Cboe Global Markets Inc

F:C67

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, everyone, and welcome to the Cboe Global Markets Second Quarter 2021 Earnings Conference Call.

At this time for opening introductions, I would like to turn the call over to Debbie Koopman, Vice President of Investor Relations.

[Debbie Koopman, Vice President of Investor Relations]

Thanks, Pete. Good morning and thank you for joining us for our second quarter earnings conference call.

On the call today, Ed Tilly, our Chairman, President and CEO, will discuss our performance for the quarter and provide an update on our strategic initiatives. Then, Brian Schell, our Executive Vice President, CFO and Treasurer, will provide an overview of our financial results for the quarter as well as an update on our 2021 financial outlook. 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 want to welcome Ken Hill, who recently joined Cboe as the Vice President of Investor Relations. Ken will take the lead on IR effective August 1 as I support him and transition to retirement later this year.

I would like to point out that this presentation will include the use of 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.

During the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials.

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

[Edward Tilly, Chairman, President and Chief Executive Officer]

Thank you, Debbie. Good morning and thank you for joining us today. I hope that you are doing well and remaining safe and healthy. Our purpose is to operate a trusted, inclusive global marketplace supported by our guiding principles, which include active transparency.

It is in this spirit that we issued a press release this morning regarding spot volatility indices and I want to comment on that before I dive into the results for the quarter.

As outlined in the press release, we recently discovered instances where the spot VIX Index calculation differs from the calculation described in the VIX White Paper, which details the formulas used for deriving values related to VIX. Specifically, in certain instances, an index level was not produced at the applicable interval resulting in the dissemination of the prior index value. These instances relate only to the spot VIX Index, which is not a tradeable product. We believe the VIX tradable futures and options, as well as the NAV of products that track the daily closing prices, such as volatility ETP products, were not impacted. In addition, the calculation of the final settlement value for expiring VIX derivatives, which uses an independent process, was not impacted.

We are investigating the degree of impact and the number of instances with respect to which the redissemination occurred, but based on our initial assessment, we believe that in the vast majority of cases, the current VIX index calculation yielded the same result as provided in the VIX White Paper.

Now turning to slide 5. I am pleased to report on strong financial results for the second quarter of 2021 at Cboe Global Markets. We continued to deliver on our strategic growth plan, expanding on the foundation we laid over the last year as we build one of the world's largest global derivatives and securities trading networks. For the quarter, we reported year-over-year increases in both transaction and recurring non-transaction revenues, with net revenue up 18%, to over $350 million and adjusted EPS up 5%.

Our solid results were driven by continued growth in recurring non-transaction revenues, increased trading volumes, and engagement of institutional clients trading our index options and volatility products. We saw strong year-over-year growth in our proprietary products. ADV increased by 40% in VIX futures, 41% in VIX options and 8% in SPX options.

During the second quarter, we made excellent progress executing on the four key incremental growth drivers I outlined at the beginning of this year – the opportunity to grow recurring non-transaction revenue, the upcoming planned launch of Cboe Europe Derivatives, our expansion plans for BIDS Trading, and extending access to our products and services across geographies and market participants.

July 1, we also closed our acquisition of Chi-X Asia Pacific. We are very excited to further expand in this new region and I'll share more about our plans later in the call.

First, I'll touch on the solid growth of our recurring non-transaction revenue, powered by our Data and Access Solutions business. Similar to the first quarter, we exceeded our growth targets, achieving 21% growth during the second quarter. This increase included organic growth of 19% year-over-year, which was fueled by an equal contribution from both proprietary market data fees and access and capacity fees.

As a result of this continued strong performance, we are increasing our 2021 organic growth target for recurring non-transaction revenue to a range of 12% to 13% from a range of 10% to 11%.

The growth in non-transaction revenue was driven by new subscribers to Cboe's front-end platforms, such as Silexx, LiveVol Pro and TradeAlert, as well as demand for logical ports and market data, as customers look to gain global market access.

Our Data and Access Solutions business provides a suite of data analytics, market intelligence, and execution services, allowing us to interact with and add value for market participants at every step of the trade process.

Later this year, we plan to launch Cboe Global Data Cloud, which will provide cloud distribution for certain data products, creating a simple, efficient way for customers to access our data. Our goal is to optimize the efficiency and delivery of our data and access solutions to market participants across the globe. We believe the acquisition of Chi-X creates a tremendous opportunity for this business.

Turning to Europe, I'm pleased to report that we received regulatory approvals this month to launch Cboe Europe Derivatives and we are on track to go live with this new market on September 6th. We have key market participants ready to support the exchange from day one, including banks, clearing firms, market makers and proprietary trading firms, who will help contribute to the provision of liquidity and client order flow. I am incredibly proud of our team and their dedication over the last 18 months, working remotely from their homes, to develop this new market designed to address the diverse needs of our customers. We believe that market participants will find tremendous benefit in being able to access a truly pan-European, transparent, efficient, and lit derivatives market.

