Q2 2020 Marketaxess Holdings Inc Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
If you would like to withdraw your questions. Please press the pound key at any time. Please note each person it's limited to one question before being asked to rejoin the queue.
As a reminder, this conference call is being recorded on July 22nd 2020, I would now like turn the call over to Dave Kratzke Investor Relations manager at market access. Please go ahead Sir.
Good morning, and welcome to the market access second quarter 2020 conference call.
For the call written today, Chairman and Chief Executive Officer.
I would work.
Christian can president and CEO.
Well discuss automation in our trading.
And then what easily Chief Financial Officer will review the financial results.
Before I turn it over to Rick.
We remind you that today's call may include forward looking C.
These statements represent the company's belief regarding future events that by their nature are uncertain.
Actual results and financial condition may differ materially what is indicated in those for listing.
Discussion of some of the risks and factors that could affect some of these future results.
We see a description of risk factors in our interim report on form 10-K for the year ended December 31st 2019.
Our quarterly report on form 10-Q, so the first quarter.
I would also direct them to read the forward looking statement disclaimer.
Quarterly earnings release, which was issued earlier this morning.
Now available on our website.
Now, let me turn the call over to rent.
Good morning, and thank you for joining us to review our second quarter 2020 results.
Our second quarter results reflect accelerating market share gains robust credit market volumes and a global shift among dealers and investors towards fixed income trading automation.
Revenues were up 47% to $185 million on the back of a 44% increase in fully electronic trading volume versus Q2 19.
Earnings per share at $2 in 20 cents was up 73% year over year.
Operating margins reached a new record of 56.4% up from 48.5% last year.
Record new issue activity contributed to the increase in market volumes during the quarter.
Estimated market share on market access back to normal trend during the quarter with accelerating share gains in spite of the heavy new issue calendar.
You as high grade estimated share jump to a record 21.5% during the quarter up from 18.7% and U.S. five year old estimated share grew to 14% up from 10.4%.
Open trading volume grew to a new record of $241 billion in Q2 up 87%.
With significantly higher volatility and price dispersion during the quarter open trading estimated transaction cost savings reached a new record at $312 million exceeding company revenues for the second quarter in a row.
The value proposition to our clients has never been more clear as we deliver substantial transaction cost savings essential new market liquidity and greater trading efficiency.
I'm also thrilled to announce the appointment according to Gibson President of loop capital to our board of directors.
Coordinate breadth of experience in both equity and fixed income markets and her investor client relationships will bring valuable perspective to our company.
Slide four highlights market conditions.
Market volumes measured by trace remain high due to the combination of higher credit spread volatility and record new issue volume.
Since the covert 19 market conditions started on February 24th High grade average daily trace volumes have increased 28% in high yield is up 12% versus the levels earlier this year.
New issue volumes are at record levels with high grade issuance of $691 billion in Q2 up 150% year over year.
Credit spreads peaked in March and decline throughout the second quarter following the fed announcements on liquidity programs.
Credit downgrades continued in the second quarter.
Year to date, approximately $196 billion of high grade debt has been downgraded to high yield.
Well credit spread volatility has fallen from extreme levels in March our expectation is that it is likely spread volatility will remain higher than normal in the quarters ahead due to the increased economic uncertainty it is likely to be with us for some time to calm.
Slide five provides an update on open trading.
Open trading delivered essential liquidity to market participants throughout the last four months.
During the second quarter open trading grew to 33% of our trading volume up from 25% one year ago.
On average are open trading marketplace at 32000 orders and over $18 billion, a notional value available per day for trading.
Dealer initiated orders into open trading reached record volumes during the quarter and investors reached new records for providing liquidity on the system.
We believe this robust all told marketplace represents a substantial improvement in fixed income market structure, which is most evident during volatile times.
Unlike the challenging experiencing credit trading in 2008 market turnover actually increased throughout this recent credit event demonstrating that new innovations in fixed income markets are creating important new tools for risk transfer in secondary markets.
There are encouraging signs a credit market turnover or trading velocity is increasing.
Open trading is creating opportunities for new market participants leading to record active client firms with other over 1500 institutional firms completing open trades during the quarter.
These new participants are important contributors to the open trading liquidity pool in credit products.
Now, let me turn the call over to Chris to provide an update on automation in our trading volumes.
