Q3 2019 Earnings Call
Later, we'll conduct a question and answer session at that time, if you have questions simply press Star then the number one on your telephone keypad, if we would like to withdraw your question. Please press the pound key at any time. Please note. Each person is limited to one question before asking before being asked to rejoin the queue. As a reminder, this conference is.
Being recorded October 20, Threerd 2019, I'd now like to turn the call over to Dave Prophy Investor Relations manager at market access. Please go ahead Sir.
Good morning, welcome to the market access third quarter 2019 conference call.
Well, Nicole Richie Ben Sherman Chief Executive Officer.
I like to the court.
Christine can president and CEO .
We'll discuss new initiatives and automation.
I've been told easily Chief financial Officer.
The financial results.
Before I turn the call or to Rick Let me remind that today's call may include forward looking to see.
These statements represent the company's belief regarding future events that by their nature are uncertain.
Actual results and financial condition may differ materially from one indicator in those forward looking statement.
For a discussion.
Some of the risk factors that could affect the company's future results. We see description of risk factors in our inner report on Form 10-K for the year ended December 31st 2018.
It also directly to read the forward looking statements. This waiver and our quarterly earnings release, which was issued earlier. This morning and is now available on our website.
Now, let me turn the call over to room.
Good morning, and thank you for joining us to discuss our third quarter 2019 results.
This morning, we reported record financial results, driven by broad based volume and market share gains across products and regions.
Total fully electronic trading volume reached a new record of $529 billion up 37% year over year compared to Q3 2018.
Open trading volume was up 61% to $142 billion.
Our growth in trading activity outside of the U.S. also accelerated with international volumes of $160 billion up 59% year over year.
Estimated U.S. high grade Marketshare also reached a new record of 20.2% in the quarter.
Third quarter revenues were a record $132 million up 30% from the prior year.
Operating income for the quarter was up 42% to $66 million operating margins expanded to over 50% and diluted EPS was up 39% to one dollar and 42 cents.
Last week, we announced the addition of Justin Good Malik to our board of directors.
Justin was most recently chief operating officer for fixed income currencies in commodities at Goldman Sachs and prior to that he was the global head of credit.
We are thrilled to add his experience and strategic advice to our board.
Slide four highlights market conditions.
Market conditions were mixed during the quarter.
Credit spreads over treasuries remained relatively flat.
And credit spread volatility during the quarter was up modestly.
Interest rates around the world continued to decline on the back of Central Bank Monetary policy easing.
New issue activity was robust with high grade issuance up 14% versus the third quarter of last year.
Traced market volumes were healthy during the quarter with high grade trace volume up 10% and high yield trace volume up 19%.
Fee capture improvement during the quarter was driven by longer average maturities and higher duration in high grade and a favorable mix shift in the other product category.
Slide five provides an update on open trading.
Open trading volume reached new records in the quarter of $142 billion up 61% year over year.
Open trading now represents 27% of our total volume up from 23% a year ago.
Open trading volumes grew strongly in all product areas, most notably emerging markets were open trading volumes were up 143% year over year.
Over 348000 open trading transactions were completed in the third quarter up from 283000 in Q3 2018.
Dealers are increasingly using open trading to both provide liquidity and to reduce risk as liquidity takers.
As a result, our dealer to dealer average daily volume grew to $480 million up 89% year over year.
By seamlessly connecting global participants at an all to all marketplace open trading is creating new trading opportunities and reducing transaction costs.
Liquidity takers saved an estimated $61 million and transaction costs through open trading up 72% from the third quarter last year.
In addition, we estimate that liquidity providers saved an estimated $50 million in the quarter up 49%.
The combination of transaction cost savings and improved trading efficiency is the cornerstone of our value proposition for dealer and investor clients.
Now, let me turn the call over to Chris to provide an update on new initiatives and trading automation.
Thank you Rick slide six outlines our new business initiatives, while our growth trajectory continues we are focused on building sustainable long term growth opportunities I'd like to highlight several of those initiatives today.
Last week, we launched alive markets, where the pilot group of Investor and dealer clients and we are starting to see early interest in this new protocol, it's clear that different trading styles are required for more liquid and newly issued corporate bonds.
This coupled with the growing adoption of automated trading strategies underscores the need for a protocol that offers large order driven liquidity for both investors and dealers.
We're also actively building new portfolio trading capabilities, which is an enhancement to our existing lifts trading capabilities.
Our portfolio trading solution, which we expect to launch next month will support the growth in trading large fixed income portfolio, including unique customize portfolios as well is the creation or redemption of fixed income Etfs.