Our overall business in Europe was exceptionally strong in the second quarter and we expect the launch of Cboe Europe Derivatives to build on this momentum. As we've said before, we see a significant opportunity to grow the overall derivatives market in Europe. We are not aiming simply to take market share from incumbent exchanges. We intend to reshape and expand derivatives trading across Europe with a novel market structure designed to attract both new and existing participants. We're excited to get started doing just that in September.

Moving to BIDS Trading. Last month, we announced plans to launch Cboe LIS powered by BIDS in Canada in February 2022. Based on our highly successful offering in Europe, our Canadian LIS offering, which is subject to regulatory approval, will combine the industry-leading block trading capabilities from MATCHNow, the Canadian alternative trading system Cboe acquired last year, and BIDS to create an enhanced market center for block-sized liquidity. The launch of BIDS in Canada will be coupled with the planned migration of MATCHNow to Cboe technology, further extending our world-class trading platform.

BIDS has established itself as the premier block trading destination in the US and Europe and we are excited about our plans to expand the BIDS network to Canada and Asia Pacific, first into Australia and then Japan, to serve an even broader base of customers.

As we broaden our global footprint by entering new markets and launching new products and services, we further our goal of expanding access to a broader base of customers – both institutional and retail.

Last month, we announced a November 21st launch for our extended global trading hours for VIX and SPX options, as part of our 24-by-5 initiative, subject to regulatory review. The lengthened global trading hours will complement our entry into Asia Pacific with the Chi-X acquisition and are designed to help meet growing investor demand for the ability to manage risk more efficiently, react to global macroeconomic events as they happen and adjust SPX and VIX options positions around the clock.

We've seen steady growth this year in SPX options trading on retail broker platforms as retail engagement across the market continues. Monthly ADV in SPX options on retail platforms has increased more than 50% since the start of the year.

We've also continued to see strong growth in multi-listed options trading with ADV increasing 11% year-over-year in the second quarter. We see opportunity with the growing retail audience and remain committed to investing in education and product development to meet their unique needs. Product innovation remains a core focus of the Cboe franchise, and we continue to evaluate opportunities to expand our proprietary product offering with smaller contract sizes that appeal to both retail traders and institutional investors.

Enhancing and expanding our education offering from the Options Institute remains a top priority. Last quarter, the Options Institute hosted numerous webcasts and training sessions for market participants and also launched a new learning management system for retail and institutional investors looking to learn more about derivatives.

We are currently demoing this system with clients, and plan to make it available for on-demand online education later this year. Additionally, we've cultivated an expert team of derivatives specialists to serve as adjunct faculty instructors for the Options Institute and look forward to hosting classes beginning this fall. These distinguished practitioners specialize in derivatives products, operations and risk management, decision theory, and research and we look forward to engaging with and educating investors on the benefits derivatives can provide to their investment portfolios.

And last, we closed our acquisition of Chi-X at the beginning of July, enabling us to establish a significant presence in the Asia-Pacific region. This acquisition marks a pivotal moment in our corporate evolution. We are now a truly global market infrastructure provider, operating markets and delivering products and services around the world every day of the week and around the clock.

We plan to migrate Chi-X to Cboe technology over time and the team is busy working through the integration plan and timeline. Offering one, unified technology platform will help provide market participants with greater access to Cboe's diverse product set and more efficiency, resiliency and functionality when trading across Cboe's markets.

As we move forward, we see a significant opportunity to expand our ecosystem of market infrastructure and tradable products into one of the world's largest and most comprehensive global derivatives and securities networks.

We have proven ourselves as a nimble and efficient operator of securities markets around the globe. But more importantly, we see securities markets as the foundational element in creating products and services that span the equities and derivatives landscape. Our transactional expertise allows us to create, package and distribute a host of market data, analytics and index products.

Having recognized benchmark indices allows us to, in turn, develop additional tradable products and new markets for these products to trade, creating a virtuous circle of transaction and non-transaction product growth at Cboe.

You only have to look at the success of Cboe Europe, which started out as a small equity market and is now on the cusp of launching a pan-European derivatives market, to realize the power and potential of these relationships.

I'm extremely pleased with our performance this quarter and I want to thank all Cboe employees for their hard work and also welcome Chi-X to the Cboe family. We look forward to delivering enhanced value to our customers and our shareholders as we broaden our global network and access to Cboe's unique products and services.

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

[Brian Schell]

Thanks, Ed. And good morning, everyone. Let me remind everyone that unless specifically noted, my comments relate to 2Q 2021 as compared to 2Q 2020 and are based on our non-GAAP adjusted results.

As Ed just indicated, we reported strong financial results for the quarter, seeing solid contributions from our proprietary trading products as well as our data and access solutions.

Earnings in the second quarter increased on a year-over-year basis as we build a more balanced and diversified company. We remain steadfast in our efforts to become one of the world's largest global derivatives and securities networks, enhancing value to our customers as well as our shareholders.

Now, a quick review of the quarter. Our net revenue increased 18%, net transaction fees were up 19% and recurring non-transaction revenue was up 21%. Adjusted operating expenses increased 34%. Adjusted EBITDA of $234 million was up 11%. And finally, our adjusted diluted earnings per share was $1.38, up 5% compared to last year's quarterly results.