Thank you Rick slide six demonstrates the growing momentum of automation in credit trading automated trading volumes rose to over $32 billion in the second quarter up from 19.3 billion in the second quarter of 2000 1983 firms used our auto execution functionality in the second quarter.
<unk> up from 55, the prior year.
The average trade size conducted through auto axes also rising in the second quarter. The average trade size using our auto Rx functionality grew to $222000 first 184000 the year prior.
Hi, it's continued to increase the size of their orders as they gain comfort with the execution quality of our auto ex solution.
The use of dealer algorithms continues to grow on the platform with approximately 3.5 million algo responses in the second quarter, resulting in over 300000 trades. Despite recent market volatility we continue to see strong growth in our automated trading solutions as both investors and dealer clients look too.
Improve their trading efficiency inquiry volume and count reached new highs demonstrating greater willingness to automate trading workflows.
Slide seven provides a summary of our trading volume across product categories.
Are you at high grade bonds were up 56% year over year to $415 billion for the quarter largely due to market share gains and the increase in market volumes estimated U.S. high grade market share increased by 2.8 percentage points year over year to 21.5%.
Well estimated U.S. high grade trace volumes were up 36% year over year.
Our other credit category volume was up 32% year over year led again by significant growth in U.S. high yield trading over our platform.
Sure. It's high yield volume was up 85% has estimated market share reached a record 14% an estimated trace market volumes rose 37%.
Our emerging markets and eurobond volume each grew double digits in the second quarter with virtually all of those gains due to higher estimated market share.
We also had another solid quarter of trading and municipal bonds in the second quarter 315 unique client and dealer firms traded $3.2 billion and municipal bonds.
On the platform up 93% from the prior year.
Our rates business maintained its revenue in market share as compared to Q2 2019, and we are continuing to invest in new rates trading solutions. We're excited about the successful launch of our quick to trade clients solution during the second quarter and our client Onboarding for this unique solution is very encouraging.
Also our treasury auto hedging solution recently crossed $2.8 billion in volume since launch and hit a record of close to 1 billion in volume during the month of June. We also plan to launch our net hedging solution during the third quarter of 2020 I.
Our Green Bond trading initiative continues to support clients SG related investment mandate in the second quarter over 6 billion dollars' worth of Green bonds were treated on our platform, resulting in over 30000 trees being planted in critical regions across the world. We have now planted over 60000 trees since beginning of the.
Year.
Before providing color on July. Please note that there are eight trading days remaining in the month.
July market volumes have declined from Q2 levels as they often do around the fourth of July holiday.
At this point in the month July trace volumes for our high grade and high yield look similar to last July and our high grade estimated market share is running similar to Q2 levels and our high yield estimated market share is running above Q2 levels now let me turn the call over to Tony to provide an update on our financial.
Thank you Chris.
On slide eight we provide a summary of our quarterly earnings performance.
Overall revenue was a record $185 million up 47% year over year.
44% increase in credit trading volume and the inclusion of us Treasury trading.
Resulted in a 51% uplifting commissions.
Information services revenue was up 18% in the second quarter and includes onetime data sales of approximately $600000.
Operating income was up 71% year over year.
The leverage in our model came through clearly in the second quarter with operating margins expanding to record 56%, while we continue to invest in a variety of growth initiatives.
The effective tax rate was 19.7% in the second quarter and reflects $5.7 million of excess tax benefits related to share based compensation awards.
We expect that the fully year effective tax rate will be near the lower end of the guidance range of 20%.
Our diluted EPS was a record $2.20.
Year over year increase in our diluted share count was largely due to the 146000 shares issued as part of the liquidity edge acquisition.
Yes.
Slide nine we have laid out our commission revenue trading volumes and fees per million.
Total variable transaction fees were up 61% year over year, driven by the increase in credit trading volume higher U.S. high grade fee capture and the inclusion of us Treasury trading commissions.
US high grade fee per million was $5 higher on a sequential basis and $20 higher year over year, mainly due to longer duration.
Average years to maturity on bonds traded over the platform hit nine years and the recent quarter compared to 7.8 years in the second quarter of 2019.
Our other credit category fee per million increased by $6 on a sequential basis and $15 year over year.
Principally due to a shift among products favoring high yield volume.
Fee capture at the individual product level was very similar to the first quarter.
Rates fee per million at $4.02 was slightly higher than Q1.
Both us treasuries fee capture and agencies fee capture were similar to the first quarter levels.