Our award winning composite pricing engine is also supporting the launch of our joint jointly developed enough product, which is part of our partnership with Virtu. The combination of virtues fair value calculation tool for EPS with our proprietary fixed income market data has brought real time price evaluation to the market.
For fixed income EPS this data product, which has interest across the ETF trading community ultimately brings more participants into the fixed income EFI ecosystem.
In August we announced the planned acquisition of liquidity edge, a leading us treasuries trading then.
This acquisition brings streaming treasury liquidity and trading capabilities to market access well liquidity edge, primarily serves the inter dealer treasury market today, our dealers see a strategic opportunity to grow the business by building custom dealer decline connections, which we hope to launch in the first half of 2020.
In addition to the ability to trade us treasuries on market access. The acquisition also supports the further expansion of our treasury hedging capabilities with the first phase of these enhancements that the launch later this quarter. We now have all the necessary regulatory approvals and expect to close the liquidity edge acquisition in the coming weeks.
Slide seven demonstrates the growing momentum of automation in our market institutional investors and dealers are increasingly demanding trading tools. So allow them to work more efficiently, while achieving transaction cost savings our automated trading tools backed by our AI powered pricing data is helping them.
To achieve both low touch trading combined with attractive cost savings.
Investor adoption of our auto ex functionality continues to grow rapidly with 63 firms now actively using our automated functionality this quarter up from 28. The prior year over 115000 auto ex trades took place in the third quarter up 96% year over year and over 22 billion in Bob.
Hi, Jim was conducted via auto ex up 156% year over year. The use of deal or algorithms is also experiencing growth with approximately 2.3 million algo responses in Q3, 61% increase year over year.
We're continuing to invest in our automated trading functionality by developing a new liquidity provision solution, our new auto responder tool will allow investors to automatically respond to request for liquidity VR anonymous open trading marketplace based on a set of Predefine rules and criteria.
So managers and their traders will be able to automatically monitor and react to unique pricing opportunities across their portfolios. Thus enhancing transaction cost savings for all investors. We expect this new enhancement to launch next month now let me turn the call over to Tony to discuss the financials in more detail.
Thank you Chris.
Please turn to slide eight for summary of our trading volume across product categories.
Overall trading volume was up 37% as we experienced significant year over year growth in active clients market share in market volumes across each of our core for trading products.
Our U.S. high grade volumes were up 27% year over year to $262 billion for the quarter on a combination of a 2.7 percentage point increase in estimated market share and hire us high grade trace volumes.
Our other credit category trading volumes were up 53% year over year on a combination of higher estimated market volumes and gains in estimated market share.
Our trading volume in emerging markets us high yield and European corporate bonds, where each more than 50% higher than the prior year.
Similar to the second quarter, the inquiry mix during the third quarter favorite client buying.
Our investment in municipal bond trading is also showing dividends.
Trading volume grew to $2.3 billion in the third quarter up 77% year over year based on participation from 225, investor clients and 70 dealer clients.
Open trading is also a meaningful liquidity source and driving transaction cost savings and represents almost half of our municipal bond volume.
Realizing that it is early in Q4.
And there are seven important trading days remaining in this month.
We'll go to market volumes look similar to third quarter levels and October us high grade and high yield market share are currently running below third quarter 2019 levels.
On slide nine to provide a summary of our quarterly earnings performance.
Overall revenue was a record $132 million up 30% year over year.
The 37% increase in trading volume resulted in a 32% uplifting commissions.
Information services revenue was up 7% and on a constant currency basis up 11%.
Post trade services revenue was up 9% on a constant currency basis up 17%.
Expenses were up 19% and operating income was up 42% year over year.
Operating margin was up 4.3 percentage points and reached 50% in the third quarter.
The effective tax rate was 19.8% in the third quarter and 20.9% on a year to date basis.
We expect our effective tax rate for full year 2019 will be near the lower end of our guidance range of 20.5%.
Our diluted EPS was a record $1.42 cents.
The increase in our average share price during the quarter accounted for the rise in the diluted share count.
On slide 10, we have laid at our commission revenue trading volumes and fees per million.
Total variable transaction fees were up 46% year over year, driven by the 37% and increase in trading volume and an increase in the overall fee capture rate.
Our us high grade fee capture can vary quarter to quarter due to a variety of factors, including duration and trade size.
US high grade fee per million was up $11 from the second quarter level due to the favorable impact on duration from lower yields and longer years to maturity.