Turning to the key drivers by segment. Our press release and the appendix of our slide deck includes information detailing the key metrics for each of our business segments, so I'll just provide summary thoughts.

The revenue increase in our options segment, which accounted for a majority of our total net revenue growth, was driven by higher trading volumes in both our proprietary and multi-listed options.

Total options ADV was up 12% as we saw double-digit increases in both index and multi-listed options. Revenue per contract also moved higher by 5%, given positive mix shift to index products and a strong increase in our multi-listed options RPC, up 31%. And We continued to benefit from solid growth in recurring non-transaction revenue, particularly access and capacity fees, in this segment.

North American equities revenue decreased 2% year-over-year as industry equity volumes in the US declined by 15% and Cboe's market share trended lower, primarily reflecting incremental share going off exchange. While our overall market share has trended lower, our continuous trading market share has held up relatively well and we are optimistic about the many innovations we have introduced, and plan to introduce, to the market, including retail priority, Quote Depletion Protection, earlier trading hours and periodic options. The volume declines in 2Q were partially offset by a $10 million contribution from BIDS and MATCHNow for the quarter. Lastly, recurring non-transaction revenue increased by more than $4 million or 15%, with organic growth of 14%.

Second quarter revenue increased in futures by 31% on the back of a 49% increase in ADV. The revenue increase in Europe primarily reflects the addition of EuroCCP, which contributed $11.7 million during the quarter and the impact of favorable foreign currency translation.

Underlying trends are strong in the business as average daily notional value traded on Cboe European Equities was up 16%, outpacing the broader market's 5% increase. Net capture also rose 7% during the quarter. And finally, the 1% net revenue growth in FX was a result of slightly higher trading activity.

Turning to expenses, total adjusted operating expenses were approximately $128 million for the quarter, up 34% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 16% or $16 million for the quarter. Most of the expense variance related to the acquisitions was compensation and benefits.

Cboe's recurring non-transaction revenue momentum accelerated in the second quarter with year-over-year organic growth reaching 19%. Again, this strong growth was largely a product of additional subscriptions and units as opposed to price increases. More specifically we are seeing both physical and logical port usage has accelerated in our equities and options businesses, driven by increased demand for trading capacity.

On the market data side, we have seen equities also perform well as the strength of Cboe One and top-of-book products have driven market data growth, both domestically and internationally.

We are excited to build on our strong organic growth trends with the addition of Chi-X and its revenue base that is approximately two-thirds recurring in nature. We are increasing our organic growth outlook by 2 percentage points to 12% to 13%. As we factor in the Chi-X contribution, our total non-transaction revenue growth is now expected to reach 15% to 16% for 2021, up 4 percentage points versus our prior expectation.

Overall, our recurring non-transaction businesses remain a critical component of the Cboe growth story and one that we expect to continue to accelerate and diversify our revenue stream over time.

Moving to our expense guidance, we are reaffirming our full year range of $531 million to $539 million. Importantly, our unchanged guidance range now includes the full impact of Chi-X, an incremental $13 million, which is expected to be completely offset by expense reductions related to COVID-19 in 2020 that have continued into 2021 longer than we initially expected, a reduction in facilities overlap given our ability to expand space in one of our existing locations, and lower compensation expenses due to hiring at a slower pace than we initially expected within both our core operating expenses as well as some of our strategic growth initiatives.

Note that we expect the incremental Chi-X expenses to be more than offset by its incremental revenues. We expect our expense spend to increase sequentially in 3Q and 4Q, and we expect to see positive returns from the investments we are making. Specifically, our investments reflect our plan to increase access to our existing products and services, especially growth in our index options and futures by developing, listing, and distributing unique products, enhancing our marketing, education, and content, and increasing our efforts to tap into the growing base of retail investors.

Turning now to a summary of full-year guidance on the next slide. We are lowering our guidance for depreciation and amortization to $34 million to $38 million from $38 million to $42 million. Our CapEx guidance range moves $5 million lower to $55 million to $60 million, and while our effective tax rate for the second quarter was 30.1%, above last year's rate of 26.7% and above our guided range of 27.5% to 29.5%, we are reaffirming the guidance for the full year under the current tax laws. However, we now expect the adjusted effective tax rate for the full year to be at the higher end of the guidance range given where we are in 2021 through June.

While we are not providing full year guidance on interest expense, we note that we drew an additional $110 million on our term loan credit agreement at the end of the second quarter to fund a portion of the Chi-X deal. Going forward, absent any additional borrowing and significant changes to LIBOR, our interest expense for the third quarter of 2021 is expected to be $11.5 million to $12 million, slightly below our second quarter expense of $12.3 million, reflecting more favorable rates associated with amendments to our term loan facility and EuroCCP credit facility that were effective late June and early July, respectively.

In addition to the investment priorities we outlined earlier in the call, we remain committed to returning excess cash to shareholders through dividends and share repurchases.

From a capital return perspective, our strong cash flow generation enabled us to return $79 million to shareholders through dividends and share repurchases in the second quarter. We plan to continue to use our share repurchase capacity opportunistically.

