I'd like to briefly highlight some of the key revenue -- key drivers influencing our performance in each segment. Before I get started, let me point out a change we made in our income statement reporting. We combined access fees and exchange services and other fees into one line item access and capacity fees. We believe this enhances comparability and better captures the overall revenue associated with accessing and obtaining desired level of capacity to trade in our markets.

Despite the lower trading volume in the first quarter, our recurring revenue stream of proprietary market data and access capacity fees combined increased 10% year-over-year, which is slightly higher than we originally projected and believe we can grow this at mid- to high single digits in 2019.

We continue to see opportunity across all of our asset classes and believe our migration to Bats technology will provide additional revenue opportunity over the long term. As it relates to proprietary market data, about 70% of that growth was the result of incremental subscriptions.

Now I'd like to turn to our segments. In our options segment the 17% or nearly $29 million decrease in net revenue was primarily driven by a $40 million decline in net transaction fees, reflecting lower trading volume and lower revenue per contract or RPC. Net transaction fees in index options fell $39 million and multi-listed options were down just $1 million.

Index options average daily volume or ADV declined 34% for the quarter, offset slightly by a 3% increase in RPC. The RPC increase was primarily due to a mix shift with SPX options accounting for a higher percentage of volume as well as fee changes implemented in the first quarter of 2019. The 17% ADV decrease in our multi-listed options was primarily driven by lower industry volumes and lower market share.

Our multi-list market share was down from last year's first quarter as we continued to focus on optimizing our overall net transaction fees as reflected in a 13% increase in RPC for multi-listed options for the quarter. The RPC increase was driven by fee changes implemented in 2018 as well as lower volume based discounts.

Turning to futures. The 30% or nearly $13 million decrease in net revenue, primarily resulted from a 37% decline in ADV and a 1% increase in RPC. The higher RPC year-over-year primarily reflects the impact of new pricing implemented in the latter part of 2018 and lower volume-based rebates. CFE posted growth in non-transaction revenue of 16%, driven by higher market data revenue and regulatory fines. If you exclude the increase in regulatory fines, which may not recur, the increase is 6%.

Turning to U.S. equities. Net revenue was down 5% or nearly $4 million, primarily due to lower SIP market data revenue, offset somewhat by increases in net transaction fees and access and capacity fees. The growth in net transaction fees was driven by higher net capture, offset somewhat by a lower industry ADV and lower market share.

SIP market data revenue fell 20% in the quarter, while our proprietary market data revenue increased 2%. SIP revenue fell due to lower market share as well as a decline in auto recoveries versus last year's first quarter. We still expect the SIP revenue pool to remain relatively unchanged in 2019 versus 2018 and expect our SIP revenue to be primarily influenced by changes in market share and any audit recoveries.

Net revenue for European Equities decreased 7% on a U.S. dollar basis, primarily reflecting the unfavorable impact of foreign currency translation. On a local currency basis, net revenue was only down 1%. While net transaction fees were down, the decline was mostly offset by growth in non-transaction revenue.

Decline in net transaction fees was due to lower market volumes, offset somewhat by favorable net capture and higher market share. The higher net capture resulted from combined strong periodic auction and LIS volume, which have higher relative net captures.

Net revenue for Global FX decreased 5% this quarter, reflecting a 12% decline in market volumes, offset significantly by higher net capture, which was up 7%, primarily reflecting the impact of fee changes made in 2018. In addition, we grew market share to a new high of 15.8%, up nearly 50 basis points year-over-year.

Turning to expenses. Total adjusted operating expenses were just over $94 million for the quarter, down 14% compared with last year's first quarter. While expenses were down in nearly every category, the key expense variance was in compensation and benefits primarily resulting from decreases of nearly $7 million in incentive-based compensation and $3 million in equity compensation.

