Cboe Global Markets Inc

F:C67

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone, and welcome to the Cboe Global Markets Fourth Quarter 2021 Earnings Conference Call. As a reminder, this call is being recorded.

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

[Ken Hill, Investor Relations]

Good morning. Thank you for joining us for our fourth 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 for 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 2022 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer; and John Deters, our Chief Strategy Officer.

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

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

Thank you, Ken. Good morning, and thanks for joining us today. I hope the year is off to a good start for all of you, and I hope the year ahead sees us turning the page in this global pandemic.

I'm pleased to report on a strong fourth quarter and record full year results for Cboe Global Markets. For the year, we grew net revenue 18% to a record $1.5 billion and adjusted diluted EPS grew by 15%. For the quarter, we reported revenue growth across each of our business segments, reflecting strong year-over-year increases in both transaction and recurring non-transaction revenues.

Our results were driven by higher volumes across our businesses, coupled with increased demand from our suite of data and access solutions. In our proprietary products, ADV increased by 50% in VIX futures, 10% in VIX options and 47% in SPX options. We also continue to see strong growth in multi-listed options trading with ADV up 21% year-over-year in the fourth quarter.

During the quarter, we also announced key planned acquisitions designed to strategically expand our global network, including ARRIS X, which is expected to provide Cboe with spot trading, data, derivatives and clearing capabilities for digital assets through its regulated futures exchange and clearinghouse and Neo Exchange, which is expected to provide us with a significant presence in the Canadian equities market.

We also invested as a limited partner in Trading Technologies, a global provider of professional trading software, connectivity and data solutions. The ARRIS X and Neo deals, which I'll touch on or detail later and are subject to regulatory review and other customary closing conditions, are expected to further expand our ecosystem of market infrastructure and tradable products as we continue to build out 1 of the world's largest and most comprehensive derivatives and securities networks.

Turning to our targets and expectations for this year. Similar to last year, we plan to leverage new and recent acquisitions to fuel future investment opportunities across our business in 2022. Our recent expansion into Asia Pacific, Canada and our planned reentry into digital assets further expands our global ecosystem, providing Cboe the ability to drive growth as we innovate, integrate and grow.

To highlight a few recent examples. Last week, we reached 2 important milestones for these recent acquisitions. In Canada, we completed our year-long effort to migrate the technology platform of MATCHNow, the largest equities alternative system in Canada to Cboe technology. We also launched Cboe BIDS Canada, bringing BIDS leading block trading capabilities to the Canadian market. We were very pleased and grateful for the strong engagement and widespread support from customers, vendors, regulators and other market participants throughout the migration process.

In Asia Pacific, we rebranded the Chi-X businesses to Cboe Australia and Cboe Japan and announced our planned technology migration road map for Cboe Australia, anticipating a February 27, 2023, migration of exchange to Cboe technology pending regulatory review and approval. Brian will do a deeper dive in prepared remarks, but we plan to invest an incremental $23 million to $26 million of organic growth initiatives tied to revenue in 2022. Initiatives we expect to contribute to our top line and annual organic revenue growth target of 5% to 7% over the medium term.

Our results from this year reaffirm our view that further investment in our business can help us deliver value for shareholders.

Key to the long-term success of Cboe will be the ability to execute on the transformational opportunities we see in 3 core areas of our business: data and access solutions, derivatives and Cboe Digital. We will fuel these opportunities by executing against our ongoing strategy, which remains consistent, leverage our superior technology, further strengthen our core proprietary products, increase recurring revenue and expand our product line by geography and asset class.

Let me begin with data and access solutions, where we continue to see strong momentum resulting in a 21% increase in our recurring non-transaction revenue for the quarter. This growth was driven by continued demand for access to our exchanges, proprietary market data and new subscribers to Cboe's front-end platforms.

During the quarter, we were excited to launch Cboe Global Cloud, a cloud-based market data streaming service that aims to optimize the efficiency and delivery of Cboe's data services for market participants globally. The launch of Cboe Global Cloud is an excellent example of utilizing technology solutions to increase access for new and existing data products to new customers around the world.

Prospective customers may not have access to one of our data centers, but they have an Internet connection and can now benefit from our truly unique data set that is unrivaled amongst exchanges. This year, G&A will be able to realize the full value of our global expansion efforts as we were able to add new data sets and penetrate new markets with our products and services.

We are also focused on growing our index and analytics platforms and services and have made key hires that we believe can help fuel sales of this business.

Data and Access Solutions posted a very strong fourth quarter to cap an excellent 2021, and we believe the business is positioned incredibly well moving forward. We anticipate Data and Access Solutions organic revenues will grow at a 7% to 10% rate in 2022, consistent with our medium-term guidance provided at Investor Day in November.

It was an exciting quarter for our derivatives businesses, and we continue to expand access to our products and services globally through new initiatives, including the successful launch of 24/5 training for SPX and fix options, scaling of our new European derivatives business and the continued engagement of retail customers in the options market. Additionally, while we're only 5 weeks into the new year, we are seeing strong volumes across our proprietary products franchise. In January, month over-quarter volume increased 31% in VIX futures, 24% in VIX options and 17% in SPX options. We have seen a strong start to 24/5 trading since launching in late November, validating our belief that global customers want access to tools like our proprietary products around the clock.