Our leverage ratio increased slightly versus the prior quarter to 1.5 times at June 30 as a result of the additional term loan financing used to partially fund the Chi-X acquisition.

Overall, our balance sheet remains unencumbered as we look to put incremental capital to use in the most value enhancing way possible for shareholders.

In summary, we are pleased to report solid 2Q results. We are even more excited about the momentum we are carrying into the remainder of this year with an increase in guidance for our non-transaction revenue growth rate, overall, and importantly organic, and our unchanged expense guidance range despite the addition of Chi-X expenses. We believe we have made, and expect to continue to make, investments that are set to deliver growth and increased value to our shareholders.

Now, I'd like to turn it back over to Ed for some closing comments before we open it up to Q&A.

[Edward Tilly, Chairman, President and Chief Executive Officer]

Thanks, Brian. Before we turn to Q&A, I wanted to quickly highlight a couple of important corporate developments. As we accelerate our growth and operations on a global scale, we remain focused on our environmental footprint, social responsibilities, and opportunities to make a difference in the communities in which we live and work.

To that end, last month, we announced a new community engagement program, Cboe Empowers. This program provides mentorship, scholarships, and guidance to under-resourced students through their educational journey from elementary school to career.

Cboe Empowers is our most ambitious philanthropic endeavor to date. We couldn't be more excited to help equip the next generation with opportunity to realize the career choices available to them as they embark on building their future.

Additional information about this exciting program, as well as some of the other important initiatives we are focused on regarding environmental, social and corporate governance, is included in our recently-published ESG report. We are committed to doing our part to help ensure we are tackling the important challenges our global community is facing today and in the future.

I'd also like to take a minute to express my immense gratitude to Debbie Koopman for her service to Cboe as she will be retiring in November. During her 13 years with us, she has built Cboe's investor relations program from the ground up, played a major role in our transition to a public company through our successful IPO in 2010, and has been pivotal in the execution of our acquisition strategy. She has helped shape and communicate Cboe's vision and mission to the investment community, developing strong relationships with our shareholders, potential investors and research analysts. I have always appreciated her sharp wit, tough questions, friendship and indelible laugh and will miss working with her.

We are thrilled to have Ken Hill succeeding Debbie as Vice President of Investor Relations. He joined us last month and is working closely with Debbie to ensure a smooth transition. His experience and expertise in capital markets make him a perfect fit for this role. We wish Debbie all the best in her retirement.

I'll now pass it back to Debbie for instructions on the Q&A portion of the call.

[Debbie Koopman, Vice President of Investor Relations]

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

[Operator]

[Operator Instructions]. And this morning's first question comes from Rich Repetto with Piper Sandler.

[Richard Repetto, Piper Sandler]

I've got to extend my appreciation and thanks to Debbie. You've had a heck of a run. Let me tell you. And it goes all the way back beyond the CBOE to the CBOT as well. But thank you for all the help you've given the investment community. She said this is the last call. She go, you better ask about growth. So, I will ask about growth.

On the organic growth going up by 200 basis points and then the non-transactional recurring going up by about 400 basis points, so is it roughly the explanation here 2% organic lift and then 2% from Chi-X on the recurring side?

And then, just a little bit more deeper color on it? It seems like Cathy Clay and your reorganization is benefiting you. And then, on the Chi-X side, can you go through once again why that is so high percentage of non-transactional recurring revenue?

[Edward Tilly, Chairman, President and Chief Executive Officer]

Thanks for the call out to Debbie. You're right. She's been an anchor for us long before the IPL. So, thank you for calling that out.

As for growth, couldn't be more excited to share with you a little bit more color there. And, yes, Cathy's business is really set up nicely for us. The timing is perfect. We definitely have the right leader there. But, Brian, why don't you take it over?

[Brian Schell]

We do love this question, Rich. So, I'll just kind of reiterate a couple of things. One, on the access capacity, we've kind of seen that strength all year long. Again, reflecting, like I said, accelerated demand for basically overall capacity to access our markets, again, showing the quality and depth in what we're doing there. And again, that is across the board. That is options, equities, Europe. Actually, the strongest on a pure growth rate is European equities. From an overall contribution, it's still coming from the options business as well as North American equities.

On the market data side, I would say a couple of things I want to hit there as well, is that I hinted that that growth is actually coming also internationally and domestically. If we look at just the market data growth, we're seeing that most of that – not most of it, but the majority of it, I'll say, more than 50% is actually coming internationally. So, we're still seeing really good strength there as far as what's happening.

And then, I would say from the incremental guidance that we're seeing is, we look at our pipeline, we have assumptions around attrition, that may or may not happen. I will tell you, what we're seeing is, the things that we've been doing, the continuous enhancements that the team is making, we've seen a decline in the attrition rate. So, we're actually seeing, I'll say, better results than we had actually originally forecasted. So, the attrition rate is actually down from what we've experienced in the past. So, we're seeing it be even stickier than it was in the past. So, that's driving a lot of the, I'll call it, incremental guide on the growth rate in the non-transaction revenue on the tracks.

