Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand by and thank you for your patience.
At this time all participants are in listen only mode. Later, we'll conduct a question and answer session at that time. If you have a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound keys at any time leased know each person is limited to one question.
Before being asked to rejoin the queue. I start reminder, this conference is being recorded its January 29, 2020 I would now like to turned to call over to Dave Crazy Investor Relations manager I might get access. Please go ahead Sir.
Good morning, and welcome to the market access fourth quarter 2019 conference call.
For the call, Rick Mcvey, Chairman and Chief Executive Officer.
You know highlights for the quarter and the full year 2019.
Christine can president CEO will discuss progress in open trading in automation.
Tony The least chief Financial Officer will review the financial results.
Before I turn the call over to Rick Let me remind you that today's call may include forward looking statements.
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 what is indicated in those forward looking statements.
A discussion of some of the risks and factors that could affect the company's future results.
She just the description of risk factors in our annual report on Form 10-K .
The year ended December 31st 2018.
I would also direct you to read the forward looking Stephen disclaimer in 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 Rick.
Good morning, and thank you for joining us to review, our fourth quarter and for your 2019 results.
Our fourth quarter results contributed to our 11th straight year of record revenues and earnings.
Revenue growth for the quarter was 15% in spite of the challenging year over year comparisons to fourth quarter 2018.
You will recall the credit spreads widened significantly in Q4 last year, leading to a robust quarter for trading on market access.
This year credit spreads continued their march to the low end to the historical credit spread range and volatility declined.
Operating income for the quarter was up 13% S was up 9%.
Our acquisition of liquidity edge closed on November 1st and added about 3.2 million in expenses this quarter, which Tony will cover in more detail.
U.S. I agreed estimated market share reached 19.9%.
International client volume was up 44% year over year and open trading volume was up 16%.
Due to our strong results and growing free cash flow our board of directors approved an 18% increase in our quarterly dividend to 60 cents per share.
Slide four highlights our record full year results.
Our long term results reflect our consistent track record of growth with five year drop on revenue growth of 14% and compound EPS growth of 22%.
Full year 2019 revenue growth was 17% and EPS growth was 18%.
The results this year reflects strength in all four of our core credit products with record volume and revenue in U.S. high grade high yield globally and euro bonds.
Total credit trading volume was up 22% this year and we had new records in all four core products for active institutional clients.
Acted international flying firms reached 830 up from 293 in 2014.
The number of client firms trading three or more products is just shy of 1000 nearly doubled the total from five years ago.
Our success in growing our global network of institutional customers has created a diverse base of trading revenue.
Commission revenue in 2019 was up 19%.
We believe our lead in global electronic trading revenue incredibly products grew significantly during 2019.
96% of credit trading revenue at market access is generated by institutional client order flow, while we believe our key competitors are in the vast majority of their credit trading revenue in the dealer to dealer segment.
According to FINRA trace volume data.
Well I have to dealer trading represents approximately 78% of combined high grade and high yield trace volumes.
Slide five provides an update on market conditions.
Our record results. This year were achieved at a market environment that is not normally favorable for our business.
Got it spreads declined throughout 2019 and ended the year near the low end of historical credit spread ranges.
Credit spread volatility declined in the second half of the year.
New issue activity levels were strong throughout the year.
Well monthly share numbers will always fluctuate the six month estimate it rolling average market share for combined high grade in high yield shows consistent growth and ended 2019 at the highest levels ever.
Our investment in trading automation is adding important trading efficiency for both dealers and investors.
Open trading continues to provide an important addition to market liquidity and is reducing transaction costs.
For the full year 2019 open trading price improvements delivered estimated transaction cost savings of $385 million to our clients.
Slide six outlines the breadth and growth of our global network.
Volume and revenue growth is being driven by a healthy combination of increased activity with existing clients and new investor client relationships.
Total active institutional clients exceeded 1700 this year nearly double the active client base from five years ago.
We're especially pleased with the progress we continue to make outside of North America.
Active international client firms now total over 800 and international firms represent 30% of total trading volume up from 17% in 2015.
European clients volumes were up 38% last year and global emerging markets volume was up 29%.