In January, average daily volume in SPX options during global trading hours was nearly 24,000 contracts, up from an ADV of approximately 11,000 contracts prior to the launch of 24/5. We are also seeing positive impact from VIX options as a result of the 24/5 trading initiative, and we look forward to continuing to expand access to our suite of proprietary products to new and existing customers.

In that vein, earlier this week, we were excited to announce a planned March 14 launch date for Nanos' pending regulatory approval. Nanos' is a first-of-its-kind options contract designed to make trading more accessible for the retail trader. We are excited to have a number of retail brokers offering the product on day one, including interactive brokers, TradeStation, Trader and Lebel, who recently added SPX and VIX options to their suite of products.

As the retail market continues to grow, we remain committed to investing in education and product development to meet their unique needs. In tandem with Nanos' launch, the Options Institute will unveil new curriculum customized for retail audience. We expect this market to continue to grow over time, and we look forward to welcoming a new generation of options traders with the launch of Nanos.

As we expand access to new customers around the world, we have an opportunity to integrate them into the Cboe ecosystem across many touch points via access to new asset classes, products and services. This week, we also announced plans to expand SPX Weekly options with the addition of Tuesday and Thursday expirations pending regulatory approval. With these planned new listings, Cboe will offer SPX Weekly options that expire each and every trading day, providing traders with additional tools to manage their short-term U.S. equity market exposure and execute trading strategies with even greater frequency, precision and flexibility.

We have seen increasing levels of interest and adoption for short-dated option strategies through our Monday, Wednesday and Friday weekly exploration contracts, driving trading volume growth in the AsetXcomplex in recent years. We see the launch of Tuesday, Thursday expiries as a way to build on the success of existing weeklies and look forward to bringing these to the market.

On the retail front, we saw solid growth in SPX options trading on retail broker platforms with ADV on those platforms up 8% from the third quarter, hitting a new all-time high.

Turning now to Europe. I'm pleased to report that our recently launched European derivatives market continues to gain momentum. Since launching a few months ago, we have laid a strong foundation for future growth and product expansion. We grew the number of participants trading on the exchange and volume continue to grow month-over-month. The market is off to a strong start in 2022 with nearly 2,000 contracts tuned in January, already surpassing our total in 2021.

In terms of product expansion, we are planning to launch futures and options on 4 additional Cboe European country indices, Italy, Spain, Sweden and Norway, next quarter, subject to regulatory approval. And we have already secured market making support for this product complex expansion.

Later in the second quarter, we plan to also launch weekly options on our Phase 1 index products, and our longer-term plans include a third phase of product expansion to include a European single-stock options, subject to regulatory approvals. We are very excited about the many initiatives in the works with the derivative franchise, and we find new ways to deliver access and meet client needs around the world.

Turning to Cboe Digital and our planned acquisition of ARRIS X, which remains on track to close in the first half of 2022 and is subject to regulatory review and other customary closing conditions.

We've been pleased with the reception from regulators and state approval processes progressing as expected. As the appetite for ownership and digital assets continues to grow, we believe Cboe can play a guiding role in shaping the trajectory of this revolutionary market.

While this is a new asset class, we can apply our blueprint of success, operating trusted, transparent regulated markets to this experience. While much of the market focus today is on a transaction opportunity, we also see tremendous potential to generate and provide benchmark crypto data that is currently opaque and untimely in many instances. Our teams are working closely behind the scenes on integration and road map planning.

We're also excited to close the transaction with the Airtex team and our incredible partner group of investors and engage market participants to charge Cboe's course in this exciting new frontier.

We're excited about both the near and long-term opportunities to grow and expand our business, and believe we have a strong momentum as we kick off 2022. We are well positioned to move up into attractive and expanding addressable markets across all of our businesses, and we couldn't be more excited about the opportunity set in front of us today. We expect these initiatives to help us further strengthen our position as one of the world's largest global derivatives and securities networks.

With that, I will turn it over to Brian.

[Brian Schell]

As Ed spoke to, fourth quarter was a very strong finish to an exciting and record-setting year at Cboe. Overall adjusted earnings per share were up 41% on a year-over-year basis and 17% sequentially, as both the transaction and nontransaction businesses turned in excellent results.

Furthermore, as we look at trends through January, we have seen continued acceleration across our businesses.

Quickly looking back at some of the noteworthy takeaways from the fourth quarter, our net revenue increased 27%, matching another quarterly record. Net transaction fees were up 42% and recurring non-transaction revenue was up 21%. Adjusted operating expenses increased 23%. Adjusted EBITDA of $264 million was up 28%. And last, but certainly not least, our adjusted diluted earnings per share was a record $1.70, up 41% 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 from each of our business segments. So I'll just provide summary thoughts. We saw year-over-year growth in all of our segments for the second consecutive quarter. Options delivered exceptional growth of 25%, driven by higher trading volumes in both our proprietary multi-listed options as well as higher revenue per contract, or RPC, and index options.

Total auctions ADV was up 23% as we again saw double-digit increases in both index and multi-listed options. RPC moved higher by 9%, given a positive mix shift to index products and a solid increase in our index options RPC, up 5%. And lastly, we continue to benefit from another quarter of double-digit growth in recurring non-transaction revenue, particularly access and capacity fees, which were up 20% as compared to the fourth quarter of 2020.