Our other credit category feet per million increased by $6 on a sequential basis, resulting from a heavier weighting and trading volume attributable to high yield and emerging market bonds.
Capture at the individual product level was unchanged sequentially.
Slide 11 provides you with the expense detail.
On a year over year basis expenses were up 19% for the quarter and up 16% year to date.
Compensation and benefits accounted for more than 60% of the absolute change in expenses for both the quarter and year to date as we continue to add personnel to support our growth initiatives.
Our year over year increase in head count of 67 higher stock based compensation expense and higher variable bonus provision were the main contributors to the rising compensation and benefits.
We expect that full year 2019 expenses.
End up near the high end of the expense guidance range of $256 million.
The expense guidance includes roughly $1.5 million for acquisition related transaction costs, but excludes the post acquisition impact of the liquidity edge transaction.
We recently kicked off the 2020 budget process. So it's a little early to talk about an expense guidance range for next year.
I'd like to point out two items.
First step function increase in expense associated with the senior hires added in 2019 is not expected to repeat in 2020 and second we will need to overlay the liquidity edge operating expenses and deal related intangible intangible asset amortization expense into the 2020 guidance.
Liquidity edges operating expenses in the third quarter were approximately $4 million with roughly 50% of those expenses tied directly to trading volume and revenue.
On slide 12, we provide balance sheet information.
Cash and investments as of September Thirtyth were $556 million and trailing 12 months free cash flow reached a record $216 million.
During the quarter, we pay the quarterly cash dividend of $19 million and also repurchased 7500 shares under our share buyback program.
Just a quick reminder, that the liquidity edge purchase price is $150 million, including $100 million in cash and $50 million in stock.
We are funding the cash portion from our readily available cash position.
Based on the third quarter results. Our board has improved to 51 cents regular quarterly dividend.
Now, let me turn the call back to Rick for some closing comments.
Thank you Tony.
The results from the third quarter demonstrate great progress in moving the credit markets forward through increased trading automation and global trading connectivity.
Open trading is creating new trading opportunities for all market participants and driving down transaction costs.
In addition to growing momentum in our core products. We are excited about the potential in the expanded slate of new opportunities.
US treasuries municipal bonds portfolio trading and live markets, all demonstrate our investment in new and large areas for future growth.
Now we would be happy to open the line for your questions.
Thank you.
This time, if you have a question Sam Please press Star one then.
On your telephone keypad, if he would like to try your question. Please press the pound cake. Please note each person this limit to one question before asking.
We joined to Q.
Our first question comes from Dan Fannon of Jefferies. Your line is open.
Thanks, Good morning, I guess, if you could talk about the new initiatives you have several one place.
That are either started are slated to come online can you talk about in terms of contribution for.
Kind of 2020, what you think could have the biggest impact incrementally.
Well.
We mentioned the number of new initiatives, some obviously feeding our core business like portfolio trading some feeding our market data business psyche NAV.
And data products.
I would say liquidity edge is probably the most exciting opportunity given it's the largest market in the fixed income arena and one we really don't offer today, so having the liquidity edge acquisition closes.
This is coming weeks, and then making available clients a dealer solution sometime in the first half of next year is an exciting addition.
To our current offering of corporate bonds across our largest client so I'd say the liquidity edge acquisition and the opportunity to grow a sizable rates footprint is what we're most excited about but that said we've got a lot of new initiatives. If you look at our.
Miscible opportunity that Rick mentioned.
Thats a wonderful opportunity we had record volume in August .
Of 1.2 billion.
And obviously, a broad set of clients joining our opportunity immunity.
Thank you.
Next question comes from Richard Repetto.
San Antonios your line is open.
Yeah, Good morning, Rick and Chris and Tony I have one question.
One question, but it might have two parts.
Josh Harris.
Shocker.
But it is about our favorite topic automation and I guess, one thing I just noticed the algo responses wrote open trading and I guess, the other I guess was it.
In.
The automate and when you just talked about all automation, the algo responses were down quarter to quarter over quarter, but the number trades were Rob and I'm just trying to see is this a more efficient people getting better or what are your car responses to their.
You know that fewer responses, but more trades and then the part the bigger part that goes along with his this portfolio trading there's a lot of people at thank that Thats. The next big initiative and not to.
Downplay liquidity edge, but as far as move in the corporate bond market more electronic.
I guess would you share that view that this portfolio trading it could be the thing that you know really pushes the automation forward.
Okay. So on the.
Both the algo execution trade volume I think that really what we're seeing rich is the adoption of our auto Akorn Auto Act solution.