We are excited about the long term growth opportunity, we see in CEMEA Asia and Latin America.
Now, let me turn the call over to Chris to provide an update on open trading and automation.
Thank you Rick Slide seven provides an update on open trading open trading adoption grew to 27.2% of global trading volumes, representing 136 billion in notional volume the number of active open trading firms reached a new record of 1436 firms.
10% year over year, the number of active client firms also drove significant growth across our four core products, notably in emerging markets with a 92% increase and euro bonds with a 109% increase year over year. We're also seeing an increase in inner dealer activity.
Dealers continue to leverage open trading to move risk off their balance sheets in the fourth quarter over 31 billion of dealer to dealer volume was executed on the platform up 45% on the prior year inter dealer volume now represents 6% of our total credit trading volume.
Open trading also continues to deliver significant transaction cost savings for participants with an estimated 79 million in aggregate savings in the fourth quarter for both liquidity providers and liquidity takers as announced last quarter, we launched a pilot phase of log markets are alive order book.
For active and newly issued corporate bonds. We are now actively onboarding clients and dealers to build a robust streaming liquidity solution. This innovation will allow participants to quick to trade and leave life resting orders, which is a new way of trading credit.
Our effort to move toward a self clearing model is progressing well and we expect to be fully live in early early in the second quarter, we expect self clearing to favorably impact our carrying costs, while improving our client experience.
Slide eight demonstrates the growing growing momentum of automation and credit trading automated trading volumes rose to over 24 billion in the fourth quarter up from 9 billion in the fourth quarter of 2018 78 firms do used our auto execution functionality in the fourth quarter up from 31 the prior year.
Our new auto responder functionality will allow investor clients to more efficiently engage in liquidity provision through the open trading marketplace.
The use of dealer algorithms is also growing with approximately 2.4 million algo responses in the fourth quarter, a 33% increase year over year dealer Algos also drove an increase in the average number of price responses per inquiry to 7.3 in the quarter up from 5.8 the year prior.
This increase in pricing activity across liquid and illiquid corporate bonds, ultimately can improve execution quality and the likelihood of execution.
Slide nine provides a summary of our trading volume across product categories.
We're pleased with the 14% increase in overall credit trading volume in the fourth quarter in light of less favorable market conditions for electronic trading are you at high grade volumes were up 5% year over year to 253 billion for the quarter solely due to an increase in estimated market share with flat traits volumes.
Year over year other credit category trading volumes were up 26% year over year emerging markets in Europe on volumes were both up more than 30% on a combination of higher estimated market share and an increase in estimated market volumes. Our rates category is mainly composed of trading volume and.
Yes, treasuries and reflects the post acquisition contribution from liquidity edge on a pro forma basis average daily volume for US treasuries was up 62% from 2018 to 2019, resulting in over 14 million in total annual revenue. We believe these volume gains were primarily driven.
And by an increase in market share.
2020 will be a build year for our reach business as we focus on integration efforts with liquidity edge, including the development of a dealer to clients solution.
Sign of the early integration success, our auto hedging solution was launched in December 2019, and has already executed close to 400 million and Treasury hedges 2020, we'll also see continued investment in our other new initiatives, including portfolio trading solutions Treasury net hedging life markets Muni.
Automated trading enhancements in our recently announced rebound trading program. Our January month to date average daily credit volume is tracking more than 10% higher than January 2019, while you at high grade and high yield market volumes are somewhat flat.
Our us Treasury volume is tracking more than 20% higher versus January 2019, and I'm happy to report that our January volumes include over 1.7 billion in Green bonds, which will plant close to 9000 trees under a new Green Bone initiative now, let me turn the call over to Tony to discuss the.
Financials in more detail.
Thank you Chris.
On slide 10, we provide a summary of our quarterly earnings performance.
Overall revenue was $130 million up 15% year over year.
The 14% increase in credit trading volume and the inclusion of US Treasury trading commissions resulted in a 15% uplift in commissions.
Information services revenue was up 21% in the fourth quarter and includes onetime data sales of approximately $700000.