North American Equities net revenue increased 24% year-over-year as industry volumes moved slightly higher, further helped by solid growth in proprietary market data fees and access to capacity fees. Net capture meaningfully improved on a year-over-year basis, somewhat offset by a decline in market share.

As we move forward, we continue to look to strike the right balance between market share and pricing, while delivering on quality market data, innovative new order types and functionality to the market. For the quarter, BIDS contributed $8.5 million in net revenue. Lastly, recurring non-transaction organic revenue increased by more than $4 million or 13%.

The Europe and APAC segment delivered outsized growth in the fourth quarter of 2021, with net revenue up 46%. The increase was driven by higher volumes and the inclusion of Chi-X Asia-Pacific revenues of $8.5 million. Clearing fee growth outpaced transactions as settlement volumes were up 25%, clearing volumes up 19% and European equity market ADV was up 17%, coupled with market share growth of 230 basis points.

Fourth quarter revenue increased in futures by 39%, benefiting from a 44% increase in ADV and a 5% increase in capture. We continue to see steady engagement in our futures business to start the year, with January ADV up 32% from fourth quarter levels. And finally, revenues in the FX segment increased 6% as compared to the fourth quarter of 2020 as net capture moved higher and trading volumes remained steady.

During the quarter, Cboe recorded its sixth consecutive record ADV quarter at $725 million versus $135 million in fourth quarter 2020. Cboe's recurring non-transaction revenue growth accelerated from strong third quarter levels, with a year-over-year organic growth reaching 15% in the fourth quarter. Again, the strong growth was primarily driven by additional subscriptions and units as opposed to price increases. More specifically, we saw robust physical and logical port usage in our equities and options businesses driven by increased demand for trading capacity. And on the market data side, the equities top of book and options depth of book products are performing well.

As we look to 2022, we see tremendous potential for the Data and Access Solutions business. We are targeting D&A organic net revenue growth to run in the 7% to 10% range for the year, in line with the medium-term guidance we delivered at our November Investor Day. We look to continue to invest strategically in the business to unlock its full potential within the Cboe ecosystem.

Turning to expenses. Total adjusted operating expenses were approximately $138 million for the quarter, up 23% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 13% or $15 million for the quarter. Most of the expense variance related to the acquisitions was compensation and benefits.

Moving to our expense guidance. We are introducing a full year expense guidance range of $617 million to $625 million for 2022. This guidance incorporates our run rate expenses as of December, coupled with a healthy level of investment spend in the year ahead, a reflection of our conviction in the many high-margin, high-return opportunities ahead of us.

Throughout 2021, we have consistently messaged that we would be investing in our business, strengthening our global infrastructure and laying the groundwork to support future growth. We see 2022 as a year where we make many of those investments. We expect $23 million to $26 million of the 2022 investment spend to directly drive incremental revenue growth at for greater levels of activity in the future.

I think it's important to spend some time illustrating how some of our recent investments have led to higher levels of revenue growth. Most recently, Cboe has invested purposely in Data and Access Solutions, European clearing and derivatives and the expansion of core product set, with initiatives like 24/5 and a planned launch of Nannos. While we are by no means finished, we are already seeing attractive returns that contribute to today's 41% year-over-year growth in EPS for the fourth quarter and record results for the full year.

More specifically, in Data and Access Solutions, we delivered 21% growth and recurring non-transaction revenue for the fourth quarter and 20% growth for the full year. This growth was made possible by investing and integrating recent acquisitions to build a global distribution and sales platform.

As we look to take on D&A business to the next level, we are investing in cloud capabilities, hiring senior sales talent and further building out our index franchise to help unlock the full potential of the platform and broadening our potential revenue expansion opportunities in the years ahead.

EuroCCP was an investment we made a little over 1.5 years ago that is driving more meaningful revenue at Cboe. Not only has EuroCCP vastly exceeded our initial expectations, but it has also laid the groundwork for European derivatives business that is beginning to take shape. While European derivatives is still a minimal contributor today, we have seen January contract volume and open interest nearly triple from December levels. We will look to expand on that growth with plans to introduce 4 new contracts in April and weekly options later in the second quarter of this year, pending regulatory approval.

Lastly, 24/5 trading on the SPX and VIX options contracts went live on November 21. As Ed highlighted, in only a short amount of time, 24/5 has delivered incremental volumes to our platform, not to mention the ancillary benefits of greater market data and access fees and an expanded customer base. We expect to continue to invest in our infrastructure to facilitate greater volumes across our platforms.

We believe these initiatives exemplify our philosophy at Cboe, leverage our superior technology, further strengthen our core proprietary products, increase recurring revenue and expand our product line by geography and asset class. While not included in our formal 2022 expense guidance range of $617 million to $625 million, we believe the pending acquisitions of ARRIS X and Neo has the potential to add an incremental $36 million to $42 million of expenses in 2022, contingent on the timing of closings, which are subject to regulatory reviews and other customary closing conditions. We anticipate a potential revenue offset for more than half of the expense in 2022, with an expectation that the additions are EBITDA positive on a combined basis in year 2. The company plans to further update its guidance for 2022 after the acquisitions close, which is expected in the first half of this year.

