Cboe to Focus on Global Trade Imports to U.S.

Fredric Tomczyk, president of Cboe Global Markets, said the group will focus less on acquisitions and will instead allocate capital to organic growth initiatives, investments in its global technology platform and returning cash to shareholders.

On the Aug. 2 second-quarter earnings call, Tomczyk said he was sharpening the group’s strategic focus on areas that have the most valuable growth opportunities. He took over as CEO in September 2023 and was leading a strategic review.

As a result, he said, Cboe is reducing M&A activity; reallocating resources to align with core strengths, including eliminating the spot market for digital assets; cutting costs and stabilizing margins. Capital from M&A activity will be allocated to increase investment in organic growth initiatives, such as investing in its global technology platform and increasing shareholder returns through dividends and share repurchases.

“To that end, we are refocusing on the fact that the company has both import and export operations, which allows us to leverage even more of our global growth potential,” he added.

Export activity has included expanding into new geographies and deploying technology and data to create better trading experiences for clients around the world, and exporting the US derivatives market model to Europe. However, there are now opportunities to expand import activity.

“As I’ve traveled and spoken to our global clients over the past nine months, I’ve learned that there’s a huge demand for investment in the U.S. market, and our analysis confirms that trend,” Tomczyk said.

Last year, U.S. equities reached nearly $14 trillion in value, growing at a CAGR of 10.5% over the past decade. Cboe expects this trend to continue as retail investors grow globally and various markets implement legislative changes that are expected to create opportunities for Cboe.

“The S&P 500 is the dominant global equity index, with an estimated $16 trillion in value relative to the index, and importing foreign investment back into the U.S. is a significant and growing opportunity,” Tomczyk added.

Cboe also continues to see significant opportunities in the Asia-Pacific region, where demand for index options is growing to access the U.S. market. Three global brokers in the region joined in the first half of this year and added CBOE products to their platforms, including S&P 500 index options (SPX). Tomczyk continued that this is a long-term secular trend, and that international participants are very valuable to the U.S. market because they enhance the trading ecosystem.

“We believe that the secular trends that are transforming trading and capital markets, including the globalization of markets, the rise of retail investors, the increased use of options by market participants, and the technology and data revolution, create excellent opportunities for Cboe,” Tomczyk said. “The strategic review should be viewed as a journey, not an event, and you will see us continue to refine our strategy over time.”

SPX and Volatility Packs

Tomczyk said the derivatives business delivered another “solid” quarter, as organic net revenues grew 11% year over year and volumes increased across the board. Options net revenues of $306.7 million were up 8% compared to the second quarter of 2023, while futures net revenues of $34.8 million were up $5.6 million over the same period.

Dave Howson, global president of Cboe, said on the call that SPX options hit their highest monthly volume in April, when volatility spiked. SPX options volumes rose 9% year over year in the second quarter to 3 million contracts.

“VIX (volatility) options volumes increased by 18% quarter-on-quarter, making it the third-largest quarter on record, even outpacing the Covid-induced growth in Q1 2020,” Howson added. “With this unprecedented interest in VIX options trading, we are excited to expand access and usability with a planned October launch of VIX futures options, subject to regulatory review.”

The new options will be traded on the Cboe Futures Exchange, or CFE. Howson said this is important because it allows access for participants who may not be able to use Cboe’s options exchanges, and Cboe will also be able to offer shorter tenors to meet customer demand.

“We are particularly excited to expand our volatility toolkit ahead of this year’s US election, which has historically been a significant catalyst for markets,” Howson said. “The VIX has risen more than 10 points in the months leading up to the last two elections.”

Growth Plans

Tomczyk said the second-quarter results showed the durability of Cboe’s business model, as net revenue was up a solid 8% year-to-date.

“This performance was driven by contributions from every part of our ecosystem, including increased volumes across cash and spot markets, solid volume across our derivatives franchise, in particular our proprietary index options and futures products, continued expansion of our data and access solutions business, and disciplined expense management,” Tomczyk added.

Jill Griebenow, Cboe’s chief financial officer, said on the call that Cboe reported a solid 10 percent year-over-year increase in second-quarter net revenue, with every business segment reporting solid year-over-year trends.

Cboe expects organic growth for the group’s total net income to end this year in the range of 6% to 8%, down from previous guidance of a higher range of 5% to 7%. However, Cboe expects data and access solutions to meet the lower end of the organic net income growth range of 7% to 10% this year. Howson said timing plays a big role in data and access solutions revenue.

“We are optimistic about the prospects for this business as we look to continue to leverage our global network and ecosystem to drive growth,” Tomczyk added.

In access solutions, Howson said Cboe is “excited” about the momentum behind its new dedicated core offering, which delivers reduced latency and increased throughput. The dedicated cores launched in all four of Cboe’s U.S. options markets on July 1, 2024, and the company plans to introduce the technology in Europe in the fall.

Europe and Asia Pacific net revenue of $54.3 million was up 15% compared to Q2 2023. The average daily notional value of Japanese shares was 71% higher, and the average daily notional value of Australian shares was up 12% over the same period. In Canada, migration to CBOE technology is on track to occur by early 2025, subject to regulatory review, according to Howson.

“The Asia-Pacific region remains incredibly exciting for us,” Howson said. “We see the opportunity to more effectively monetize our ecosystem of trading and non-trading activities in local markets such as Australia and Japan. As we continue to grow, we look forward to driving imports of derivatives activity into the U.S.”

Griebenow said, “We expect continued growth in demand for access across our global markets, particularly as we expand our presence in new geographies, leverage the distribution capabilities of CBOE’s Global Cloud, expand dedicated cores to significantly enhance our exchange access layer, and enhance our American options data capabilities as we reallocate technology resources from integration efforts to organic revenue-generating enhancements.”

On April 25, 2024, Cboe announced plans to transition digital derivatives trading and clearing to its existing derivatives and clearing business lines, pending regulatory review, and the group ended trading on the Cboe Digital spot digital asset trading market. As a result, the digital segment recorded an intangible asset impairment of $81 million in the second quarter.

Cboe seeks additional regulatory approvals for cryptocurrency ETFs and cryptocurrency index options.

Howson said: “There are a number of regulatory and infrastructure hurdles that we need to overcome, but we’re really looking forward to working with our customers and regulators to get through these.”