As a reminder, there could be some variability in our rates fee capture due to volume tiering under our treasury fee plans.
Total distribution fees were $700000 lower than the first quarter level.
One us high grade dealer and one us high yield dealer transition from distribution fee plans to variable fee plans during the second quarter.
Slide Slide 10 provide you with the expense detail.
On a year over year basis expenses were up 25% for the quarter with compensation of benefits accounting for close to 60%.
Of the year over year change the main contributors to the rise in compensation benefits was an increase in head count of 81 personnel in support of our growth initiatives and an uplift in the variable bonus provision, which is tied to financial performance.
Clearing costs more than doubled year over year, reflecting the 87% increase in open trading volume and the inclusion of match principal Treasury trading volume.
The increase in depreciation and amortization reflects the continuing investment in product development and the trading platform along with the amortization of acquired intangibles.
The biggest factor influencing the increase in technology and communication costs with higher software licensing fees, some of which are tied to trading activity.
And the uplift in professional consulting costs is largely tied to higher recruiting fees.
We expect that full year 2020 expenses.
Among other items the most sensitive factor to our expense forecast is the level of credit market volumes, which impact variable line items, such as clearing cost and incentive pay.
We are assuming that credit market volumes are likely to decline in the second half of the year.
On slide 11, we provide balance sheet information.
Cash and investments as of June Thirtyth were $536 million and trailing 12 months free cash flow reached a record $280 million.
During the second quarter, we pay the quarterly cash dividend of $23 million.
We also repurchased 37000 shares in total during the quarter, including 13000 shares under our buyback program and 24000 shares associated with the exercise or vesting of employee stock Awards.
We are approaching the go live dates for our us and you care UK clearing and settlement initiatives.
We believe it or regulated businesses that handle Nash principal trading has sufficient sufficient liquidity and capital to cover any new deposit or reserve requirements.
We also do not anticipate any change in our in our shareholder capital return programs.
Based on the second quarter results. Our board has improved to 60 cents regular quarterly dividend.
Now, let me turn the call back to Rick.
Thank you Tony we're pleased with the record results we delivered during the second quarter. It is encouraging to see the acceleration of market share gains during these extreme conditions in credit markets.
I want to thank our clients for supporting our vision for an open marketplace, our shareholders for believing in us and our employees for their dedication to allow the company to thrive throughout this health and economic crisis. We wish you all the best and hope that we are on the right path to a full recovery in the coming quarters.
We would now be happy to open the line for your questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
And our first question comes from Rich Repetto with Piper Sandler Your line is open.
Hey, good morning, Rick, Chris and Tony I wondered rich I guess my.
Good morning.
My questions around automation and.
Great results on the open trading.
As well as the automated trading and I guess my question is around market data and.
How would you know I've heard from past panels and from caused the importance of market data to.
Can you to grow.
The automated trading so could you give us an update.
Rick or Chris on.
The market data offering and how important it is and in all I'd also like that.
Find out why Chris hasn't wrestled more this 312 million of savings.
From open trading back to market access.
[laughter].
Well I was planning on talking about that savings rich because it's a it's unbelievable.
That.
Company up our size can deliver that much savings in a quarter, where at the savings actually toward dwarfs. Our revenue. So when clients see that savings obviously, they are migrating to the platform, but to answer your question directly you're absolutely right rich.
Market data is a key component of automation and if you look at all the automation innovations both here at market access and elsewhere in the industry is highly dependent on.
Very solid accurate market data and price information and it has to be real time in order for the automation the truly succeed.
If you look at our.
Rollout of our automated trading solutions and our pipeline of new initiatives around those tools. They are all linked to our wildly successful CP plus market data feed.
So that is a critical part.
Part of our automation strategy, both in terms of how to price the instrument as a guide for clients, but also as risk parameters to protect them against large market moves while they have automation launched so we have a number of risk controls using that our unique market data.
That is a high.
Supported market data.
So to answer your question, we are continuing to advance our automation solutions things like auto responder is critically dependent on RCP, Pos data feeds and helping our clients to automate how they become a passive liquidity provider in the credit.
Good.
Hopefully that answers question.
Yes, yes, but what about the trailing 12 wrestling of a tweet 300, [laughter], we're happy to leave that provide that back to our clients.
Thank you. Thank you.
Thank you. Our next question comes from Jeremy Campbell with Barclays. Your line is open.