Looking forward, we see numerous opportunities to invest in ways that fuel sustainable earnings growth for years to come. Investments have delivered a double-digit return on invested capital that shareholders have received and they come to expect.

Now turning to a summary of full year guidance on the next slide. We are reaffirming many of the elements you've heard us speak to at our Investor Day back in November. Specifically, we anticipate D&A organic net revenue growth will be in the 7% to 10% range. Acquisitions held less than a year are expected to add 1 to 3 percentage points to total net revenue growth this year. Inorganic net revenue growth is expected to be 5% to 7% in 2022.

Depreciation and amortization is expected to be in the $40 million to $44 million range. Our CapEx guidance range is $47 million to $52 million for the full year, and we anticipate our tax rate will fall in the 27.5% to 29.5% range for 2022 under the current tax laws.

Our interest expense for the fourth quarter of 2021 was $11.1 million. During the first quarter, we anticipate incremental borrowing costs as we put financing in place for the acquisitions of ARIS X and Neo, which includes an expanded and longer-tenured revolving credit facility. Given this expected activity in the debt markets, interest expense is expected to be in the range of $12 million to $12.5 million for 1Q '22.

While the investment priorities have taken on a bigger role in our capital allocation strategy, as of late, we remain committed to returning excess cash to shareholders through dividends and share repurchases. In total, we returned $52 million to shareholders through dividends in the fourth quarter. We remain opportunistic around share repurchases, with $319 million in remaining repurchase authorization available. Our leverage ratio decreased slightly versus the prior quarter to 1.3 times at December 31 as our debt levels remained steady on a sequential basis.

Given the anticipated funding of Neo and ARRIS X, we expect our leverage ratio to expand in the quarters ahead, but we remain committed to maintaining a flexible balance sheet over time.

In summary, Cboe delivered a very strong fourth quarter to close the year, and 2021's record results give us increased confidence that if we continue to invest in the Cboe ecosystem, we can continue to deliver strong long-term results for investors.

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

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

Thanks, Brian. In closing, it's an exciting time at Cboe as we continue to execute on our strategy and initiatives, aimed at accelerating growth and value creation as we innovate, integrate and grow. We are extremely proud of the record results we delivered in 2021, and I'm even more excited about the opportunities ahead.

The investments we plan to make this year are expected to contribute to our long-term growth in 2022 and beyond.

I want to thank the entire Cboe team for their dedication and hard work to continue to put Cboe to new heights.

With that, I'll turn it to Ken for instructions on the Q&A portion of the call.

[Ken Hill, Investor Relations]

Thank you. At this point, we will be happy to take your questions. [Operator Instructions] And my first question comes from Rich Repetto with Piper Sandler.

[Rich Repetto, Piper Sandler]

Good morning, Ed, good morning, Brian. And I guess there's plenty of, what you call it, interesting strategic question, but I'll -- to start off, I'll stick with expenses here. And first, I'm trying to understand the conservatism because you're well below what was implied for the fourth quarter. And then on expense question, I guess, as we look forward, it looks like you're going to invest $70 million to $80 million, half of that in Neo, half of that in other. You gave some revenue impact on Neo and ARRIS. But what about the revenue impact on the other roughly $35 million of investments you're making in 2022?

[Brian Schell]

Sure. Thanks, Rich. A couple of things there. As far as the conservative kind of comments on the expense guide overall, what makes the difference, say, '21 versus '22, the '21 guide, as we look back on it is being conservative is obviously not new to the organization. We will make sure we lay out there the expectations what we think we're going to need as far as the investment to execute, particularly to deliver the top line and the bottom line results.

Last year was a lot of growth, highly reliant on a lot of incremental headcount resources and some other investments along the way that, frankly, were never in doubt as far as making those high conviction investments. It just took a little longer to get them in place than what was originally anticipated.

So the timing is more what drove the amount of investment that was recorded in '21 versus where that effort was and the total where we think the run rate is, and you're seeing a little bit of that bleed into '22. And so as we look at what's different or unique about '22, is it more or less conservative than '21? We're obviously going to put forth what we think is a very achievable plan as far as what we think it will take for investment.

But at this point is a little bit more mixed. It still has a -- reflects incremental people to help deliver some of the initiatives that we're looking about. We could talk more and more about those. It has some incremental marketing delivered from some of the initiatives that we're talking about with respect to our growth initiatives around D&A and the derivatives.

And you heard about the recent launches of what we're doing around Nannos and the additional weekly expiration. We're doing more around our tech services spend. You talked about cloud and what we're doing to support that. Again, directly back to D&A and the additional offerings over there, I mentioned a little bit around our software development capitalization is a little bit less, say, than the prior year, again adding a little bit more to that expense.

And then as we look at December and you say, well, here it is conservative, sandbagging in I look at the December numbers is where we wrap up. And I roll that forward on just a pure annualized rate, that will -- when you look at that number, that's a much healthier growth rate, just looking at those to separate numbers that the gap of the incremental investment that we're laying out is pretty close to what you're seeing there.