As largely in the smaller trade size. So many of the large firms that have adopted auto ex tend to target a smaller ticket sizes to allow them to just automate that feature that allows their traders on their desk to focus on larger more complicated trade. So it's it's proven to be quite a fish.
Question tool for most of the trading desk that are deploying it with the algo responses, you're seeing they're responding to an auto ex the smaller trade size. So you tend to see growth in.
In the transaction volume.
And with less growth in the Algos.
That makes sense, but we are seeing if you think about our launch of life markets.
That's a market that.
Calls for live algo streams. So it's that we'll be seeing much more activity in our algos streams as a result applied markets as stream start to join.
The market. So when you think about the automation of the overall market we're offering multiple features.
And we're just starting really that rolled that the auto respond or that we talked about today is a key function to bring more of the the investor interest into an automated feature if you think about it today, we offer auto axes, allowing them to auto our Q.
Requesting liquidity and you typically get algo responses to those auto at request auto responder allows them to actually respond to other argues that are in the market using open trading the anonymous feature so we expect to see higher growth rates of.
And volume as well as volume.
Feeding through our entire auto auto functionality.
Rich I'll just jump in on the second one but.
I agree with your thesis that portfolio trading has been growing and likely to continue to do so and I I really think it's an important part of the new market, making model that showing early signs of increasing overall market turnover in credit trading and it yet it's sort of a four part answer but.
Investors in certain situations are finding more efficient means are transferring risks through portfolio trades with the dealer community.
It is still a relatively small part of trace we estimate 2% to 4% of trace volume.
They are growing rapidly and we want to be sure to have this solution in place for our clients, which we wrote will roll out. This quarter. It's also remember important to remember that these portfolio trades create a lot of secondary activity around the tail risk.
That investors are dealers are trying to manage it a lot of that we see as so the growth in portfolio trading has already been part of the growth that you're seeing in our volumes, but I think the other pieces that are improving turnover are the increase in all to all trading primarily through our open trade.
Adding solution.
Which is bringing new participants into the market and then also the adoption of ETF share trading in a much bigger way by boat dealers and investors is another way to move risk. So you really see this whole new risk transfer model emerging that we are excited about because we think it will not.
Only be healthy for our volumes, but it also comes with the prospect of increasing market turnover.
And rich I would just add on our portfolio trading solution.
That we're launching next month, we'll be able to offer clients the ability to trade up to 1500.
Bonds, which is unique but we also will allow them to market that to follow up to five dealers. So it allows investors that are currently conducting portfolio trades in less than efficient environment.
Some even emailing spreadsheets to conducted in a much more efficient way and improve the pricing will also be.
Putting in front of our clients RCP plus calculation, so they'll be able to price their portfolio and really regulate the transaction costs of their portfolio trades going forward.
Thank you. Our next question comes from Jeremy Campbell of Barclays. Your line is open.
Hey, thanks.
So I remember week volatility used to be a little bit of a headwind for you guys, but that's currently picked up over the past here.
The one one question, we keep feeling from clients is about the impact is a next year volatility settle down a little bit now I know this wouldn't really ignore like your new product capabilities and launches like portfolio trading that spotting et cetera, but at a conceptual level is there a way to kind of untangle the year over year growth in volumes and market shares between some of the market based tailwinds.
Like widening spreads and re mall versus your organic initiatives like the rise of Algos and the increased use of open trading over the past here.
Yes ill take the first crack at that one but.
This year.
We if you look back at the fourth quarter of last year, we had significant widening of spreads and higher volatility and we did exceptionally well on market share gains during that quarter. If you look at the totality. So far in 2019, the trend has been Ford credit spread.
As to narrow that is usually not the ideals market environment for our share gains, but we've managed to gain a significant amount of share across products in spite of that market environment and I do think you're right to point out that one of the risks is low volatility going into 2020.
Very difficult to predict and there are plenty of geopolitical and sector RIS emerging that could change the volatility outlook in our hurry, but very low levels of interest rates and credit spreads for a prolonged period would be a risk to overall market volumes and end market.
Share, but we've.
We've been through so many different market environments over.
Over the years and I think the consistent theme has been year on year market share gains that drive our revenue and earnings growth. So we're confident that we will continue to gain share in any market environment going into the new year and Rick I would just add that.
We are adding to our portfolio.
The us Treasury market, which is certainly one of the largest fixed income markets on the planet.
And one that we don't offer our clients today. So in terms of organic growth opportunities. If you hold the market volumes constant we're tapping into a quite quite a large market with really.