The decrease in equity compensation reflects the forfeiture of unvested equity awards in the quarter and is not expected to be a recurring benefit in the future quarters. The decline in incentive-based compensation is aligned with our overall decline in financial performance. As we've discussed previously, this is our largest variable expense and is self-adjusting based on financial results.

Given our first quarter expense decline, we are lowering our full year 2019 expense guidance to be in the range of $415 million to $423 million, down $5 million versus our previous guidance. In the first quarter we had about $6 million in favorable net expense adjustments that we don't expect to recur in subsequent quarters. Additionally, as I discussed, we plan to continue to invest in enhancing our customer-facing business development team, to drive greater engagement in our proprietary products.

With respect to our 2010 expense guidance, we still expect a range of $420 million to $428 million, which takes into account the benefit of the synergies expected to be realized in 2020 from the C1 migration later this year and a continuation of investing to support the growth of our business. We are maintaining our run rate synergy targets, as we expect to exit 2019 with $80 million of run rate synergies and exit 2020 with $85 million.

Turning to income taxes. Our effective tax rate on adjusted earnings for the quarter was 25.4%, below our annual guidance range and last year's first quarter rate of nearly 26%. The tax rate decrease was primarily due to excess tax benefit, related to equity awards exercised in the first quarter of 2019.

We are reaffirming our full year tax rate guidance to be in the range of 27% to 29%, as we expect the rate to be at the higher end of the guidance range in each subsequent quarter for the remainder of the year. We are also reaffirming our guidance for depreciation and amortization and capital spending with the amount as noted on the slide.

Turning to capital allocation. We remain focused on allocating capital in the most efficient manner to create long-term shareholder value. During the quarter our cash flow generation and financial position enabled us to continue to invest in the growth of our business, while also returning nearly $70 million to shareholders through dividends and share repurchases. We currently have $171 million of availability under our share repurchase program and we plan to continue to evaluate share repurchases as part of our overall capital allocation.

We ended the quarter with adjusted cash of nearly $348 million. Our cash balance is elevated versus historical levels for a couple of reasons. First, working capital needs are typically higher at the end of the first quarter, due to tax-related liabilities that are due in the second quarter.

The second and most significant reason is potential strategic acquisition we referenced in our last earnings call, remains under consideration. While we are still unable to provide any specifics relating to this potential deal, there is no assurance it will ultimately occur.

I want to point out again that, if we are successful in completing the transaction, we do not anticipate a significant change to our current leverage ratio or issuing any stock with respect to its funding. At quarter end our leverage ratio was unchanged from year-end 2018 at 1.5 times.

Our cash and capital positions remain strong. And we remain confident that the actions we are taking to implement our strategic initiatives will drive free cash flow and create long-term, sustainable value to our shareholders.

In summary, Cboe delivered solid results amid a challenging operating environment and continued to focus on defining markets globally, growing our proprietary index products, growing our recurring revenue streams, disciplined expense management to leverage the scale of our business, completing our integration plan and delivering on our synergy targets, maintaining balance sheet flexibility and a capital allocation plan that allows us to invest in the growth of our business, while returning capital to shareholders through quarterly dividends and share repurchases.

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

Debbie Koopman

Thanks Brian. At this point, we’d 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 your second question. Keith?

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] And this morning's first question comes from Richard Repetto with Sandler O'Neill.

Q – Richard Repetto

Yeah, good morning Ed, good morning Brian and I saw the comp decreased quarter-to-quarter the $13 million. I didn't know we paid Chris Concannon that much this quarter. Anyway, my question is again, you mentioned M&A right at the end of the prepared remarks, Brian. It sort of brings out fodder or more questions on it. And I guess I would say can you give us any more color since it has been mentioned again publicly in prepared remarks? Are we looking to expand it in new -- from what we got from priors it's not as small transaction? It's a sizable. Is it some additive? Can you talk about what the strategic -- is it the expand asset classes or added on to asset classes? Can you give us any more details since it was brought up earlier?