So if I move in to the second part of your question about revenue expectations -- return expectations on those incremental investments, if you look at those incremental investments, we laid out roughly that $10 million for infrastructure. Again, that's hard to tie it to a specific revenue initiative, but it's all about supporting the broader Cboe global network around -- look -- we've all read about the incremental cyber attacks that are pending and what's going on.

And so can you make core investments around the basics there, continues to support around our distribution network, continued integration work that goes again across the entire network that if we're going to be running a trusted marketplace with high reliability, high uptime, working on that next development as far as staying leading edge, that requires that continuous pace of investment and spend.

But the specific revenue initiatives that we tied to and specifically around D&A and then derivatives, and it's probably high level D&A, closer to 2/3 of that number, derivatives around 1/3 in the way it's placing out, is that, that D&A numbers as far as what do we look for that is we've talked about cloud, how we rolled that out last year.

We talked about incremental people from a sales standpoint, making our platform more robust, making a little bit more around that marketing effort. That return, we envisioned is actually very short. It's high triple digit on that investment as far as achieving that growth rate.

As far as the other initiatives around the derivatives, and we've talked about this to last year is the 24/5. Again, that's immediately already returned the investment from '21. It's already a triple-digit return. It's already matched the investment of what we're already seeing this year.

European derivatives, again, this guidance hasn't changed with where we talked about that. That's more of a 2 to 3 year, where we expect to see a beneficial higher ROI. Again, approaching triple digit if we hit those revenue targets. We talked about Nanos. As we look at that launch and the incremental investment there, that should be a very high return within a 12-month time frame with that success.

And then finally, we mentioned Neo and ARIS. Again, that's going to be a little bit of a -- as we look through those, those will pace back and that ROI will be a little bit longer term. But as we look at those investments, as we look to enhance those platforms, deliver those new products, again, we talked about in our release and our guidance that we expect -- that's a little bit more of a year 2 as far as that EBITDA positive, again, requires some of that initial investment upfront in this first year in 2022.

[Rich Repetto, Piper Sandler]

Okay. Sorry about the cheese for the [indiscernible] guys.

[Brian Schell]

Wow. You can't help them sell that.

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

Rich, that was a little low, but we're thankful for a good season.

[Operator]

The next question comes from Ken Worthington with JPMorgan.

[Ken Worthington, JPMorgan]

We've seen a real surge in engagement from retail over the last 2 years, driven by some combination of maybe COVID commission, zero commissions, market appreciation. I'm sure there's a dozen other things.

As you look at Cboe's great 2021 results, what portion of the success you had last year would you actually attribute to the retail effect? So you've got a ton of initiatives. There's a lot of things driving your good results, but really focusing on this retail effect.

And given the tech mean sell-off and greater leverage of brokers like Robin Hood, how do you think about this durability of retail engagement? Is it something because options are used to not only speculate but hedge, it's going to be really durable? Or do you think there's some fragility to what we've seen?

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

So thank you. To start, Ken, and I'll ask Brian to clean up with kind of the percentage of how that's contributed. It's a little opaque in the derivatives world due to kind of a lack of clarity at OCC.

But let me frame it a little higher level. We do see this as being able to continue. And because our core has always been an education piece, and once you introduce a retail trader who is used to a pretty simple P&L scheme, right? The longer you're short, the payout's 45-degree angle, you've got to be right or you're wrong. And options -- the versatility at options allows you to customize that payout scheme, customize the risk parameters and exposure and still have the exposure in a given underlying individual stock, the broader market.

So our education really focuses on the versatility for retail. Once you teach that, you create a long-term investor. And that's what we're all about and why we think there's some runway here more broadly on retail.

So then we look at, we're in the access business. So how do we extend that exposure to uniquely for Cboe? The product set alone is terrific, right? So you start at individual equity exposure, but much many retail want broad U.S. exposure. And we look at our notional size of our most successful contracts with the S&P 500. It's quite expensive notionally for exposure for retail.

So we're launching Nanos. Very, very simple, one multiplier concept. If you look at the average notional value of option exposure in the S&P 500, roughly $5,000. Nanos, the premium double $5. That's an incredible way to learn the power and the tools of options trading. We love that. So that's the concept behind that. It will make it simple, make it easy, make it accessible.

So then we look at what's the fastest-growing portion of our S&P 500 complex. Well weekly, it's super short dated and low premium. So when they had Tuesdays and Thursdays, another opportunity to be able to be more precised and answer the demand coming from really short-dated exposure. So add Tuesday and Thursday. So all of that to build and the continuation of what we've seen in the last 2 years of the growth in retail, we want to be part of the story, open up access and teach.

So Brian, over to you or Chris, for a little bit more color on how we saw that breakdown.

[Brian Schell]

Yes. So on the -- I think we'll break it down a little bit by asset class, because I think you see the ebbs and flows. And again, to Ed's earlier points, the opaqueness.

So the percentages aren't going to be as precised as we frankly would like as well. But as far as starting with the North American equities franchise, we saw a lot of that lean stock trading, obviously, very retail focus and as strong as even the January numbers as far as overall market volumes of, call it, 12 billion shares.