A large competitor and Bloomberg in their clients.
Dealer to clients solution in the rates market followed by another competitor in the client the dealer to dealer to client market. So we have a huge market opportunity ahead of us.
Without with or without Tailwinds.
Thank you.
Our next question comes from Kyle Voigt of KBW. Your line is open.
Hi, good morning.
Maybe just.
Maybe just one on life markets and I know just launched a week ago, but.
Can you talk about some maybe early client feedback and maybe more importantly, our you are you seeing already kind of attractive quotes for those bonds being posted it not live order book.
And then.
The second part to that is just.
Just wondering if you talk about just in more detail about where you landed on pricing for that offering.
And one incentives there may be for underwriters on on new issues for example.
Sure. Thanks for the question Kyle pretty excited about the launch applied markets. There was a lot of people here at market access working long hours to make that product come to fruition just last week.
A reminder, it's still in its pilot form, but we are excited about the activity that we're seeing we're seeing a daily trading activity on the platform.
Some great key factors were seeing two sided pricing coming into the platform. We're also.
We've seen new issue trades those are trades that we typically wouldn't see.
In a new issue. We're also seeing clients using the hidden order reserve functionality that we offer which is a key feature for clients to sit inside the market unrest without disclosing any any signs or price information. So.
Sorry early days, but quite excited about the client feedback and again a reminder, it's still in its pilot form.
For the for the near term.
Tony do you want to cover the price yeah, I'll pick up on the pricing. So so you'll you'll you'll recall that you just generally speaking when we set up fee schedules were looking at at bid offer spread in most cases, and we expect the trading in light markets. It will be the more liquid end of.
Trading as larger trade size is typically with tighter bid ask spread you also remember this is a.
The liquidity take or pay or a markup model is.
Thats the model, we think scales best.
Little difference here, a little twist, we are incorporating some incentives or rebates for for liquidity providers. So it does look different than than any other fee models, we had in place.
The capture rate is going to be lower than what you see the headline U.S. high grade fee per million the capture rate is going to be lower.
It's it's tough to pinpoint as Chris said it it's early days where were less than a week into the launch here, but just remember it's all additive revenue I am sure as the quarters go on we'll have more to share on where the fee capture is landing, but but again right now it will be lower than that headline us high grade capture rate.
Thank you and our next question comes from Chris Allen of Compass Point. Your line is open.
Morning, guys I just wanted to ask about another credit you noticed noted strong market volumes in strong share gains are maybe give us some color where the share gains are coming from is this further electronification to specific markets.
In taking.
Basically share from the income of dealers Oh, you're taking share from other electronic competitors side in each of the buckets. So any color there would be helpful.
I think if you look at.
At high yield and EM in euros, Theres, a slightly different story and each one but with high yield in the we think it's further adoption of electronic trading by investors in dealers.
Moving more business away from phone based trading to electronic trading.
Which which is great to see because those markets are still in early stages of Electronification weve.
Got it low low teens areas and plenty of growth runway still in front of us with euros. We're confident we're taking share from some of the other platforms in the region.
There's there's certainly part of this story is further adoption of electronic trading, but I think the combination of our open trading liquidity in the trading automation tools has really increased our market position in the European region, and remember European clients are active with us at multiple products a year.
Arrows are only a piece of the story, we've done exceptionally well in m. with European clients, and we do see cross regional activity in the us credit as well so really encouraged about the international story, that's developing and Chris I'll just add that.
The concept of moving liquidity away from dealers just doesn't doesn't happen on our platform really what we're doing as Rick pointed out converting.
Current volume between dealers and clients from the phone onto the platform, where it's more efficient or more electronic for both parties were seeing dealers benefit from offering algo solutions and reducing their own cost.
While investors are feeling the expense pressures that they feel are able to reduce their cost as well. So we're seeing and as a net benefit for both dealer and client.
More importantly, our OTI solution.
Is being adopted by both dealer and client it's been a valuable source for dealers to unload liquidity in an anonymous way. So we're seeing benefits that are being delivered to.
To both dealer end client through the adoption of the platform.
Thank you.
Our next question comes from Hugh Miller of Buckingham Research. Your line is open.
Hi, good morning, Thanks for taking my questions.
Morning him.
Wanted to start off I guess, what some more color on live markets and I. Appreciate you guys did provide is the the lower fee capture that you had mentioned kind of a function more of kind of the types of securities that would more likely to treat online markets or is that more a function under some of the early rebates that you're providing and any color. You can provide on just maybe that's the time horizon, which that go.
