CBOE Holdings, Inc. ( CBOE)

Analyst Day Call

October 5, 2011 10:00 ET


Debbie Koopman – Director of Investor Relations

Bill Brodsky – Chairman and Chief Executive Officer

Ed Tilly – Executive Vice Chairman

Dick DuFour – Executive Vice President

Ed Provost – Chief Executive, Vice President, Business Development

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

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

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


Rich Repetto – Sandler O'Neill

Niamh Alexander – KBW

Ken Worthington – JPMorgan

Jillian Miller –BMO Capital Markets

Mike Carrier – Deutsche Bank Securities

Chris Allen – Evercore

Roger Freeman – Barclays

Dan Harris – Goldman Sachs

Patrick O'Shaughnessy – Raymond James

Justin Schack – Rosenblatt Securities

Howard Chen – Credit Suisse


Debbie Koopman – Director of Investor Relations

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

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

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

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

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

I know that we all have them in our four years. Before we begin our presentation I do have to do minor housekeeping saying and read the safe harbor provision. You should be aware that this presentation contains forward looking statement, which represent our current judgment and what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risk, and uncertainty.

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

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

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

Bill Brodsky – Chairman and Chief Executive Officer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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