If you recall, January of last year was almost 16 billion ADV. And so we know that was driving mode. But as you look at those retail percentages in the U.S. equities market, you start saw trailing down as we got deeper into the year, such that the third quarter was lower in fourth quarter. I think it was significant lower than where it was in the first quarter.

So it was a nice contributor, but I think it's come back to a -- I would say, more a sustainable level, but I'm not sure it's going to going to go anywhere. So was it a nice contributor? Yes, but it wasn't the majority.

I would say it was a stronger contributor within the options, as Ed talked, about the various exposures looking for (inaudible) patterns. They've always been a big presence in the multi-list. And now what they're looking for, for a broader community as far as investment alternatives.

So we actually are more optimistic that the percentage could grow in our derivatives complex with the retail and the retail channel. So I know we didn't give you a specific percentage. It was solid. We expect to see continued growth in it. We're going to continue to look for to growing that with our retail efforts and with the new product launches, I kind of leave it there.

Chris, I don't know if you have anything to add?

[Chris Isaacson, Chief Operating Officer]

Just a couple of items. Just in January, we've seen incredibly strong volumes a couple of days, all-time records OCC volume with strong retail engagement. As Ed and Brian mentioned in their comments, we're really excited about those 4 retail brokers, and hopefully more that are ready to go day 1 with Nano. So while it drove a lot of growth in 2021, we do see that enduring through '22 and hopefully beyond.

[Operator]

And the next question comes from Alex Kramm with UBS. Please go ahead.

[Alex Kramm, UBS]

I hate to ask a volume and trade environment question on the proprietary products, but it seems like the market environment has changed significantly year-to-date. So maybe it does make sense. I mean, rates are moving higher, much more divergence in asset classes and markets, et cetera.

So just wondering if you can talk about what is different -- what you're seeing from customers, strategies, et cetera. And I want you, in particular, to contrast what we've seen over the last few years because I think all of us, we got used to this low vol environment where sometimes you got these spurts of volatility, and then it actually seems like volumes went up and then they actually kind of went down a lot, and it got quiet again.

So I know you don't have a crystal ball, but just wondering if what you're seeing out there just maybe seems more sustainable, what you would point to? And is this something that we should get more excited about from a cyclical perspective?

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

Alex, great question. I'll kick it off. And we share the excitement, weekly does appear from an institutional perspective, much more sustainable than we've seen, as you referenced, the spikes and then the ebb and flow around spikes.

But the uncertainty out there that's been driving this of late for institutions now really Russia tension, oil prices, continued supply chain challenges. And then the big one, right, the expectations on rate moves, all impact a portfolio differently. And actually, the value of the components of that portfolio are influenced by all that uncertainty.

We see that in both the SPX and VIX and uniquely, as we talked about the rotation in the past. What's different this time, if you look at the second derivative VIX, there's an 8% move yesterday. That is an incredible punch for a relatively inexpensive contract, both the futures level and the options associated with it. And that's not gone unrecognized. 8% move, and then you look at today and maybe there's some follow-through even pre-trade, the market was up, the market is down. That is an amazing tool relatively inexpensive that really takes advantage of these 50-plus point S&P 500 moves.

And then in the same week, as you see these moves early in the week, the SPX 1 month at the money vol comes crashing down. Really incredible. So SPX looks cheap in implied volatility compared to what's been realized. So it really is an amazing opportunity in our product set that these products actually deliver. And you're seeing that engagement.

It's now -- it's been month-over-month, January really keeping up with December or fourth quarter is truly amazing. Actually surpassing fourth quarter is terrific. So that's the difference, and those risk factors are out there, and there's still uncertainty. So no reason why this isn't going to continue for a bit.

[Operator]

And the next question comes from Brian Bedell with Deutsche Bank. Please go ahead.

[Brian Bedell, Deutsche Bank]

I appreciate all the granular guidance, Brian. Maybe if you could just talk a little bit about the growth path on D&A? Obviously, you did very well in '21. You're heading in with better momentum relative to that 7% to 10%.

Given how we're seeing that volume environment performed pretty well in customer traction, especially in retail, back pretty well, what would you say would be some upside potential drivers to the high end of that 7% to 10% range just for this year?

I know you obviously don't want to redo the guidance or anything like that, but just thinking about some -- what would continue that momentum? And then also, just a secondary question, if you could talk about any upside from revenue contribution from the European derivatives effort now that we are seeing that volume increase in January? Just sort of time line to get to that $25 million annual revenue number, I think you have for a couple of years out in euro derivative?

[Brian Schell]

Sure. I'll take that. Thanks for the comments, Brian. On the revenue for D&A, I think it's helpful if you look at broadly the 3 main components of how we think about the D&A number. Again, we're coming off of a 2021 year of about $427 million from $21 million of that kind of that group of revenues.

And so as we look at each of those components, still the largest component is still that market data and access, right? That's the bulk of that number. And to get any movement on the growth rate, that's where we're -- just mathematically, we're going to have to see some real growth there. I think that's where the upside is going to have to come. But -- and that's going to be a big part of the growth, again, going forward because if its sheer size.

So I would say what would be potential upside there is we have a pretty good pipeline right now in market data sales. I think we continue to see nice traction in the U.S. I think the upside will be our incremental traction internationally from -- with our APAC entry, with what we're doing with the Cboe team there and then the incremental international clients there selling the U.S. data and then the local data as well. So I'd say there's -- if there's going to be upside, it would likely have to show there.