<unk> expenses were up 18% and operating income was up 13% year over year.
Excluding the impact of the liquidity edge acquisition expenses were up 12% and operating margin was approximately 48.5% in the fourth quarter.
The effective tax rate was 18.9% in the fourth quarter and 20.4% for full year 2019.
During the quarter, we recognized $3.6 million of excess tax benefits related to share based compensation awards.
Our diluted EPS was $1.32 cents.
The increase in our diluted share count.
Was largely due to the 146000 shares issued as part of the liquidity edge acquisition.
On slide 11, we've laid out our commission revenue trading volumes and fees per million.
Total variable transaction fees were up 19% year over year, driven by the increase in credit trading volume and the inclusion of us Treasury trading commissions.
US high grade fee per million was little changed from the third quarter level.
Here's to maturity on bonds traded over the platform with similar to the third quarter.
Our other credit category fee per million increased by five decreased by $5 on a sequential basis, principally due to the impact of two high yield dealers migrating from the all variable plan to the distribution fee plan.
Rates fee per million was $4.81 in the fourth quarter, which is slightly higher than the estimate we provided in our December volume release, and as a blended fee capture for us treasuries and us agencies.
There could be some variability in rates fee capture as our treasurer us treasuries fee plans are typically volume tiered.
Please. Please also note that the fourth quarter rates category fee per million only includes two months of us treasuries trading activity.
Reflecting a full quarter of activity and continued strong growth in treasury trading volume, we would expect the rates category fee capture to run around $4 per million prospectively.
Overall distribution fees were $1.9 million higher than the third quarter level.
Basically due to higher unused minimum fees on certain all variable plans and the two high yield dealer migrations in the fourth quarter.
We expect distribution fees in the first quarter of 2020 will be similar to the fourth quarter levels.
Slide 12 provides you with the expense detail.
On a year over year bit basis expenses were up 18% for the quarter.
Excluding approximately $3.2 million that liquidity edge related operating expenses amortization of acquired intangible assets and deal costs.
Expenses were up 12% year over year, and very similar to the third quarter level.
Excluding the liquidity edge impact compensation and benefits accounted for 65% of the year over year change in expenses as we continue to add personnel to support our growth initiatives.
Our year over year increase in head count of 73 higher stock based compensation expense and higher variable bonus provision, where the main contributors to the rise in compensation and benefits.
On slide 13, we provide balance sheet information.
Cash and investments.
As of December 31st were $500 million and free cash flow reached a record $227 million in 2019.
Dividends and share repurchases aggregated $93 million and capital expenditures were $35 million in 2019.
Our recurring quarterly dividend is an important element of our capital management strategy.
Our dividend rate has kept pace with our increase in earnings and free cash flow generation and with the announced 18% increase in the quarterly dividend to 60 cents per share we have nearly tripled the dividend level over the past five years.
We expect to maintain our standing repurchase program with the intent of offsetting dilution from equity grants.
During 2019, we repurchased a total of 60000 shares under the plan.
On slide 14, we have our 2020 guidance for expenses capital expenditures in the effective tax rate.
We expect that total 2020 expenses will be in the range at 297 million to $314 million.
This guidance range reflects a full year of liquidity edge expenses.
Including $2.8 million for amortization of acquired intangible assets.
In addition, it's important to note that variable clearing and technology costs are expected to represent roughly 50% of liquidity edges revenue.
Excluding liquidity edge expenses, the midpoint in the guidance range would represent an approximate 11% year over year increase in expenses.
2020 capital expenditures are expected to range from $44 million to $49 million, which roughly half relates to capitalized software development costs, resulting from the investments we are making a new protocols and enhancements to the trading platform.
The guidance also includes approximately $7 million of Buildout costs for additional office space in London.
We expect that the effective tax rate for full year 2020 will range from 20% to 22%.
The guidance range incorporates an estimate for excess tax benefits related to share based compensation awards.
Now, let me turn the call back to Rick.
Thank you Tony.
We're pleased with the consistent long term growth, we have delivered to our shareholders and even more excited about what we see for the next decade.
The current product in client trend showed acceleration of momentum towards greater fully electronic trading in global credit products.