Hey, thanks.
Thanks for the update on me capability side of the Algo, maybe this one's for both were again Chris here.
Obviously seems like open trading and trade automation are kind of critical to the market share gains that you guys have had year to date and it looks like both the number of firms as well the volumes on fire. So I guess my point perspective.
Given the unique.
Working so contains is we're in deal the virus you maybe just give us some color on the outlook for cementing bold open trading and automation into trading workflows for maybe both a new user and deepening Wellcare perspective, and then also just kind of wondering if you see any slackening engagement in either of these systems.
This past month or so in some large dealers and asset managers have had traders move back into the office.
Sure I'm happy to start and Chris Chris can follow up as well, but.
Yeah, the beauty of our open trading solutions solution is its simplicity.
And we really leveraged a broad base of institutional order flow that we have on the platform to create an open network, where more people can participate in that order flow.
And.
I do think that the share gains first half of this year are.
Largely attributable to the benefits that we received from the open market place first the cost savings that we mentioned and secondly by expanding market participation and virtually every quarter, we see growing activity from our growing base of alternative market makers are work.
Committing new capital to the credit markets.
We see growing activity from ETF market participants it's interesting to note. When you look at the second quarter EPS high yield share trading was up 52% very close to our own overall trading grows. So we're growing hand in glove with the ETF industry as well and that base.
The market participants has been enabled for a new way of trading through open trading. We're also starting to see very positive signs from quantitative fund strategies, which historically have not been active in credit and then finally I'd point to growth that we're seeing in that in the hedge fund clients segment.
Which is relatively new as well so.
When you look at that at the volume and share gains for the first half of the year. It has a very healthy combination of more volume with existing clients and new entrants into credit markets, which also then drives our optimism about market turnover and eye on your other point about work from home there.
Theres no question that that has created a tailwind.
For electronic trading just out of necessity.
Moving away from trading floors into a home office, it's much easier to connect with global liquidity electronically than it is any other way. However, given the results that were delivering to our clients. We personally don't see that going back to where it was as clients returned to their office in buyer.
Limits and this quarter, we do see some gradual return among dealers to their trading floors, although it's still a relatively low levels, but asset managers continue to trade primarily from home and our belief based on lots of conversations is that is likely to stay with us through the second.
Half of this year.
And Rick I'll, just add on the automation front, we continue to see high levels of usage.
Not only today, but it's consistent with the trend line growth that we were experiencing prior to the crisis and the work from home and we have it's really a workflow efficiency.
Demand that we're seeing from our large institutional clients. If you look at the size of the credit market and how large its recently grown the challenges continue to get more complicated to source liquidity and to execute both large and small size trade. So that the work flow didn't.
And certainly our leading to a higher adoption rate of our.
Automation solutions, both our auto accident, our auto responder and I would say, it's still early days on auto responder given some of the feature set that we have coming in the in the.
In the third and fourth quarter or things like high yield.
Better enhanced on this integration and even m. on our of being launched on our auto responder. The other piece of automation that we're excited about.
We plan to launch our first client Algos in credit in the second half of this year closer toward and towards the ended the year.
Thats, a unique offering where were.
Not only using our automated solutions, but were wrapping orders together into a very sophisticated client algorithm for large.
Institutional clients to use so we're excited about the innovation that's coming in the second half to the year around automation.
Great. Thanks, a lot I'll hop back into queue.
Thank you. Our next question comes from Cowboy with KBW. Your line is open.
Hi, good morning.
Just a question on the the fed primary and secondary market corporate bonds facilities, just one we're thinking about the direct and indirect impact from needs.
I guess first question have you seen any fed buying directly on your on your platform I'm not sure. If that's happening to the dealers are blackrock or something else and then on.
I'm, just the fact facilities more broadly and indirect away you think that they're already helping to compress credit spreads in credit spread volatility and its sell could that be a headwind to market turnover and the velocity and trade.
Sure catalog.
Take a crack at that but first of all we would never comment on any individual client activity on our platform. So.
We don't have the Liberty to answer your question about fed activity electronically and I would refer you to.
Your corporate bond trading desk and others for further color on that.
I think the fed has had an active role in the recovery of credit markets over the last four months. Most importantly, the short term liquidity programs back in March in early April that unlocked financing markets.
It really started the march toward more normal credit spreads that we observed throughout the second quarter.