A – Brian Schell

So I think there were multiple questions there. So let me talk about -- and this will probably address -- and I apologize for anyone else in the queue who will have a related question that might be a slightly different take, but I'll answer it more broadly around capital allocation and this. I don't really want to -- we don't really have any additional comments or color around any specific transaction that may or may not occur that was stated other than in the prepared remarks.

But in the context of capital allocation, let me address that and I think John will maybe cover some of the other kind of our thoughts around strategic investment and considerations and our overall approach broadly. But at the end of the day, our overall goal is always the efficient deployment of capital and just -- and to not just sit on that cash. We do have a philosophy and a long-term track record of returning that cash to our shareholders and we want to balance that with achieving appropriate balance sheet flexibility.

As we do every quarter and we're planning to do later this month, we discussed this topic with our Board on a very regular basis. And beyond the working capital needs, making those investments to grow the core business and achieving that flexibility, as we stated many times our goal is to grow that annual dividend as we've done since 2010 and using that capital opportunistically to repurchase the shares.

As such, it was unusual for us to hold that much cash at the end of the quarter as we did this quarter. And we don't necessarily expect to hold that level of cash going forward. And again, as we noted, it was anticipation of that higher seasonal working capital needs in that potential transaction, but we also were in the market-purchasing shares, demonstrating that ability to balance that relatively small strategic investment with a direct return to shareholders. So we'll continue to evaluate capital allocation decisions with that type of discipline.

A – John Deters

Hi Rich, this is John. So just on the strategic points. We've said this before. I think, we think about things in three ways strategically, greater access to end users, extending our geographic reach and adding to our asset class coverage. And expect any good deal to hit at least one and we like them to hit multiple of those points. And then expect any good deal to be a solid contributor financially.

Q – Richard Repetto

Thank you.

Operator

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

Q – Ken Worthington

Hi, good morning. Thanks for taking my question. On the VIX side we can see the ETP vega exposure increasing, thank you for that information. And it's definitely helping the future side as we can see. The VIX options side has fared maybe less well more recently. Can you flesh out maybe why the more -- or maybe the less robust results on the options side relative to the future side? Thanks.

A – Ed Tilly

Sure. I think it -- it's Ed Tilly. Thank you, Ken. I think it really -- if we take a half a step back and we look at the psychology going on now in hedging and traders as we know and investors as we know are most influenced by the most recent past. And you're coming out of a fourth quarter last year with very, very high volatility, a huge market sell-off; you entered the first quarter of this year either in a market or in a long position that has been hedged. And you're faced with a couple of options and we kind of set that stage at the last time we spoke where we saw hedging opportunity and remaining in a long position in the market you're forced with basically two choices to hedge that position; out-of-the-money puts in the S&P 500 out-of-the-money calls in VIX. And we referenced the really, really low VVIX making out-of-the-money calls in VIX relatively inexpensive compared to other money puts in the S&P 500.

Now, while that scenario continues and VVIX is at a relatively historic lows all of the influences in the first quarter that very volatile fourth quarter is in the rearview mirror. What we've had now is three or four months of relative calm, uncertainties like -- uncertainty around Brexit, trade wars, government, shutdown corporate earnings.

Remember we weren't even talking about raising fed rates back in the early first quarter. All of those uncertainties are kicked now well into the third quarter maybe the fourth quarter. So, you're faced with that same decision. Do I spend that money to hedge my portfolio by using out-of-the-money calls even though they're cheap? Or do I look 30 or 60 days in the future and say, maybe I need half as much hedge or maybe I'm going to let April just rest on its own. That's what's going on now in the marketplace.

And we see that we're informed by our investors' perception of risk by the volume in each of these proprietary classes. But here is what's different. If you read the commentary that's issued by the sell side each and every day I'll give you just a couple from the last few days. And these are all from banks and this is all of the commentary in the market.