In addition to our core product success, we're excited to have a serious entry point into the rates space with liquidity edge and we see additional product opportunities emerging in municipal bonds and elsewhere.
We would now be happy to open the line for your questions.
Thank you NSR reminder, to ask a question you would need to press star one on your telephone we ask that you. Please limit your questions to one and rejoin the queue if necessary.
Draw your question press the pound team.
And our first question is from Dan Fannon with Jefferies. Please go ahead.
Hi, Thanks, I guess my for my question is going to be on the expense guidance and.
Just curious.
In terms of the spend levels, how they might be differing in terms of what you're allocating to in 2020 versus last year and also just clarifying whether that includes the benefit from self clearing.
Yes, Thanks, Dan it's Tony so.
Yes, thinking about the expense guidance and we gave some color probably more color we've done in the past in terms of what what's driving the expenses. When you look at the individual line items as expected.
The line item with the biggest growth year over year would be in comp and benefits and.
We expect to add more personnel in 2020 to support our growth initiatives, it's concentrated in a technology and sales and business support and we also have the the full year impact of the almost 75 people that we added in 2019, so that comp and benefits line will be.
We'll be one of the drivers of the growth.
Two other areas, though and I was looking at consensus estimates and looking at where our base budget varies the to other areas are our big investment areas, it's around depreciation and amortization and technology and communication.
On the depreciation and amortization side.
We've had we've made a significant investment in the trading platform protocols products and that shows up and capitalized software development. So.
Chris and Rick rattled off but trading automation.
Building out the client to dealer treasuries portfolio trading hedging lied markets all of that.
Resulting an increase in capitalized software development, we end up amortizing that over three years, so you're going to see an uplift there and I think also the amortization of the liquidity edge deal intangibles also contribute to that rise in depreciation and amortization the other area, where there was it again.
Sizable variance between consensus estimates and where we're looking at a base budget was in tech and communications and there is that one had really two big components on a liquidity at side the technology costs today do very directly to directly with revenue. So as we're expecting an uplift in.
And treasury activity in revenue derived from treasuries.
We're also expecting an uplift net technology line and the second area to support all of the all the product development work, where we are building out.
Cloud development and tools to support the growth, so that's where you're going to see some see some variances in.
In the expense growth as well.
Thank you and our next question comes from.
Kyle Voigt with KBW. Please go ahead.
Hi, Good morning, actually just wanted to ask a follow up on Dan's questions. I think you also asked about.
Self clearing if there's any benefit from self clearing embedded in the 2020 guide sorry, if I missed that and then also just the 11% organic growth rate for 2020, excluding.
Liquidity edge I, just over the past five or seven years. It just feels like the organic growth rate in expenses, that's kind of been in this 8% to 10% range on average I'm just wondering how should investors think about the medium term expense growth rate organic expense growth rate of the business.
Given the investments that you're making is it is it in the double digit range in the 10% to 12% range should we be thinking about that over the medium term.
Then just you guys kind of remind us your your thoughts on operating margin expansion operating leverage and how much. You think you can kind of you can generate operating leverage on on a normalized basis.
Given the business. Thanks.
Thank you had more than one question there Kyle.
Yes.
On the I will say one first on the organic growth rate.
If you're looking at say at a three year five year 10 year basis on organic expenses. They have been double digits that they've been around 12 or 13%. So I don't think anything where where we're guiding to for 2020 again absent liquidity edge overlay anything we're guiding to would be inconsistent with what we've done in the past and.
And this is this is all about investing in the opportunity to expand the geographic reach the addressable market new products and protocol I think we're doing exactly what investors want us to do and I do think again, you look back historically wouldn't being consistent with the way expenses have grown the second part on clearing.
Yes the.
What we're guiding to includes an expectation for the market access core or legacy business. When we transitioned over to self clearing in the us and we transitioned to a new.
Clearing broker outside of the U.S., we are anticipating cost savings that is built into the numbers. So.
Fully embedded Chris mentioned in his prepared remarks, we expect to what to go lives sometime sometime in Q2, so fully embedded in the in the guidance we're providing.
