Cboe Global Markets

The high-growth exchange holding company

After my summer break, during which I was able to recharge a lot of new energy, today I'd like to introduce a very interesting shovel seller. Just a quick recap of why I like shovel-seller stocks so much: let's imagine we're in the middle of the gold rush era. Of course we want to try our luck too and, like many other gold diggers, throw ourselves right into the adventure. But in fact gold is hard to find, and you need a lucky hand on top of that. That's why we'd rather open a shovel shop - here our profits are guaranteed. It's similar with, for example, the lottery player and the lottery company.

With today's candidate it's more or less the same: whether an options trader makes a profit or a loss on a trade can be fairly irrelevant to the exchange itself. And if the company behind it also raises its dividend at a decent pace, my ears perk up. So today let's take a look at the business model of the world's largest options exchange, Cboe Global Markets.

The origins and business model of Cboe Global Markets Inc.

Before I go into more detail on the Chicago Board Options Exchange, for a better understanding we should also look at the origins of the Chicago Board of Trade, whose members founded the CBOE. For the development and infrastructure of the city of Chicago, the year 1848 couldn't have gone better. After all, that year not only saw the first railroad line laid, the city was also connected to the telegraph network and completed the Illinois and Michigan Canal, which linked the city with important trade routes on the Mississippi. Apart from that, the soil of the Midwest was very fertile, and farmers could look forward to bountiful harvests. However, the grain market was still very chaotic. In winter, when grain was scarce, prices went through the roof, and in summer, during the harvest season, farmers had to accept extremely low prices. Things actually went so far that some farmers even preferred to burn their grain or dump it into Lake Michigan, because storage and transport were simply too expensive. To counter this, a group of businessmen got together and in 1848 founded the Chicago Board of Trade (CBOT) and offered standardized forward contracts for the first time.

Farmers could now negotiate a guaranteed price during planting season that they would receive at harvest time. On the other side, buyers could secure a fixed delivery. Since there was hardly any trading at first, the Board tried to attract new business customers with free meals. Increasingly, Chicago became the most important national and international agricultural hub, partly thanks to its suitable infrastructure. To further drive trading, the Board of Trade introduced new quality assurance systems, which also greatly simplified the trading process. Whereas before you had to haul sacks of grain around, from then on trading was done with certificates. This development meant that significantly more futures contracts were traded and the Chicago Board of Trade's business was able to develop splendidly.

Toward the end of the 1960s, some of the Board's traders wanted to be able to trade exchange-listed options as well. They recognized the success of standardizing futures and wanted to introduce the same for options. However, since the SEC did not allow a futures exchange to also run options trading, the Chicago Board Options Exchange was launched as an independent company in 1973. It developed standards for calculating option prices and set expiration dates. On the CBOE's first trading day, April 26, 1973, just 911 call options on a total of 16 stocks were traded. The new system quickly caught on with investors, and by the end of the year over 1.1 million contracts had already been traded - a big number that indeed surprised many people back then. For comparison: in 2021, an average of 39 million options were traded every day. The CBOE only introduced put options a little later, in 1977. It kept developing, modernized its trading systems and offered more and more trading products. Since 1983, for example, you can also trade options on indices like the S&P 500. Also remarkable was the development of the Cboe Volatility Index (VIX) in 1993, which to this day is the preferred measure of market volatility. In 2010 it reorganized as Cboe Global Markets Inc. and went public itself. It used the fresh capital for acquisitions and in this way built up an exchange holding company that, besides options exchanges, also operates stock, futures and forex exchanges.

How could Cboe Global Markets develop in the future?

First, I'd like to take a look at the figures for the most recently published quarter (Q1 2021 - ended March 31, 2021). During this period the company did manage to slightly increase net revenue by 2 percent compared with the prior-year quarter to 365.1 million US dollars, but profit fell by almost 10 percent to 204.6 million US dollars due to higher expenses. Accordingly, earnings per share also dropped from 1.42 USD in the first quarter of 2020 to 1.27 USD now. Nevertheless, CEO Edward T. Tilly was confident: the company had gotten off to a strong start this year with continued momentum and had significantly increased trading activity in every business segment. Executive Vice President and CFO Brian N. Schell was also extremely satisfied with the completed quarter. He added that the figures were hard to compare because of the record year 2020, but that the robust cash flow allowed the company to return around 93 million US dollars to its shareholders through share buybacks and dividends in Q1 2021 alone.

Apart from that, the company announced the takeover of Chi-X Asia Pacific, with which Cboe Global Markets Inc. wants to step up the expansion of its distribution and product offering for its global customer network. When it comes to acquisitions, the company really keeps up a brisk pace. Since 2015, the exchange holding company has made 11 acquisitions - some bigger, some smaller. Of course, the danger here is that at some point it might overreach with an acquisition. On the other hand, I'm very confident that it has the right expertise for this and knows exactly what it's doing.

A trend that Cboe Global Markets Inc. will of course also benefit greatly from is that more and more investors are discovering options trading for themselves. Compared with Germany, the whole thing is much more widespread in its home country of America (also thanks to smartphone brokers such as Robin Hood). But here in Germany, too, I notice that the topic is increasingly gaining popularity, and in my opinion rightly so. As mentioned before, options trading is a craft that has to be learned. Anyone who can't handle leverage will quickly lose a lot of money. On the other hand, anyone who sticks to their risk management and has the right know-how can significantly increase their cash flow with options. Long-term investors in particular should take a closer look at this topic.

What about the dividend?

Since its IPO in 2010, shareholders of Cboe Global Markets Inc. have received a quarterly share of the profits in the form of dividends. Since then, the exchange holding company has also managed to pay and raise its dividend every year. Looking at the last 10 years, it raised its dividend by an average of 15.6 percent per year - looking at the last 5 years, this figure leveled off at an equally decent 14.1 percent. The current dividend yield is 1.4 percent, and the payout ratio of 40.8 percent is, in my eyes, still well within the green zone.

Conclusion:
Cboe Global Markets Inc. didn't invent options trading, but it developed it considerably. By now the exchange holding company is also active in other financial markets and in this way has built up a really interesting, high-growth shovel-seller business. I'm confident about the company's future and will pick up a few shares when the opportunity arises.