On the Chi-X, yes, that is a bit of a – kind of a little bit more uniqueness to the market structure, say, of Australia and Japan, particularly Australia. If you look at the overall mix, it's roughly a 50/50 between market data and access and capacity fees, a little bit more leaning towards market data. And it's more weighted as a higher percentage of the overall mix within Australia.

[Operator]

The next question comes from Alex Kramm with UBS.

[Alex Kramm, UBS]

Not to ask the same question again on Chi-X, but I know you've given some revenue numbers, specifically in the past, that you said it's a fast growing business. So, can you just update us on current run rates? And then also, maybe a little bit more specifically, in terms of where this is all going to fall from a modeling perspective? Is this going to be a new segment or where it's going to go? Sorry, if you've provided that before.

And then, just sorry for the longwinded question here. Can you maybe expand on the immediate plans here for the business in terms of regional expansion or where you think you can make the most impact quickly in terms of enhancing technology or order types? What's really the plan of attack in the next 6, 12 18 months?

[Edward Tilly, Chairman, President and Chief Executive Officer]

Let's go on reverse. Chris, you want to start off with the plan, I think what you and Dave have outlined. So, let's give a little bit more clarity there. Brian, you can fill in that on the first part of the question. So, let's start in reverse if that's okay, Alex, and I appreciate it.

[Chris Isaacson]

In the integration plan, as we do normally with integrations, we do plan to migrate to our technology. We plan to first bring bids to the region first in Australia, then in Japan. We haven't put out specific dates, but we're moving swiftly now that we have the transaction closed and working with our new colleagues there.

And then, we would migrate likely first Australia and then Japan to Cboe technologies, the same platform we use to run all of our equity options and futures market. So, we're moving very quickly. We'll have more firm dates in the coming months. But really pleased with the initial work with our colleagues. They're very excited about the growth opportunities in Asia, both for those existing equity markets, but also the access and distribution it gives us for our other products around the world.

[Edward Tilly, Chairman, President and Chief Executive Officer]

Chris, why don't you pick up then also on the effort at the end of fourth quarter, end of the year on 24/5, as you say, with existing products and our bigger presence in the region?

[Chris Isaacson]

As Ed mentioned in his opening remarks, so November 21, we plan to extend trading hours to nearly 24/5 for SPX and VIX options on our Cboe options market. That will better align with our CFE futures or VIX futures that are already trading 24/5. This is in direct response to customer demand. They want to trade these options products around the clock. And so, we want to provide them that access. We're adding a curb session here in September. It will be right after the market closes US time. And then, full or nearly 24/5 coming in November. So, really excited about that and being able to distribute those to our APAC customers, as well as those in other regions that may want to trade during those hours.

[Brian Schell]

Alex, on the growth rate, I think we've historically said that we've seen some of the growth rates in the kind of the 20% ranges and where we are. We see that momentum continuing, whether that's kind of low-20s, mid-teens, as far as we kind of looking forward. And we see that business continuing to grow. We haven't seen the slowdown from, call it, when we started talking with them to where we are today.

John, I don't know if you have incremental color as well.

[John Deters]

This is John. To Rich's prior question as well, a question of why non-transaction revenues are substantial in this business, when we diligenced the business, it was one of the really interesting things we found about the platforms of the two countries. They're highly connected. They're indispensable platforms in both countries. And as a result, you see reflected, people really needing to take that access, take the data from both platforms.

Where you can grow from there, to your question, Alex, we were in – relative to the size of the Chi-X businesses, we see a market opportunity, just looking at the incumbents of 20 times the size of the revenues of these businesses, and our aspiration is always to grow the pie, just like we talk about for European derivatives. It's not just to take share from the incumbent. So, we think it's pretty clear case where we can take the business from its position today.

[Operator]

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

[Alexander Blostein, Goldman Sachs]

I was hoping you could expand a little bit more on this increased subscription and incremental units dynamic for non-transaction revenues you described earlier. So, Brian, sounds like increased demand for access fees really kind of across the board, across all your markets. How much of that is coming from sort of existing customers versus new customers. If it is more of a bit of a new dynamic, it would be helpful if you can sort of characterize who they are.

And then, I guess, just secondly, given tremendous amount of volume growth in both equities and options over the last 12 months, how much of that do you guys think could be cyclical versus secular?

[Brian Schell]

I don't have the, I'll call it, exact numbers you're looking for. I want to kind of talk high level trends of what we're seeing. And it's going to be primarily – you're going to have some new, but the bulk of that you're going to see the existing and you're going to see a reflection of two things. One is – and some of this has to do with some of the offerings we're also providing. I think it's a little bit of macro. And obviously, we're seeing higher volumes. So, they're going to be pulling in, they want more access, they want more capacity. So, you're definitely seeing some influence from macro. And we won't be able to say, hey, it's coming from X percent from macro and increased volumes versus – as they continue to figure out what their incremental analytics and what they're doing internally and adding incremental ports. So, we're seeing both. And I think we're helping facilitate that with some of our pre trade, at trade, post trade analytics and services and what we're doing with them. So, we're seeing a combination of both.