The other piece, you mentioned, which was which was question number two was around.
Was around operating margins.
Yes. This you've heard this from us in the past, where we are investing and we've had we've had a period here over the last several years, we've invested significantly in building out.
Our geographic reach and launching new products and protocols and again you can you can reference back all the initiatives we have underway right now at the same time, we've been delivering operating margins around 50%.
We don't think that's a bad answer but this is all about.
Growing and addressing the opportunity here, we think there is it if we're right around about.
Investing today, we think there is an ability for margins to expand.
Yes, if we're right around our client the dealer Treasury trading if we have an uplift in in Muni trading if.
Market share accelerates in our core business, that's all going to drive revenue growth forward I think there is a an opportunity for margins to expand but yes. This is about investment look at this past year. We delivered you look at it and say the expenses were up significantly in the past year, but but our net income was up 18%. So we're.
Or not we're not managing to a margin number right now I do think there's opportunity to expand but today, it's all about investment.
Thank you and our next question is from Rich Repetto with Viper Sandler. Please go ahead.
Yes, good morning.
Rick and Christmas and Tony.
I guess, what what caught my attention was Rick when you highlighted 96% of your businesses institutional.
And you think peers data D. and you also highlighted that I think the FINRA traces 78%. So I guess well I guess the point here is what are you trying to say versus your comp.
Competition and isn't.
I assume that did the space is much lower capture but isn't as good liquidity as well.
Or what are you trying to say about differentiate near your platform with those numbers I guess.
Yes.
Im trying to outline riches in the institutional client to dealer segments are fully electronic trading we feel better about our market position than ever before and it's important to remember that there are no industry standards for electronic trading volume.
Ports and every company is different in what and how they report.
So I think it's important to look at.
What's going on in the revenue side to compare with what is being reported on the volume side and when we when we really talk to the major dealers in this space that see the order flow.
We continue to feel like we have been strengthening our leadership position in the most important space for credit trading, which is the client to dealer institutional space and I.
What do you look at the competitors that they're all of you follow.
The retail space is primarily a dealer to dealer business.
There is also institutional dealer to dealer, both electronic and voice brokerage going on and I believe that our lead has as growing throughout the year in the institutional customers space.
And yes, when you look at the fat within FINRA trace.
That helps to frame out the size of the market and 78% of the combined to high grade in high yield volume reported to trace involves a customer trade and 22% as a dealer to dealer trade. In addition to that some of the stats that Chris outlined is that dealers are using our value.
Liquidity pool for credit trading for their own liquidity more than ever before so we're excited that we're also starting to compete in the dealer to dealer space, but just to keep that in context. It represents 6% of our trading volume and 4% of our revenue and I think if all the compare.
Editors in this space would follow that lead in terms of the granularity around.
Revenue reporting by client segment, it would add to your understanding.
What's really going on electronically by client segment as well as investors.
And rich I would just add.
I just think the importance of the client business as we look at our network value in value that client business. It is a global business.
And it is quite a sticky business versus the dealer to dealer business that we've seen on other platforms shift rapidly so the build out in the investment.
And the cost both in terms of time and human value to build that client network that is a an enormous advantage that we have and an advantage that were clearly using as we jump into other product areas like rates.
Ladies and if you look at our success in emerging markets. So the client network is a network of great value and and so we look at that those volumes as an important metric of our global growth.
Thank you and our next question is from Jeremy Campbell with Barclays. Please go ahead. Your line is open.
Hey, thanks.
As you guys highlighted earlier non U.S. clients on volumes have been very strong and emerging markets. In particular is a pretty big market and that's been a pretty big growth driver for you I think kind of overarching you guys have previously noted that every 1% market share pick up like $30 million to $40 million of additional revenue just kind of wondering.
The recent switch to your new non U.S. settlement agent.
That has better kind of relationships and expertise in local markets, maybe just discuss what your expectations are for potential accelerated mark to market share gains and emerging markets.
Tony and maybe whether if thats a function of new client sign ons or deeper and deeper wallet share.