Beyond pilot into kind of more of a broader based dissemination.
Yes.
It's more of a function of the type of bonds.
Again think about how we how we set up our fee schedules.
Bonds typically that tighter bid ask spread we charge less and the community that we're going after here. It is it's new issue activity. The for several weeks after new issues come out they typically have a tight bid ask spread it's the most active bonds, whether its story bonds or benchmark bonds.
Again, those tepid typically are in larger trade sizes and trade and tighter bid ask so it's more reflective of that we do have some incentives in place and rebates in place and Thats, we're starting off with it to promote liquidity on the platform. We think it's the right thing to get to get live markets up and running and.
Yes, let let's see how we let's see how we run here for a couple of quarters, but but again.
The the expectation is based on the type of bonds that we that we see going through live markets. It will come with a lower capture rate.
Just to add to that Hugh that remember this is a part of the market where historically our market share has been very low so it's not a case where were cannibalizing existing.
Trading activity in market share for transitioning to live markets. These are newly issued bonds and benchmark bonds are trading tight bid offer and often trade in block trade sizes.
So even though the fee capture is likely to be lower than what we observe and the rest of our acute protocol. It is additive revenue and it's designed to attack a part of the market, where historically our share has been low and we will commit to do what we always do applied markets becomes a meeting.
Meaningful part of our volume will be transparent about the fee capture in the volume in that area just like we are elsewhere.
That's very helpful. Thank you so much.
And then just on the follow up for just some house keeping items here.
Any distribution fees changes that we should be thinking about as we roll into Fourq. You early 2020, and then of the 1.5 million in deal costs that you mentioned about liquidity edge can you just let us know how much of that was threeq versus fourq you.
Sure.
Happy to take both of those so on the distribution fees and we're always little bit cautious about giving guidance on distribution fees because we give.
Dealers the choice of plans and in most products we have.
Couple of different choices and some have distribution fees some of them are all variable.
If it's all variable there's there are minimum fee commitments, so it's a little bit difficult to predict.
Looking out right now we're not tracking.
Anything of real substance in terms of movement looking out, but I caution on one thing the big swing is around.
Unused minimum fees.
On on plans, where dealers have minimum monthly fee commitments. We we report those unused minimum fees within distribution fees. It does vary period to period, depending on activity. So I do caution again, we're not tracking anything of significance going into Q4, but I, but I do caution as unused minimum fees can Kim.
Period to period.
Second part of the question on the liquidity edge I mentioned that the transaction cost for the full year.
Are expected to be around $1.5 million and Thats included in our expense guidance range. So we're pointing you to the high end of the 2019 expense guidance range of 256 million inclusive of that 1.5. The majority of it came through in the third quarter, there's some residual as we get closer to the.
Closing date Theres, some some valuation work that we're completing but but large majority of that came through in the third quarter.
Thank you and our next question comes from Chris Shutler of with William Blair. Your line is open.
Hey, guys good morning.
Yes.
Can you provide more detail on the the auto respond or tool maybe give an example are two of our client might use that functionality and the parameters they might set.
And how many investor trading desks do you think are actually capable today of adopting that kind of a solution.
That's a great Chris' question Chris.
Really the where client would use the auto responder to typically going to be a client that's already using our auto ex functionality.
Because they'll understand the parameters settings and have more comfort.
With the auto responder as well it will be likely sold in combination with both.
Hi will.
Load a list of bonds that they have some.
Price levels that they are interested in and they can actually allow the auto responder to monitor for other AARP cues that are going on in the market without having a watch list today and manually responding which they can do today.
Most of the client feedback on auto respond or ready was you know I'd like to watch this list of bonds, but I just don't have time to then engage in an RFP processes. This allows them to have certain pricing limits certainly we'll be using our CP plus data feed as a guide as well, but it will.
All of them to have certain pricing limits or other criteria around liquidity in the bond how how the ARPU is being formed and so they can simply respond to our accusing and fully automated manner.
And here back they can either have.
A and except button, where they actually make sure that.
They are priced right for that that our Q, but literally this is a way for them to fully automate a function that they to today, which is a manually respond to other our queues in the market.
Thank you.
Our next question comes from Patrick O'shaughnessy, Raymond James Your line is open.
Hey, good morning curious about how do you guys think about your ownership structure in terms of attracting the buy side in the sell side to participate in your platform has been independent really conveying the event just you guys that you see.
Well I would I would point out a couple of things Patrick.