S&P-implied vol of vol as measured by VVIX index was roughly unchanged last week at 84%. We continue to see interest in cheap upside call it convexed etrades which has driven VIX call wing to record highs.

To protect against the squeeze and higher VIX as SPX corrects from record highs consider buying VIX call spreads. So, the commentary is reinforcing when you're looking to hedge these are the products. Cboe's products are the ones you're looking to hedge in any market environment. We've seen the ebbs and flows and I -- we think the psychology of that trade now is establishing and looking forward through now the recent really calm environment to when this uncertainty comes back how do I position myself to continue to enjoy the upside run but to have a hedge position. So, I think that shows up first in those out-of-the-money VIX calls and taking more vertical position in the S&P 500 to maintain loss.

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 don't usually like to ask about expenses, but I guess it would be great if you can just run through some of this and the expense -- and the expectations for the rest of the year a little bit more Brian.

If I heard you correctly the equities side of the comp line was $3 million better than I think $6 million from something else. I don't know if you said what it exactly was. But -- so I guess its $9 million so the real core expenses if I'm looking at this correctly are more like $103 million so at a 4, 12 run rate.

So, the question I guess is do you expect expenses -- where do you expect expenses to ramp in an environment where you're still taking those costs because of the integration? And then secondly, can you give us a little bit more color around the kind of like incentive fees -- or incentive compensation? How that's working? In terms of what are you accruing right now? What is the environment you're kind of budgeting for? How could this look going forward if we're staying in this kind of volume environment going forward? Hopefully that made sense. Thank you.

Brian Schell

Sure. So, let me take the first part of that as far as the ramp and why do we expect the slightly higher run rate in Q2, Q3, and Q4. As we look out I mentioned -- we mentioned a couple of times about our continuing investment that we need to do. And that will primarily show up in people and different things that we're doing as far as how do we continue to invest in that client-facing approach. So, that's one of the areas of investment. We'll continue to see that it could show up in the comp line end for example.

We also see -- with respect to various initiatives that are going on, we see some increases coming on potentially in professional fees. We know that we have some of our software tech that's rolling on so we're starting to see a little bit slightly higher increase in some of the depreciation and amortization.

Again offsetting -- some of that offset is the synergies that are coming in. But again there is not going to be a material change from synergies showing up until the very end of the year.

So, there's not really that offset as we try to kind of profile a little bit in the last call of like hey, we're still on track and we still think this is a big number on a run rate basis. But unfortunately the realization of that -- those kind of direct-offsetting expenses during the year are just not going to happen in these early quarters.

So, we expect to see a slight ramp-up in comp and I'll come back to incentive in a second. Slight increase in professional fees, slight increase a little bit of a D&A depreciation, and amortization that I mentioned. And along with that sometimes as we ramp up some of this some of our tech support expenses are also going to slightly tick up a little bit.

Again, it's kind of across the Board, so I wish I could point to something specifically to that. So, your analysis I think is the right way to think about that. And that number is still less than that kind of that number of what we had in a quarterly basis last year as far as that adjusted operating expense number.

So, it does reflect a continued benefit from the synergy savings with the investments that we mentioned. As far as the incentives go I'm obviously not getting it into, hey we're setting a new cool rate at this and that. We do factor in multiple financial metrics and operational metrics, but primarily, financial as a way to make sure that we're appropriately funding incentive comp with our shareholders so that we are completely aligned. And we have a perspective on the environment of what that looks like. Our accruals reflect that. I'm not necessarily going to sit down and say, here’s what we think that volume looks like. But if you think about the incentives and the variable piece of comp, it's roughly 25% of that comp line item. If it's going great it's going to be higher than that because it's not just the incentive comp, it's also the associated payroll taxes and benefits and all the other stuff that nobody likes talk to about, but it's cost money. And then if it's lower than that it's because, hey, the financial performance shows what is there. So as a benchmark 25% of the overall comp is going to be driven by that variable incentive comp number.