No. Thanks, thanks for pointing that out where we couldn't be more excited about the opportunity in global E and the progress that we are making and in the prepared remarks, we did highlight that international growth over the last several years has been faster than North American growth.
And it's primarily because of our success in our EPM franchise.
Europe took the lead last year with 38%.
Increase in client volume within the region and EM was an important part of that but we also saw a significant increase in active clients in Asia and improvement in our franchise in Latin America, and what we what we feel great about is that for many years our E.
Volume gains were primarily driven by hard currency M. trading we're now seeing an acceleration of interesting growth in local market trading where we have 26 different local markets available for trading on the platform.
So this is another sign that the demand for trading automation and electronic trading is growing well beyond the United States and its turning this this into a very much a global opportunity with really healthy trends in Latin America, So EMEA and Asia.
Thank you. Our next question is from Chris Allen with Compass point.
Morning, guys. Just following up on that point, you talked about investing in different regions is that where you investments can be driven from boots on the ground.
And to keep the emerging market growth going.
Theres certainly some of that we're increasing.
Our headcount internationally too.
To capitalize on the growing demand that we are seeing.
But it's also a technology investments so.
It's it's a combination of client facing people too.
Work with a growing base of international clients that we serve as well as technology investment.
And I will just add we've made a number of headcount investments certainly in.
Latin America as well as in Asia, we are seeing dividends paid as a result of those human investments we've made it people on the ground in both regions.
And growing our penetration in those regions.
Thank you. Our next question comes from Ken Hill, with rather than that.
Hey, good morning.
Had a question on the Muni bond trading mentioned in the prepared remarks, but I know that's been an opportunity for some time, hoping that volume kind of moves a little bit more electronic I was hoping you guys could provide a little bit more of an update on kind of behind the scenes effort, what you're hearing from clients.
Moved out a little bit more electronic over time, because I know, it's a big opportunity so not only maybe what you're doing with clients, but how long you see that kind of playing out.
When we see some more substantial volume sure great question, obviously, we've got a great deal of focus on the Muni bond area.
Just here in January we're seeing our month to date volume.
Increasing from from both December and obviously prior year January 19.
We're close to eight or just over 800 million in volume in the month, so a pretty exciting area. We are seeing a shift from in among the retail dollar is moving into SDMA accounts, which are putting.
Muni dollars in the hands of large institutions, where we have a competitive advantage. So we've seen some uplift from adoption of our traditional institutional clients as they shift how they handle their muni desks.
And we are seeing rewards from both technology investments and also.
The Omar solutions that we provide those institutions. So were excited about the muni space, where we expect.
Obviously, the see continued penetration in our in our clients across the institutional.
Region. We also are seeing benefits many of the green bonds.
Our found in the Muni space. So we're we're getting deriving some green bond benefits as a result of the demand in green bonds that are coming in from both Europe Asia and the us.
And our green bond activity is growing.
As a result of our muni growth Ironically.
Thank you. Our next question comes from Ari Ghosh with credit Suisse.
Hey, good morning, everyone. So just on back to liquidity edge, Chris maybe you could take this one.
Update us on the timeline around the rollout of some of the new offerings and cross sell opportunities that you see the CEO and then if I think about the freshly space, maybe talk about a little bit about your competitive positioning as the industry adoption of some of these screaming protocols increase thanks, Yeah, great question.
Obviously, we're very excited about.
The liquidity edge acquisition, and just the dealer to dealer business and the progress that liquidity edge has made in the year, we've got over 125 banks and dealers on the platform 21 of the 23 primary dealers.
And obviously, there eightv was tracking.
In 2019 over 2018, probably about a 60, 60% growth over 2018, as we think about the integration of liquidity edge on the market access platform, we start with the hedging solutions that we're able to we launched in December of last year we.
Also expecting net hedging solutions coming in the second quarter. So further enhancements and build out on our hedging solutions for our corporate bond trading more importantly, our dealer to client.
Integration, where we actually allow our institutional clients from the market access platform to.
To access dealer streaming liquidity, we expect that to be launched in the second half of 2020. So we're excited about the build out there as well.
Thank you and our next question comes from Brian that gel with Deutsche Bank. Please go ahead.