We have been independent now we're about to celebrate our 15th anniversary as a as a public company.
And it does in our opinion, a number of positive things for our clients one.
We are able to take into consideration the priorities for both investor in dealer clients.
So we can be very balanced about our decision, making and our strategy with.
With both investors and dealers in mind.
It all I would also point out that.
Our board of directors is a tremendous asset for the company.
And adding people like Nancy Altobello, and Richie Praeger, and now just and Gamello to our board just this year.
Brings is really important outside strategic advice to the firm.
So we're really pleased with the way the board interacts with the management team and Collaborates on company strategy.
The dealer side, obviously some of our competitors have had dealer ownership one of them is going through a transition right now.
We would expect that decline and dealer ownership to continue and ultimately it's likely now based on what we're reading that LSC will be the majority shareholder or longer term. What we think that does is just kind of level. The playing field on the dealer side were dealers are agnostic in terms of which platform.
It is delivering the most value value the high quality client order flow in the right pricing.
So we think that helps to level, the playing field a bit as well and I would just to add when we look at our investor.
Shareholders.
I'm very encouraged by that list of investors because most of them. If not every one of them are informed users of the platform. So you have a unique circumstance, where our largest clients are also our largest investors. They have very informed investment thesis around.
The market that we run because they are actively using the market and that's hard to do if youre. A if you are owned by a vertically integrated exchange for example.
Great. Thanks.
Thank you.
As a reminder, ladies and gentlemen that star one to ask a question.
Our next question comes from Jeremy Campbell with Barclays. Your line is open.
Hey, guys.
Just a follow up to Chris is earlier question auto trading.
When firms new firms adopt auto execution do they tend to increase the usage over time or the big hurdle just kind of getting it turned on and then you see a lot of volume for the pipe I ask because I'm wondering if we're going to see a similar adoption volume cadence with auto responder or some clients are more used to automated trading couldn't be more rubber robust and leader.
Our stronger read through to trading velocity in volumes.
Well, it's a great question.
The the sale process for auto ex today is long.
Typically clients would adopt a small set of the auto ex feature try it out on certain bonds get comfortable with the pricing and the execution quality.
Look at the transaction cost savings.
Do a lot of analytics around it before really rolling out to further.
Further bonds or bonds of different types of liquidity.
Most importantly, we do see some clients increasing the size of their auto wax. So they would typically a launch in auto X.
Sure on a million or smaller tickets and then over time increase those ticket sizes.
Upwards of two to three millions and we were seeing some clients adopting a 4 million in larger size limit on their auto ex features we'd expect to see that similar rollout on auto responder, obviously, there's some benefits of having a client order already adopted auto wax feature.
But we do see a long sales cycle around the auto responder.
Thank you.
Our next follow up comes from Chris Allen of Compass point. Your line is open.
Yes, I want to Miss this I was just wonder if you guys provided the revenues for liquidity edge. During this past quarter, just trying to think about how to build the then moving forward.
Yes, so Chris we Didnt give you the revenue specifically, but.
We did provide the volume numbers. So if you look on that on the one slide that.
Just covered you will see average daily volume in the third quarter, it's roughly $18 billion a day and yes. We did also provide some color two months ago. When we had that the call announcing the acquisition when you look at there.
Fee capture.
Feet per million.
Last 18 months, it's been bubbling around $3.50 per million.
So you can you can do the math and you can see that.
Revenue is is around that four four and a half million dollars in the third quarter.
Yes, so that you can you repeat but the pieces together and see what it looks like for revenue also.
We gave you volume growth there as well.
There is some public information on their results for prior years as well it was $9 million revenue in in 2018.
Thanks, guys.
Thank you and our next follow up is from Chris Shutler of William Blair. Your line is open.
Hi, guys real quick one on liquidity I just want to confirm once once you once you do own it.
Now you're going to change the disclosures.
Yes, so Chris what we're going to what we're going to do.
And again, keeping with that theme of being.
Fully transparent and and timely with with delivering information.
We're going to we're going to stick with the monthly volume reporting we're going to report volume in three buckets, which will be.
US hydrate other credit the existing categories that we have today and the third category will be rates and we look at rates that will largely be the U.S treasury reporting we do have some agency and government bond reporting in there, but but you'll see that 90, 99% of it is going to be is going to be us treasury.
We reported.
Thank you.
Next follow up comes from Richard Repetto with Sandler O'neill. Your line is open.
Yeah, one more question on automated training I guess on the excuse excuse me portfolio trade what is going to be priced stat and do you think it's going to be a substitute for the all to all trading.