Alex Kramm

Excellent. Thanks for the color.

Brian Schell

Yes.

Operator

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

Michael Carrier

Hi. Thanks and good morning. Maybe just given some of the investments that you mentioned given some of the expense guidance, what has been your traction with the new clients and international users? And maybe any stat that you can provide over the past few years and what you see as the opportunity ahead given some of these investments?

Ed Tilly

Yes. I don't -- as far as statistics that's very, very difficult. But I will tell you coming out of our Risk Management Conference in March and the hunger for updated and the continued exposure to white papers and neutral papers so for example, we updated the Wilshire report on option-based benchmarks performance and risks and updated that through December of 2018. Those types of engagements because they're demand-driven is why we're focusing and continue to focus in the pension and insurance space where that exposure is non-stop. Those customers need the information. They need third-party validation before they can go and convert funds that don't use our basic strategies to employ those strategies. So it's really now we're in the knowledge and gathering phase after a year like last year.

And the sophistication level and the engagement, I would say that this Risk Management Conference was at an all-time high. I saw all of our client-facing folks engaged in conversations that years ago I could only have imagined from a sophistication level. We need to invest and keep up not only on the client-facing customer interaction from our team, but going out and commissioning papers and having things written by third-parties. That's what we're doing now. And again it's fueled by a year like last year. And run-ups like this where gosh, I haven't seen an all-time high before. Well I did. I've seen them over the cycles in the past. What do I do this time? And why is it different? And these basic strategies these basic -- these white papers that are educating our users that's how we start.

John Deters

Michael, this is John. I'd add one more thing. So Ed spoke to the sophisticated end of the user base spectrum. And we see -- because it's a little more visible, we see some pretty interesting momentum in the more entry level of the user base spectrum. And you see that around things like some of the packaged products that incorporate our strategies. So for example Global X has recently announced they'd be launching a Russell 2000 covered call ETF -- that joins a family of ETFs from a variety of distributors including Invesco and WisdomTree and others. So we -- those are visible launches. The asset accumulation there has been really robust. We talk about VIX ETPs, but I think the story around ETPs that incorporate all of our product strategies is a really compelling story for us.

Michael Carrier

Okay. That’s helpful. Thanks a lot.

Operator

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

Alex Blostein

Hey, good morning, guys. I wanted to ask you about dynamic in equity market share trends. So obviously, it looks like you've been losing pretty meaningful share. And I know you highlighted EDGX and that's the one we tend to focus on more. But it looks like there have been some losses on the Bats side as well. So maybe expand a little bit on why you're seeing incremental share losses now? What sort of pricing changes you have made? I think you alluded to something on EDGX side, but curious any plans for the rest of the cash equity franchise. And ultimately how is that going to shake out and the blended capture rate we should be thinking about on U.S. cash equity side from here?

Chris Isaacson

Yes, Alex. Good morning. This is Chris Isaacson. I'll take that one. Yes, as you can see we have had higher-than-expected capture in U.S. Equities. And we made a decision in May we're going to reinvest some of that higher capture into the EDGX book where we've seen most of the market share attrition. So we made quite a change there and we've seen some early results that are positive, but it's just a couple of days in. We intend to be very, very competitive in this space and we're going to reinvest that capture.

We think this change on EDGX will work very nicely with the retail priority that we have before the commission and hope to get approval this summer on that will -- we think put retail orders earlier in a market queue position for them and hopefully improve fulfillment rates. For the rest of the exchanges, it's month-by-month we're looking at market share and capture. And so I think as we reinvest some of that capture you can expect the capture to come down as the market share goes up. We've -- we made a choice here that we think it's better for us and for our shareholders and customers if our market share is higher than where it's at now so we're going to reinvest to capture.

Alex Blostein

So just net-net between the SIP and the trading revenues there, should we be thinking about kind of that whole bucket being flattish? You lose in trading you gain on market data and that's kind of the framework?