And then on the -- the second part of that is when we think about our risk and market analytics. Again, we're expecting a nice strong growth rate out of there as well, but that's likely going to -- we think where that opportunity, that's probably EMEA is where we see incremental benefit possibly out of there.

And then on that third component of it is the index side. Again, we think there continues to be within the U.S. is a huge opportunity. If the traction around our sales effort, more products. We see more and more ESG, and really trying to leverage our distribution channel with CSMI. So that's where I think that we're going overall.

As far as Europe, Chris, I don't know if you want to talk a little bit more about if we see any of the path we're seeing there on the talks around European derivatives?

[Chris Isaacson, Chief Operating Officer]

Yes. So we are seeing strong demand for U.S. data into Europe and APAC and then vice versa. So that's a global network coming together, and we still think we have a lot of room to sell into Europe and APAC with the existing data we have, especially as we add more data sets to the Cboe Global Cloud as we mentioned.

We just currently have really North American data there, indices data and futures data, and we'll be adding more data this year, including analytics data and working with Cathy Clay.

I just mentioned Europe, the EU derives is going quite well. The onboarding has gone well, and January was very encouraging to us, surpassing all of the volume from last year in a single month. So tracking very well as we build.

We told you from the start this would take a bit, and it's tracking on or ahead of schedule. And the team there is doing a wonderful, under Dave and An team and Cecil with your CCP, another investment we made in the last couple of years that is paying off very well and is key to our long-term success there in Europe.

[Operator]

And the next question comes from Alex Bolstein with Goldman Sachs. Please go ahead.

[Alex Bolstein, Goldman Sachs]

So I was hoping we could spend a minute on sort of like your medium-term expense growth philosophy and sort of the growth algorithm. So the 2022 guidance (inaudible) helpful. You previewed some of that at the end of the year. So the decline in margins is probably not that surprising.

But how long do you expect sort of the elevated pace of incremental investments to last it essentially double what your core sort of expense growth is in 2022? So is it just a '22 thing or spillover, not asking you for '23 guidance, obviously, just yet. But just trying to understand when we should expect Cboe to return to sort of positive operating leverage on the comp?

[Brian Schell]

Thanks, Alex. But I think I did hear you asked for '23 guidance. But I think it's a very appropriate question as we think about it. And as we look out to '23, you're right, we're not ready to say it's going to be x to x type of range.

But as we look forward from what we know today, in the environment where our growth objectives are, we do expect a more moderated expense growth rate in '23 versus what you've seen in '21 and '22.

I get independent of the run rates around acquisitions. So if we look at kind of what that core kind of, I'll call it, that more normalized there. So as you think about -- and how do we get that thought process, as you think about '21 and '22 is our investment in our core, our investment in our infrastructure, our investment in the revenue growth initiatives to facilitate and enable that growth. That's what we'll continue to do. And we'll continue to get those as we look into '22 is -- and continue to highlight those return on investment items, right?

We've talked about and one of the first questions that we start talking about is of those various initiatives, how are they doing? Can you build a case study for us of why should your investors have confidence around your investments and what you're doing?

So we will continue to try and provide as much visibility as we can around how they're performing, what the return looks like and then make adjustments as appropriate. So we're not going to shy away from seeing an opportunity investing in it if we think it is really, like I said, a high conviction, high margin type of opportunity, particularly around data, particularly around the derivatives.

And again, we've talked about our excitement around bringing on a digital capability as well. So that is what we're looking towards. So it's a moderated level in '23 without giving you any specific percentage range.

[Operator]

And the next question comes from Owen Lau with Oppenheimer. Please go ahead.

[Owen Lau, Oppenheimer]

So for ARIS X, could you please give us an update on your initial thought process about adding new products? And how does the current digital assets trading environment like the Bitcoin price impact your thought process? And then finally, on the $36 million to $42 million additional expense assumption for ARIS X and Neo, could you please also talk about, kind of like on paper, when do you expect Cboe to close these two deals, just in your math in your assumptions? What are the key assumptions baked into this range?

[Chris Isaacson, Chief Operating Officer]

Yes, I'll take that question. Thanks for the question. On ARIS X, we're moving toward close working through the state and federal approvals. And as we said, we hope to close that here in the first half of this year given previous guidance. Maybe bit earlier than we expected, but working well through that with the ErisX team. Regarding new products, we -- there is a new listing process that ErisX has put together that's very well thought through, and we're looking at new products based on customer demand, understanding that we will need to add new products within the confines of those rules as we grow the business.

We're very excited about ErisX, as Ed mentioned in his comments, because it gives us that spot data derivatives and clearing platform in a trusted marketplace that we think is where the market needs to go, and we want to help define that together.

So very excited about ErisX going forward and close in transaction here in the first half. I want to make sure I answered all your questions. Was there another segment of your question that I missed?

[Owen Lau, Oppenheimer]

Just the key -- like key assumptions baked into that range, like $36 million to $42 million. Are you assuming like at the beginning of the second quarter or at the end of the second quarter? I just want to make sure we model this correctly.