It's a great question Rich I was hoping you are going to ask about our muni record in August , but I'm happy to answer a portfolio of trading.
One question I can ask that [laughter].
The way we're pricing it.
Is it's going to be obviously cheaper than doing a per ticket item.
The functionality is designed to make it attractive for both dealer and client to transact a large portfolio.
But we do think it will.
Create as as Rick mentioned.
We'll get the benefit of the tales of the post portfolio trade as people unwind certain certain bonds within the portfolio. So it will be priced aggressively certainly to launch because we see the market today and we do think its relative to the trace find that small, but it is a large market.
We're missing today. So initially it will be priced aggressively.
And and it's really both for dealer and client.
I think the biggest benefited the having the portfolio priced in comp.
With a variety of dealers being able to offer pricing on the portfolio. So declines will see a benefit to their current trading environment, where it's not very efficient and their pricing is typically one to one pricing.
Okay.
Thank you I'm I'm happy to hear anything about.
Yes, definitely yes, I wondered if that was a question on Muni is we did hit a record at all [laughter] 1.2 billion. So thank you rich for that Muni question.
I apologize. Our next question comes from Kyle Voigt. Your line is open with KBW.
Hi, Thanks for taking that the follow up.
So you saw some good growth and market data in the quarter, just wondering if that the uptake there was it related at all to their affinity partnerships and then just maybe that's providing an update on kind of.
We're seeing uptake uptake to that park partnership I think you said in the past that the sales cycle, so maybe a little bit longer there but.
Yes, I wonder if that's related to finish at all thanks.
No really the the uptick in market data, we really think what we're seeing.
A lot of activity related to the rough refunded relationship.
The impact is really not making its way to financials in the third quarter right now.
We're seeing obviously sales in Europe . Our track data has continued to be a benefit in our market data business.
Currently, but we're excited about some of the new products that will have to offer obviously, having a treasury data feed is interesting to us it will be a new product and as we grow out our muni bonds, we see an opportunity for municipal data as well I don't know if you heard on the call, but we hit a record in August .
We haven't built.
Okay.
Just to just to add that that growth from a stake in the second quarter. The third quarter just to get a little more granular.
Combination of just the carryover impact of.
New data contracts during the year so.
This year, we've we've closed on data contract value about $3.5 million, that's 10% higher than all of last year. So so through the nine months where.
We're obviously on a run rate much higher than last year. We also had just.
Much much lower impact, but there was some some onetime historical data sales during the quarter, but most of that is just a carryover impact from the increase in new contract activity.
Gotcha, and and Tony just skip Martin for any follow up territory here can I just ask one more on on expenses were looking at the expense run rate for 2019 and trying to model out next year. You noted that a couple items aren't going to reoccur next year, including the sign on of executive management members.
As well as some of the one offs related to.
Acquisition, you called out the one of the half million there.
Can you can you kind of quantify those helped to want to half million for the for maybe additional pro fees that are coming during the second half and then.
Can you kind of quantify how much expense was in the 19 expense run rate for the executive management hires that we shouldn't expect to recur and then just on organic growth basis should be thinking more and kind of that that high single digit type type territory for organic growth in the next year.
So as I said it goes a little early to get give you more comprehensive guidance into 2020, but on the first part of your question there.
The senior hire component, which which we did the right thing we hired Chris has been has been tremendous.
We hired Mike Baker, as our new Chief Technology Officer, Oliver hug into new Chief Risk Officer. Those were those are the right things to do they don't happen every year. So that you that step you can just stop there.
Okay, [laughter] that that step function, you that was around right around $10 million in expense in 2019, you tack on the.
The million and a half dollars for the liquidity edge deal related costs, you're close to 12 million and if you look at our historical expense CAGR, even including.
The $256 million this year, the five year CAGR has been around 12% and if you just humor me and you say you take out the senior hire impact and the and the impact of the deal costs, you're down at something like a nine or 10% increase year over year in 2019, so when we were actually little bit lower than our lower than our five.
You are CAGR on an adjusted basis, but.
I will definitely provide a lot more information a lot more color on the on the January call it including.
Including the view on liquidity engine and the amortization of intangibles.
I'm not going to stop you stop at that right now that.
Thank you at this time I'm showing no further questions I'd like to turn the call back over to Mr., Rick Mcvey for closing comments.
Thank you very much for joining us this morning, and we look forward and talking to you again next quarter.
Ladies and gentlemen, thank you for your participation in today's conference you May now disconnect everyone have a wonderful bank.