Thanks, Good morning, maybe Chris and Tony If you could talk a little bit more about.
The spending on growth initiatives in a few areas and is the how you.
I guess I guess, the scalability of how you're developing these and and maybe kind of rank them a little bit but it would be obviously open trading but on auto acts obviously, you get you've gotten very strong traction there. If you can talk about the spending in.
In the 2020 plan for that and how that is already scaling and then I think Chris you mentioned.
We are trading solutions.
And could even be growth area. Thanks.
Sure well first on the the scaling I think its most evident in our automated trading solutions, our auto ex feature as I mentioned.
Saw 24 billion in volume just in the fourth quarter alone. So.
We didnt add headcount to offer additional auto execution functionality and yet we are seeing those levels of volume coming across the platform. We're also seeing better penetration within clients that have already adopted auto acts and what I mean by that is either rolling out two additional product or.
Sure.
Offering larger sizes in their autoweb solution so that.
That some of the growth is both new clients adopting auto execution solutions, but also current clients increasing their use of auto execution.
And then as I think about portfolio trading probably has the most scale because it's built we're adding features throughout the year 2020, but the largest part of the building has been done and now it's really client adoption we have.
93 clients now onboarded to.
Execute portfolio trades, it's about 830 traders across our institutional client base and now 11 dealers supporting a pricing in our portfolio trading solution. So we're excited about what the portfolio trading technology can do and how much volume can come through those very large.
George a block trade portfolio trades.
And then just one one add on on the spend.
If you looked at 2019, however, our spend for.
Enhancements to the platform Rolling out these new protocols. It was almost double the spend in 2018. So just put in perspective 2018 capitalized software development roughly $11 million 2019, roughly $22 million. When we look at 2012 2020, and we in the prepared remarks, you saw some yes.
Color commentary there we expect that.
Capitalized software development to have another uplift in spend so.
We had a big uplift in 2019, and we're expecting another year of heavy investment in 2020.
And I'll just add our Green Bond initiative will scale quite nicely. We look we saw close to 20 billion in Green bond activity in 2019, and as I mentioned, we already have 1.7 billion in Green bond trading just in this month alone.
So we're excited we really didnt have much of an initiative in 2019 for Green bond trading and as we look at 2020 were excited about a planting five trees for every million dollars in green bond trading we think thats an enormous incentive.
For our clients because they will get credit.
SG credit for trading on our platform and as you know SG is quite a hot topic not only in 2019, but clearly in 2020, So I would say our green bond trading incentive is probably our most scalable offering on the platform right now, but I'm a little bye.
Thank you and as a reminder, ladies and gentlemen to ask a question just press Star then one to getting the Q and we ask that you. Please limit your questions to one and then rejoin the queue.
Our next question is from Alex Blostein with Goldman Sachs. Please go ahead.
Hi, guys. Good morning, Thanks for the question.
Bigger picture question for you guys just show electronic trading of credit obviously continues to to expand beyond the sort of traditional our Q model.
You guys have very strong presence and the all to all part of the market and obviously launching portfolio trading and all that kind of particles can you help us think about the competitive landscape and you know about part of the market outside of the ARPU model, which obviously, whereas market access more dominant and importantly, how you think pricing dynamics will evolve for some of those newer product.
Thanks.
Sure I'll take a first crack at that Alex good morning.
First of all on portfolio trading the demand is growing but it is in very early stages.
And what we have seen and also heard consistently from the market is that portfolio trades still consistently tend to be bilateral trades. Although there is some increase starting to occur in multi dealer.
Portfolio trades.
But.
Our early portfolio trading on market access.
We are providing value by primarily processing a trade that's taking place off the system.
So dealers and clients are still negotiating the bonds in the portfolio and the pricing benchmarks that they will use our system with spreadsheets and then taking advantage of the processing benefits online and it's our understanding that thats generally what's taking place elsewhere I would expect that to continued.
Develop in terms of more automated portfolio trading solutions.
My view is that it's in early stages today.
And the also the other thing that we do his track what we believed to be portfolio trades that hit the trace tape and while the growth rate has been very high.