Chris Isaacson

Yes. The framework is I think at least net revenue neutral for the entire complex for U.S. Equities, but we want higher market share.

Alex Blostein

Great. Thanks very much.

Operator

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

Brian Bedell

Hi. Thanks very much. So, just to follow-up on two prior questions. Just on that last one the market share we're tracking. It looks like the improvements starting on May 1, I know it's just a couple of days in May, but it looks like it's coming in the Bats area mostly rather than EDGX. So maybe just talk about that.

And then a follow-up to the question on the expenses earlier, I guess, if volumes in general broadly for the whole firm remain at sort of 1Q levels not that we think it would, but if they were to do that would you have more flexibility on that incentive comp side to come in closer to that $100 million quarterly run rate on expenses this year?

Chris Isaacson

Yes. I'll take the -- this is Chris, again. I'll take the question on the market share. For BZX equities market share there were no material changes made in May for BZX equities. So that's probably just movement, natural movement that comes and goes each and every month.

The major changes were made on EDGX and that's what we're watching very closely, but no more color there. And then Brian, if you want to cover the expenses?

Brian Schell

Yes. Brian, on the expenses -- and there would be nobody in this room nor probably anybody on the phone rooting for the scenario you just mentioned. But that would show up in incentive comp. I mean, as far as there would be a lower number, it would reflect a lower-volume environment if the first quarter volumes were to repeat itself.

Brian Bedell

Yes. Thank you.

Chris Isaacson

I've made a follow-up on the last question about BZX equities. I haven't looked at the statistics yet. But I will note that we are listing VXXB and now actually VXXB migrated to VXX as of I believe it was two days ago seamlessly. So we're watching that closely. That's the listing venue for VXX.

And remind you all, we talked about VXXB last time there was a transition from VXX to VXXB and now there's a -- there was name change back to VXX where its full transition is finally complete.

Brian Bedell

Okay. Yes. Maybe that's the driver. Okay. Thank you.

Operator

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

Chris Harris

Thanks. With respect to VIX, it seems like the shape of the VIX curve has more anomalies in the recent quarters in recent years than it used to which I think has perhaps led to some of the uneven volume outcomes, we're seeing. Would you guys agree with that? And if so why do you think that's the case?

Ed Tilly

Anomalies, I think that's right. If you look at statistically, the current shape, while there are -- making of the steepness of the front month versus second while that bounces a bit, the amount of flat days that we've seen in January and February is very unusual. And why would I think that is? I think that it's just a reflection as my original comments it's just the perception of risk over that very short period of time. And that curve is most influenced as I've said by the most recent events.

I think when you have the volatility and the spikes involved like you saw last year that front month is weighed more volatile than it has been historically, which obviously changes the shape of that curve. The roll-down trade it's difficult when that front month is as volatile as it is. If we're going from 16 to 15, 13 back to 15 you're not as likely to engage in what has been a pretty consistent shape of the curve as you had like in 2017.

So my reasons for the shape of that curve were not my own. It is basically just watching the customers' perception of that 30-day versus 60-day and all of those drivers of uncertainty. Where is the timing and the spectrum? And as I said, we've seen the steepness today because all of those four big drivers on the end of the fourth quarter are kicked out into the June through October timeframe. But that's -- there will be something new. There will be more uncertainty. I guarantee it. We've seen it every cycle, but we just don't know what it is yet.

Chris Harris

Okay. Thank you.

Operator

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

Kyle Voigt

Hi. Good morning. Just on the slide regarding the proprietary non-transaction revenue in the mid to high single-digit growth guidance, you note that 70% of the market data growth is being driven by additional subscriptions. I guess, focusing on the access and capacity fees, can you give more color as to what's driving the growth there? I'm just trying to get a sense of how much of that is being driven by pricing changes. And then moving forward, are there any meaningful pricing adjustments that are planned for the remainder of the year maybe as that tech migration occurs in October?