[Chris Isaacson, Chief Operating Officer]

Brian, do you want to take that one?

[Brian Schell]

Yes. I would say kind of the combination of the 2. It is certainly won't be -- it could be as early as March. But like I said, that could -- and it could be, like I said, into the second quarter as well.

So that's why there's a range because we're talking about 2 transactions that we're trying to get, again, a regulatory approval around and multiple regulatory closing conditions. So I guess first half is better, is kind of as close as we are right now. It's highest scenario said is that they're both closed before the start of the second half of the year.

So like I said, it could fall at the end of the first quarter. And it's -- again, we'll update, obviously, when -- update the expense guidance when we do have a firm close date and provide that further projection. But for now, unfortunately, we're still reliant on the regulatory approval process, which, again, is not as transparent, not negatively just sometimes they move around pace.

John, I think you may have [indiscernible]

[Unidentified Company Representative]

This is John. Just on the -- you had a question, I think, in there about how the price of Bitcoin impacts our views to the opportunity. And I just want to drive home. We've seen this before. We've been in the digital asset space going back well prior to our ErisX agreement.

And we have a lot of confidence in this space. It's early innings, and we know that because we're out there talking to partners and clients as we speak. We've gotten a really good, strong early jump on those conversations, enthusiasm and the investment that's going on across the ecosystem is as strong as ever. And so we're very optimistic about the opportunity.

It also highlights to Chris' point about the product set in ErisX. It highlights the value that we'll be bringing to the market in terms of derivatives products and the ability to hedge some of these price movements going forward. So we're optimistic, and we see great value in the product set.

[Operator]

And the next question comes from Kyle Voigt with KBW. Please go ahead.

[Kyle Voigt, KBW]

Maybe a question on capital management. The second straight quarter, with no buybacks. Just wondering if we should expect those repurchases to remain paused ahead of this -- the ErisX and any deal close?

And then just thinking about your capital priorities, your leverage ratio is pretty modest and it's been declining with the EBITDA growth. So I'm just trying to get a better sense of kind of how those -- how buybacks are returning to buybacks ranks versus maybe additional M&A given the current M&A environment you're currently seeing?

[Brian Schell]

Sure. So as far as -- I don't want to give a prediction as far as timing of share buyback. Again, we have -- we're very clear that as we want to make sure that, that balance sheet and the leverage ratio, it will spike upon the close of these transactions. Spike up.

And -- but a comfortable range or so high investment grade. We still feel good about that. But I think what the pause has put us in a really good shape from a flexibility standpoint to actually allow us to reengage in a share buyback and a much more meaningful way on a go-forward basis.

So that little bit of a pause again gives us that flexibility. So I can't predict timing of when we would see that, but we do have expectations that we will return capital to shareholders through a share buyback in 2023. But again, I don't want to predict timing on that.

And as far as priority goes, we've always said it's in our capital allocation thought process, and we think it's important to return that excess cash. But I'll tell you, we are very focused on it. And again, this is ultimately with the goal of achieving long-term shareholder value and that highest value that we can.

We are very, very focused on growing the enterprise and growing the revenue and earnings capability of this organization. And sometimes when we see those M&A opportunities show up that we think does that, we will invest to grow. And if there's excess after that, we will then deploy it into a share repurchase program.

[Operator]

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

[Michael Cyprys, Morgan Stanley]

I just wanted to circle back to the cloud data offering. I was hoping you might be able to elaborate a bit more on that offering and the economics and vision that you have for that? And just more broadly on cloud, I was hoping you might be able to remind us of which of your markets and offerings are on the cloud today.

And how do you think about the opportunity for migrating your markets to cloud over time? Maybe talk about some of the pros and cons there? And what might make the most sense to move sooner versus later?

[Chris Isaacson, Chief Operating Officer]

Great question. There's been a lot of -- this is Chris. There's been a lot of talk about this, but first on the cloud data opportunity. We have our initial customers. We launched November 1. As we mentioned during our Investor Day, we're really excited about the the number of customers that we already have. And these are largely new customers we didn't have before that need this new access method.

The current data sets we have are U.S. equities and futures and indices data, as I mentioned previously, we'll be adding other data sets from Europe from other analytics data and then eventually APAC. So all of our markets around the world.

The data -- they can collect this data in the U.S. and Europe as well as an APAC today over the AWS cloud. And then as we think beyond the data opportunity, the cloud is ready today for data and it's ready for non-latency-sensitive applications such as clearing and other more back-office things. But as you think about microseconds, nanoseconds and multicast and things like that, the cloud still has some room to grow and there's a lot of effort going in from cloud providers. And we are also working on things like that, but the cloud needs to be ready for what our customers are demanding.

So I know there's other exchanges that are working on this, and we're evaluating it. Part of our ethos is we are customer-driven. We're client driven. So as our customers if and when they say they want us to move there, we will be ready to do so. But right now, the data -- the opportunity in the cloud is primarily around data and clearing, and we'll look at matching in due course.

[Operator]

And as that was the last question, I would like to return the floor to management for any closing comments.

[Ken Hill, Investor Relations]

Great. So this completes our call for this morning. We appreciate all the interest and questions on the call today. If you have any follow-ups, please feel free to reach out. Thank you again.

[Operator]

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