The estimates that we have that we've confirmed with major participants in portfolio trading around three or 3.5% of high grade trace volume, taking place through portfolio trading and more like 2% to 2.5% in high yield.
So it's an important and growing segment, but still a relatively small part of the secondary market.
The other pieces that there is some demand emerging for a sessions based trading and that really has led to our investment in live markets.
We think that.
Very active benchmark bonds as well as new issues can trade closer to a life market environment and that is exactly why we've invested the time and effort into alive markets and we do see reason for optimism there with the client and dealer demand that we're starting to see for life market.
Yes.
And I will just add when you think about our auto execution functionality, we are taking the traditional our Q market and creating a no touch solution, while pricing Doesnt change. They are continue to be automated RF queues over time, how we execute.
And auto execution in the speed of the our Q can be increase so you get the similar benefits through a streaming price as you speed up barbecue into a continuous our Q or.
Request for stream type of model when I look at the rates business, obviously that the most liquid asset class on the planet is our us treasury market. It continues to be serviced by an RF Q model on from the dealer to client market in the deal to decline market. So we are look.
Looking at not only that solution, but a request for stream solution as well to help solve the speed of execution in the Treasury market and then just as as Rick mentioned, our live markets is still in pilot form it's out there being offered we have 37 participants live on the platform.
Seven dealers currently on on the platform.
We're still waiting on dealers to connect in stream price and that's a critical change in the in the credit market at dealers or build out their capability to stream alive pricing throughout the day and I think thats an important development.
Both in Europe , and the new asset as all of our traditional deal or start to build out streams for pricing that's when the market solutions can change.
Obviously online markets are trading desk is routinely our trading desks headed by Mike Sheehan is routinely contacting clients letting them know about activity on the platform. So we have the eyes in the years of active trading going on on log markets.
Thank you and our next question comes from Chris Shutler with William Blair. Please go ahead.
Hi, guys good morning.
Two questions in high grade it looks like open trading as a as a share of your total volume has been pretty flat over the course of the year.
Maybe just talk about whats cost that stabilization and that that percentage.
Then secondly, and portfolio trading.
I hear what you're saying that it's early days, but overtime is that functionality does become more.
More automated and matures how should we think about the fee capture for our portfolio trades relative to your current averages.
Sure, Chris It's Rick I'll take the first crack at that one that but.
When you look at open trading percentages.
A 27% is still a significant addition, and new market liquidity.
For credit market participants, but it will also vary in our opinion with overall market conditions and we saw a huge increase in open trading percentage in the fourth quarter of last year. When we had a significant pickup in credit spread volatility in widening spreads.
That was not the case this year, where we had a us a decline in credit spreads throughout the year and a decline in volatility.
I think you'll see it vary with different market conditions. The other point to remember is that.
Our trading automation tools, you have allowed dealers to be much more responsive on the system to client inquiries. So the dealer responses are gone way up.
Over the last year, and a half or two on the back of the work that we've done with many of them.
Both are algos on market access so I think it's a combination where dealer pricing continues to get better on the platform.
Open trading is providing an important additional layer of liquidity, but also market conditions, which throughout the year saw declining spreads and declining bid offer.
And I'd, just add that portfolio training wallets.
Something that we hear a lot about its still a relatively small part of the market. It's also a market that we don't touch today.
These are large blocks that are going off and the large block market, it's something that we've been striving to get in the middle of in portfolio trading solution. It. It really requires a great deal of efficiency today dealers in clients are passing back spreadsheets and so our solution really is a workflow solution.
At first overtime, we think it can generate more secondary trading activity on the platform as a result of either dealers liquidating positions brought down from a portfolio trade. So the pricing of our portfolio trading and again its initial rollout pricing.
Is lower than traditional our Q, but the size of the portfolios can get quite large and it is a target market that we don't have on the platform today and one that we're chasing.
Thank you im not showing any further questions in the queue I would like to turn the call back to Rick Mcvey for his final remarks.
Thank you for joining us this morning, and we look forward, it's catching up with you again next quarter.
And with that ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect have a wonderful day.