Brian Schell

Yes. So that one is a little bit harder to break out, because, for example, as you think about pricing versus kind of new ports, you'll see movement a lot as far as people, as they test different strategies increasing say, folks maybe on ports because -- maybe I'll use the example of increasing capacity that are not to increase or decrease depending on the things they do. But one of the reasons it's hard to segregate price versus, I'll call it subscription is for example the CFE tech that was just rolled out.

With that platform migration, there was significantly more amount of capacity that was rolled out as part of that platform. And so, as kind of the entire environment changed, and so the pricing changed. And so there was hard way to say well, this number changes because the throughput was different.

And so that's an example of why it's hard to necessarily measure that. And we expect that some changes -- sometimes when you do have a price change, of what happens to capacity do we see the numbers fall?

With any of the price changes we have seen we really haven't seen any material reduction in it. So it's really across the board. As I look across the segments, of the proprietary market data it's pretty solid across the board up. The biggest one is -- I guess we mentioned the -- some of the futures. We mentioned some of the options.

So, it's kind of across the board of what we're seeing. So it's not any one thing. So again, long-winded way of saying that it's hard to tease out. But again we continue to monitor and take a look at it. And Chris, I think you –

A – Chris Isaacson

Yeah.

Q – Kyle Voigt

…you're directly involved on a lot of that as well.

A – Chris Isaacson

Yeah, Kyle, so we assume some attrition of capacity or port fees with a tech migration. But in fact we've seen lower attrition than we expected, as people need in fact more capacity once the platform is faster and they want to move their interest around.

On the market data front, with each platform migration we have new data products order-by-order fees, things that weren't available on the old platform. And with new data feeds people have demand for that so.

A – Brian Schell

And Chris makes a really good point that I just want to follow-up on, which I didn't make earlier about the proprietary market data. That is -- and we've talked about the growth that we've seen in the U.S. Equities side in respect to Cboe one. And what we're doing and growing that and basically all the shoe-leather, that we're doing to continue to drive that subscriber.

It's -- generally it can be a long lead time. But we're starting to see the efforts pay off. Actually the biggest growth that we've seen is, actually on the options side. And as far as some of that growth so we're seeing -- actually on the enhanced market data side, coming through with Livevol transaction we did, so multiple years ago we're starting to see the fruits of that coming through.

So we're starting to see more and more traction around other parts of this market data story, that are now starting to like I said, show up in the results incremental year-over-year. So again, it's the biggest growth actually came from that options group. But again, we saw positive numbers across each of the asset classes.

A – John Deters

Kyle this is John. Just on the point of the philosophy behind how we run our business on the options market data side. We think about that in terms of the revenue opportunity in and of itself, but almost as importantly the way those tools those data tools can support trading in our markets.

So, we focus on this reinforcing feedback loop. They're not separate businesses philosophically. And so we like to see the -- I like to see market data line increase. But ultimately that's a seed. We talk a lot about seeds in this call. That's a seed that's being planted for future volume.

Q – Kyle Voigt

Got it, thank you.

Operator

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

Q – Chris Allen

Morning guys, most of my questions have been asked and answered. I guess just a quick one. On the regulatory fees jumped up a bit this quarter. I wonder if there's any one timers there. Or is this a good run rate going forward?

A – Brian Schell

Yeah. The only thing I think that we have is, it would be the -- if there was a -- in the futures where there was I think the fine that we reported. But otherwise noise sometimes you get rate adjustments from checks they're on. So there's just going to be some noise. There is nothing there that I would say that we see a continuing trend or anything to model.

Q – Chris Allen

Got you.

Operator

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

Q – Alex Kramm

Oh! Hey! Hello again. Just on the VIX ETP side you had that slide in the growth and I think there was a question about this earlier. And I think you gave a lot of color around like VIX trading strategy.