So, to go back to that, I would say the primary growth driver is the existing. We're still seeing some new, but, again, I would say, it's all of the three. I wish I had one particular thing I could point at. It certainly would make it easier. But I think it makes a really nice mix of diversity as we roll forward as we try and touch several levers to keep it moving forward on the momentum.

[Operator]

The next question comes from Owen Lau with Oppenheimer.

[Owen Lau, Oppenheimer]

Could you please give us an update of your product roadmap of Cboe, your derivatives after it goes live? Which products you feel very strong about, given your initial conversation with clients? And how should investors expect the pace of your product launch?

[Edward Tilly, Chairman, President and Chief Executive Officer]

We are on time. Right? As I've said in the prepared remarks, regulatory review and approvals are coming along nicely. We're operational ready. So, starting with the six indices that we laid out over the last couple of quarters is how we're starting. And from there, we'll be looking to expand with more country-specific exposure.

But I think the model is what I'd like to draw your attention to. If you remember, being able to express interest across Europe, in one CCP, it's really the capital efficiencies that we've been chasing, it's the efficiency of a lit, accessible market, the US model, if you will, for posting liquidity, rewarding liquidity providers who are posting that liquidity with the ability to trade, to be able to cross bid ask. So, it really is the benefit from customers looking at a screen and seeing an accessible market, market makers rewarded for the liquidity that they post from the open to the close, and then the efficiency of having one CCP where cross European exposure can be most optimally cleared.

So, again, not a market share play. This is really expanding what we think is the opportunity for pure growth and being able to express an opinion in an individual country and pan-European risk.

Chris, anything to add?

[Chris Isaacson]

I think you nailed it. We are just super excited about this, Owen. We realize it's a long-term investment. We've said it for many quarters now. So, we recognize the build will be somewhat slow in 2021. That's why we haven't projected massive revenues in 2021. But this is the start of what we think is a long-term growth play for us under the leadership of Dave Howson and team in Europe.

We've had good demand across the ecosystem, good readiness. We're right on schedule. And starting with those indices first, six indices first, and then eventually and more country-specific, more single stock options as well, and futures. So, we have a long-term growth path here that our customers are wanting again.

Just like 24/5, this is a customer driven effort. We have customers saying we want this exposure in a better market structure than we have today.

[Operator]

Our next question comes from Brian Bedell with Deutsche Bank.

[Brian Bedell, Deutsche Bank]

Maybe back on to recurring revenue. The updated guidance for the second half of 2021, I guess, either Brian or Chris, is that based on the current subscription value that you have in the ground right now and what Chi-X Asia has right now? Or are there increasing – more penetration of data, especially with the Chi-X business factored into that guidance. And then, as we look into 2022, it's probably early, but given that opportunity, you mentioned the incumbents are 20 times the size of Chi-X Japan – in Japan and Australia and other opportunities, can you just talk about maybe the confidence of potentially also being able to generate double-digit recurring revenue growth on an organic basis, not including acquisitions in 2022?

[Chris Isaacson]

Brian, you want to start?

[Brian Schell]

Yeah, I'll try to unpack that. As far as the non-transaction revenue growth, we will – in that growth expectation is, we tend to be conservative, as you know. And while there is a pipeline, we have some visibility. We do have some assumptions around it. It's primarily going to reflect, I'll call it, a growth rate of kind of where we are today and what we see and relative to our growth last year as well, right? So, you've seen consecutive quarters of this category continuing to grow. So, we're continuously running against higher and higher comps prior year. But I would say the short answer is, it primarily reflects what we see today, trying to factor in, as I mentioned earlier, to Rich's original question about kind of what are we seeing some of the growth and changing that is the lower attrition rates. And like I said, some slightly stronger pipeline with some percentage of success rates over time. And again, sometimes it's hard to predict when those [indiscernible], but that's somewhat factored in.

I think on the Chi-X side, I'm going to let John talk a little bit about that as far as the growth and how we're seeing that relative to the incumbents, and again, a little bit more than – a little bit more color.

[John Deters]

Brian, the growth rate, historically, for Chi-X has been double-digits both on the transaction side and the data and access side. But you'll recall, when we framed the strategic benefits of the deal on announcement, we talked about really three levels intrinsic to the opportunity. There's the transaction growth opportunity, and that's about market share. We've done that before in other markets. We look to do that in these two. Two, it's about data distribution.

And this opportunity really is a two-way opportunity. So, as Chris mentioned, and Brian touched on, being able to distribute our existing data properties into the Asia-Pacific theater, where we really probably had single-digit representatives in the past and now we've got full teams and platforms, that's a game changer. And going the other direction, being able to distribute data from those markets into our existing markets where we've got significant presence.

And then, finally, the third level is on bids and connectivity with bids. And this will drive both of those. It'll drive transaction volume and it will drive the data opportunity in Australia and Japan.

