CBOE Holdings Earnings Call Nuggets: Spread-based Pricing and the 2013 Rate Per Contract

CBOE Holdings, Inc. (NASDAQ:CBOE) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Spread-based Pricing

Richard Repetto – Sandler O’Neill: I think this is the 10th straight quarter of a B here if we’re keeping track correctly.

Alan J. Dean – EVP, CFO and Treasurer: We weren’t keeping track, but it’s nice to hear.

Richard Repetto – Sandler O’Neill: My question is on the – you did a good job Bill of outlining the changes in markets, what you’re doing to respond to that. I guess I just wanted to understand on Slide 12, a little bit more this designated primary market maker model, how it differs and the spread-based pricing, how it differs from what is that C2 and what’s that CBOE as well.

William J. Brodsky – Chairman and CEO: It’s really quite innovative and as I said we’re working with the industry to educate them on that. We had a big meeting with them last week and it was very well received, but let’s get Tilly to give you all more detail on that.

Edward T. Tilly – President and COO: So let me dive into C2 and it is a different story. I’ll just remind you from our last earnings call that we told you we weren’t really happy with the C2 market share and remind you that we developed C2 as an alternative model. So, what you’re seeing is completely new to the industry and I’ll give you a little bit of the highlights. As you point out, we saw the share moving from the paying the liquidity provider to post that maker-taker model after the traditional model pays for flow, so we had a choice. We could have gotten into the race of VIP that is just to continue to make payments from the Exchange for orders or we can come up with something completely different, which is at the end of the day what we did. So, we’re trying to reward liquidity providers with lower fees for posting tighter markets and tying customer rebates to the width of the spread, set different than CBOE. If so the customer trades at a very tight market, the liquidity provider pays very little to post and the rebate is small but if a customer trades in a wide quote we raise the rebate and we raise the fee of the liquidity providers. As Bill pointed out in the prepared comments this is new to the industry and it’s going to take a little bit of time to get used to. But we think fee incentives for tight markets will reward in the competitive quoting the lines of liquidity providers and customers. We didn’t want to continue to participate in the race of just purely paying for flow without offering an incentive to tighten markets.

Richard Repetto – Sandler O’Neill: C2 was a maker-taker, if I got it correctly.

Edward T. Tilly – President and COO: It was Richard. You are right and it continues to be in ETF classes. We do actually quite well on C2 and maker-taker SPDR for example on IWBM. This is really for the multi-list single name classes where we put in the industry’s leading liquidity providers as DPMs to lead the way.

The 2013 Rate Per Contract

Jillian Miller – BMO Capital Markets: Just wanted to get a little bit more detail hopefully on the pricing changes that you made February 1st. Like what exactly what did you change? I know in the past you guys have lowered multi-list fees and then kind of a flip out with higher index fees and net-net we are kind of neutral in terms of RPC, so not sure if that’s kind of what happened again this year. Any guidance on the 2013 rate per contract would be helpful.

Alan J. Dean – EVP, CFO and Treasurer: Jillian on February 1st we modified VIP rebate, increased the rebate and also modified a customer fee that we had in place for certain Exchange traded products and for certain order sizes, that was February 1st. The way I’m looking at RPC for the year, for 2013 is if volume is similar in the multi-list products for 2013 compared to 2012, I would expect RPC to be similar relative to the two years. But if multi-list volume increases, I would expect RPC in those multi-list products to decline and if multi-list volume declines, I would expect RPC in those products to increase. CBOE is uniquely positioned with more than 70% of our transaction fees generated by our proprietary products. However we must and we will remain competitive in pricing on those multi-listed products. So the fee changes that we made on February 2nd were changes that we thought we had to make to in order to remain competitive and defend our market share and also to defend other fee categories in our P&L such as access fees, Exchange services and other fees, then of course, market data revenue is driven by market share. So that gives you a recap of how I’m looking at RPC and the changes we made, February 1st.

Jillian Miller – BMO Capital Markets: Then just to clarify one thing. So there weren’t any direct changes made to the index category. It was all associated with the equity and ETF products?

Alan J. Dean – EVP, CFO and Treasurer: That is correct; on February 1st, yes.