You don't know what people are doing. But I think that discussion was a little bit more about sophisticated people using your options and your futures directly. So, just trying to see what is driving the VIX ETP interest again. I know it's difficult to see. But what are you hearing in the marketplace?

Is this retail coming back? Are there people asking -- I think people are asking for leverage products again. Like what's going on in the ETF space because historically that's been a big driver of growth I think?

A – Ed Tilly

It has. And with the CFTC the largest position in short VIX futures as a result of, the long positions in ETPs. And you got to sit back and scratch your head well how does that happen?

So retail yes engaging and taking long positions and whether it's VXX or levered TVIX the result is -- when you're taking the long positions in the ETP, someone's selling those long positions and looking to our VIX futures to hedge. And they're buying VIX futures.

There is a liquidity provider that has to sell those VIX futures. And that record short interest in VIX futures is as a result of the retail and the small investor taking long positions in ETPs.

Q – Alex Kramm

Okay. I guess the question is like are those all -- is this all retail? Are they semiprofessionals? I guess when you go to your Risk Management Conference are there a lot of people running around using the ETPs? Or is this is more a marketplace that you don't directly touch I guess is the question?

Like because, it seems like, in the -- in previous periods when retail got hurt by something like this was similar it goes away for quite some time. So just wondering if you're hearing seeing more retail coming back is the question really?

Ed Tilly

Yeah. But if we look at that by contract size, because we don't -- obviously as you know – Alex, you know us well enough. We don't have transparency into clearing and where are the ETPs and the interest clears. If we look at contract size, it's pretty balanced. The more sophisticated trader tends to use the roll-down effect of an ETP to their advantage, and offset the ETP exposure with pure-play into VIX futures options.

Retail, because it's so easy. It's easy to track parity with an ETP and options on those ETPs that tends to be more retail-friendly. But by size, it's pretty balanced on size. And the complex -- I think it's important to look at the entire complex. Our users look at the complex in its entirety. ETPs are just one extension to volatility exposure, but tends to be way more retail-friendly in general.

Alex Kramm

Okay. That’s helpful. Thank you.

Operator

Thank you. And the next question also is a follow-up from Richard Repetto with Sandler O'Neill.

Richard Repetto

Yeah. Hi, guys. Just a brief follow-up just on, I think an interesting area that you're looking at the retail, that's on slide 8. When you -- Chris you talked about. You're trying to give some execution priority to retail limit orders. And I guess the question is can you describe that? Or how are you doing that? Because, at least, I thought that you had to treat all classes of customers of the exchange level the same. I know, there's been some -- it's a fine line with the N.Y.C. has done things in the past to give. But could you explain how you've given retail a priority on EDGX?

Chris Isaacson

Yeah. Sure, Rich. So, this has some precedent in the options market where you have, let's call it customer priority, and customers or "retailer" or given priorities. So we're using that as precedent. And as you mentioned, there's been retail programs in the U.S. Equities market kind of, on the aggressive or marketable side to give priority to them. But, yeah, this is just us giving retail priority for retail orders or orders that are clearly from retail.

If they're at the same price level as other interests from market makers or non-retail customers, they would go to the front of the line and time priority for retail orders. So, it's very similar to what we see in multi-listed options. And that's just what we're planning to do. Of course, the SEC has to approve this, and it seemed that there may be a comment period. But, we've canvassed our customers, and by and large people are quite supportive of this retail and non-retail.

Richard Repetto

Is this the first of its kind priority in equities also straight equities?

Chris Isaacson

This would be the first one on the non-marketable side for resting limit orders. This is an idea that we frankly, Bryan Harkins, who runs that business, and us -- internally we've talked about for many years, and we feel like this is the right time to bring it to market.

Richard Repetto

Thank you.

Operator

Thank you. And as there are no more questions, I would like to return the floor to management for any closing comments.

Debbie Koopman

Thank you. That completes our call this morning. We appreciate your time and continued interest in our company.

Operator

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