[Chris Isaacson]

Brian, I just had more thing on data real quick. It's just – think about, we're adding to the different data sets we're able to offer with the transactions from last year, and also more broad data sets from our markets. So, the what is increasing; the where, we're increasing; where, we're distributing that existing data around the globe, as Brian mentioned, getting a lot of growth outside the US, for instance. And then, the how. Ed mentioned in his remarks around Cboe Global Cloud, the way in which we're distributing that data is also increasing. So, that's what we think this is. This is a secular growth path for us. And we're quite excited about it.

[Operator]

Our next question comes from Kyle Voigt with KBW.

[Kyle Voigt, Keefe, Bruyette & Woods]

So, you've done several bolt-on type acquisitions over the past 18 months. Just curious, are you seeking out deals specifically in that smaller size range? And I'm just trying to get a better sense. Looking ahead, if there's a strong preference for bolt-on size transactions or whether you'd be open to larger type acquisitions, whether scale or more transformational as well?

[Edward Tilly, Chairman, President and Chief Executive Officer]

The answer has to be yes. We're not afraid to look at a larger deal. We don't have the need. That's not something that we wake up and say we have to go do. But I think more importantly is the type of transaction that we would look at. And if you can put size to the side for a moment, it's really in our core. We believe we've done a pretty good job in M&A with filling out the suite of products and services that help our customers pre, at and post trade. We like that. And we're in a full integration mode. But we look at the asset classes and geographies that we think we have an advantage to compete.

If a country or region is open for competition, we want to look how to get in and compete in a way that we operate, so that our customers, when they see Cboe, they see an asset class that Cboe is involved in that there is trust, there's knowledge, there's reliability, there's consistency.

So, we'll look across the globe. And if a region is competitive and open for competition, we want to take a good hard look. We're also interested in scale. So, in the regions that we operate today, we'll continue to look for opportunities to expand our presence. So, I hope that gives you a sense of how we view M&A.

John, feel free to jump in.

[John Deters]

I think, to Ed's point, the smaller scale acquisitions really are something we think of as an extension of our organic capabilities. With all humility, we think we're quite good at it from an integration standpoint. Chris mentioned the team's focus and planning around every opportunity. It really drives the organic growth opportunity for us.

And consider this. Just Chi-X alone, relative to the scale of capital that had to be deployed to acquire that business, the returns that you will garner on an aggregate basis with these types of transactions are really, really meaningful. So, again, it's not to say that we favor one versus the other, small versus scale. But small can have a really useful role to play in our organic growth plans.

[Operator]

And the next question comes from Michael Cyprys with Morgan Stanley.

[Michael Cyprys, Morgan Stanley]

I wanted to ask about market data. You guys have made a number of acquisitions here, maybe you could just update us on your sales strategy on the market data front. How your sales teams are organized? How are you bringing them together? Or to what extent do you operate them separately? And if you could just talk a bit about how you're using the sales teams to accelerate growth.

[Edward Tilly, Chairman, President and Chief Executive Officer]

I'll tee it up and Brian will give you a little bit more detail about how you should be viewing it and where you can find it. I think, importantly, last quarter, we did announce that Cathy Clay will be leading up a new division here with data and access services and solutions, which is very, very important to us. But, Brian, I think how to track that, model that, just a little guidance there would be helpful.

[Brian Schell]

I think there's two things that I would say – I think we'd say incremental momentum here with what Ed mentioned as far as with Cathy and pulling this together, one, is what we're doing on the more analytic side and the computational versus the real time. And that's bringing a renewed focus, bringing it all together, and making it more digestible and easier, and meeting outside customer demand for that. And so, that's really helping to accelerate that and enabling, I'll call it, the sales force. And I'll say that word very broadly, to be able to patch that offering in a more integrated way. Again, more work to be done there. But we're working towards that.

I would say that, more broadly, though, what is missed, and sometimes oversold, but we're not going to oversell here, is that there is a cross sell effort across the asset classes that's really, really important. We're seeing – continue to see incremental growth coming out of our equities business. And it's not just the market data sales team. It's the team that's actually focused on growing the transaction business, is continuing to talk to the clients about the quality of market data, the different offerings, the depth of book, top of book, whatever might meet those needs from a cost standpoint. So, that cross sell effort across all the asset classes, Europe, Asia, with respect to options, the team has been able to do that. So, it's not just a market data sales team. It's actually the broader sales team across all the businesses, even like I said, those folks in the transaction businesses. So, that rallying, we're seeing a lot more momentum really starting to take hold. And, frankly, we want to incent that behavior. And we do, so that, again, we all grow on a top line basis.

[Edward Tilly, Chairman, President and Chief Executive Officer]

I think importantly, what Brian is hinting to, the combined sales effort of real time and enhanced market data with FT, TradeAlert and the analytics that Hanweck provides, it really is an incredibly powerful, expandable and portable platform at relationship. So, just the beginning stages, as I said. We just started pulling this up a quarter ago. So, keep watching this one. We're excited about it.

[Operator]

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

[Alex Kramm, UBS]

Actually, two quick follow-ups. One, and sorry if you mentioned this, but on slide 12, when you talk about the non-transaction revenues, I noticed that the proprietary market data subscription, that chart on the bottom right, the percentage of subscriptions in incremental units has declined over the last two quarters. So, am I reading this right as saying, you've been able to take a little bit more pricing? And if so, can you just discuss where you think you've had incremental pricing power or if there's still a lot of upside from pricing, if the environment and pushback has changed? So, just an update on pricing. Sorry, if I missed it earlier.

And then, just one very quick one. On one of your summary chart slides, you had a bullet on positive tractions and corporate bond index futures on the futures business. You didn't speak to it. So just curious if there's anything real going on. Quite frankly, we haven't heard about that opportunity in a while.

[Brian Schell]

I'll take, Alex, on the pricing. I'm happy to talk a little bit about that. It was, I'll call – it was introduction of some pricing. And so, it wasn't really a strategy shift as an explicit, hey, we're going to try and get some more capture. So, it was a little bit more normalization. So, it was in the equity side of the business. And it was kind of a little bit of new pricing. So, it wasn't anything that you push back. Honestly, it was pretty minor, given the overall mix. It showed up because so much had been – there really hadn't been much pricing action that had been going on, which is why it kind of had a little bit of that blip. So, it really isn't a change in strategy as far as – what we expect to see in the near term.

On the futures, thanks for highlighting that. That's been a really strong growth story. If we look at the [indiscernible], we haven't made a large headline out of that yet, although we're incredibly proud of the success and where we are, though.

As you look at the overall numbers, relative to the rest of the scale the business, it's not a huge revenue producer yet. But as we know, you have to start from somewhere. So, we've seen a – just if you look at the whole iBoxx complex, we've seen a 90% growth rate or more from where we were before. And we've seen growth not only from last year, but also from the first quarter of, call it, 20% range across that complex. So, it's really nice momentum that we continue to see that that continues to build.

[Edward Tilly, Chairman, President and Chief Executive Officer]

Alex, great question. You're not the only one. So, this is how things start, right? Volume, this kind of growth starts to get the attention. What we're really looking for and where the demand is is in large blocks. And we need to satisfy that. The inbound and the interest, especially in this market, and you can see the growth in high yield, in particular, really looking for block trade size and solving that is what we'll be talking about in the quarters to come. So, thank you for calling that out.

[Operator]

And the next question also is a follow-up from Brian Bedell with Deutsche Bank.

[Brian Bedell, Deutsche Bank]

Just wanted to ask about market structure – US equity, cash equities market structure. Just maybe your viewpoint on the issue of getting more volume on the lit exchanges that's been mentioned. Whether you think allowing exchanges to [indiscernible] penny price, it's something that would be realistic and helpful for that issuer to reduce the tariff on. And then, any update on the view on market data in terms of regulatory structure on that.

[Edward Tilly, Chairman, President and Chief Executive Officer]

Let me kick it off. Yeah, we do believe any – we think the SEC is looking at the right approach. The chair has called out his desire to look at the review. What role do lit markets play in price formation? Of course, from our perspective, any movement, any discussion that allows for more competition, more price discovery, equal playing field as far as regulatory review oversight, we're all for it. So, just in general, these are really, really healthy discussions. And we're primed and ready to participate in the debate.

I think, Chris, from your perspective, another couple of comments on what we think are the low hanging fruit as far as trading increments, transparency would be great.

[Chris Isaacson]

Brian, good question. We think now's a good time for the commission to be looking at this under Chair Gensler who's we think focused on the right things, which is better outcomes for investors. We think the market is operating quite well today. But there can be some changes that would even improve the environment. And changes of tick sizes or finer tick sizes on exchange that would match what is allowed to be done off exchange could help level the playing field. Everyone has been watching the growth of off-exchange volume that's – Brian mentioned in his remarks, that's hard to ignore. And so, we are for displayed quotes and markets and transparent markets. And we think tick size reform could help in that effort.

And then greater disclosure and transparency, as always, around best execution. So, no dramatic reforms we're pushing for, but we think it's time to review tick sizes for sure.

[Brian Bedell, Deutsche Bank]

Any update on the market data issues as well?

[Chris Isaacson]

Nothing material to update on market data. We continue to track it closely. But we frankly welcome the focus on what we think are important issues for the retail investors.

[Operator]

Thank you. That concludes the question-and-answer session. I would like to return the floor to Debbie Koopman for any closing comments.

[Debbie Koopman, Vice President of Investor Relations]

Thanks, Keith. Appreciate it. That concludes the call. But before we end, I just wanted to take a minute to thank everybody for your kind words. It's been extremely gratifying working with all of you over the years. I was going to say more, but I don't know I'm going to be able to. But anyway, it's been great. I appreciate your friendship and working with all of you. And it's a great opportunity to be part of the Cboe team. And I look forward – I'll miss everybody. But I do look forward to my new role I'm going to get in retirement, and that, in December, I'm going to be a grandma. So, that will be my new title going forward.

[Edward Tilly, Chairman, President and Chief Executive Officer]

Thank you, Debbie.

[Operator]

Thank you. Thank you. And that does conclude today's teleconference. Thank you so much for attending today's presentation. You may now disconnect your lines.