What you see in the media is consistent with our understanding is that.
You know the fed has been active in both E S and corporate bonds.
But the levels are not outsized and the reality is that with the changes in the liquidity and financing markets.
The credit markets did a really good job recovering themselves.
And asset managers saw in flows through the quarter.
They were putting to work, which caused credit spreads to compressed significantly throughout the quarter.
So I think the fed is there when needed it's clear that they have a vested interest in the capital markets and the cost of funding through this crisis and they've had an impact on helping credit markets get back on their feet, which then allowed corporations to issue $700 billion in high grade debt one quarter.
Sure.
So they definitely it made a difference there with respect to secondary trading I don't think theyre activity has been outsize versus normal market participants.
Got it thank you.
Thank you our next question comes from.
Our gross.
With credit Suisse. Your line is open.
Hey, good morning, everyone.
So turning back to your comments right hope and creating.
Oh, you call right now around liquidity cost saves substantially playing out nicely and driving record.
The shaggy EMS and new funds in the platforms, we already see that and I think you touched on this a little bit but curious if you can just boss. Some of these recent trends how much of this is more environmentally driven that could potentially this in a more normal backdrop versus really utilization from either.
Underpenetrated appliance the regions.
Well on long only participation eight back something like that that could end up being a lot more sticky. So just trying to ask Dan you don't see elevated levels should be viewed almost as a higher reset level.
I will see going Potter platform.
No I.
It's a good point Theres no question that the.
Cost savings from open trading benefited from the extreme volatility during the quarter and the much wider price dispersion.
They clients observed in levels coming back line on order flow in any for a so I do think that the cost savings will ebb and flow based on volatility in price dispersion in in each quarter.
Having said that we are confident that are open trading marketplace is unique.
95% of the order flow that I mentioned comes from institutional order flow at about 5% from dealer initiated orders.
And that's creating a tremendous opportunity for not only alternative market makers, but also for institutional investors defined more matching opportunities per day and drive their transaction costs down on a consistent basis. So we do believe that this is a long term Bennett.
That to fixed income market structure.
And it's great to see dealers embracing it more actively as well for their own liquidity, a with the levels of dealer initiated order flow, where they can end up transacting either with it end client or another dealer on those orders and it's nice to see that the profitability of market access is growing wealth.
Same time, the dealers had very good quarters as well.
Which reflects how big these markets are.
And we do think that longer term, you're going to continue to see market share gains and increased market participation that will deliver transaction cost savings book back to our clients for many years to come.
And I would just add that open trading has a wonderful network effect that we're seeing play out in not only high yield and high grade, but obviously in EM.
Where we're seeing participants that normally don't match with one another are able to match inside the all fall market. So the network effect of of open trading will continue to grow and participants are are benefiting greatly by that network effect.
Very good thank you.
Thank you and we have a question from Ken Hill with Rosenblatt. Your line is open.
Hi, good morning.
You mentioned earlier I think on the automatic side as far as the trades kind of moving into the larger scale kind of trades.
Hi, more confidence that offering is there any sort of level, you're seeing where clients, maybe starting to pull back or become more uncomfortable there and what are things you're looking at some kind of break down those barriers for more information driven or is it more liquidity there.
It's really a client comfort, we see a number of our largest users of automation.
Regularly increasing the size.
Of their orders that they're putting on their lists and loading into automation, we're providing a great deal of analytics back to them of what is treatable.
And how liquid some of the products are so it helps we're guiding them on how they're finding.
You know quality execution at larger size orders across the auto X. I'm platform. So we are seeing our biggest users continue to grow their order sizes on the platform.
Obviously I mentioned the launch of a client algo sometime in the second half of the year that tool is also designed to take larger size orders and break them up into smaller size orders to allow clients to well trade a large size to do it over the course of a day or weak in much more.
While our trade sizes. So we're seeing we're seeing a number of clients grow their or their order size in automation, but we're also trying to cater to those clients that want to trade with a lighter footprint in the market.
And I would just to add to that what we're seeing on auto execution with investor clients is mirrored with the dealer community and the increase in size through their algos.
So I do think it reflects confidence competence in trading automation in the system and it it makes both dealers and investors more efficient.
Interacting with order flow on the platform and in addition to the increase in trade size through auto wax and was also interesting through the credit event in Q2 that our overall trade size in the U.S. credit increase during the quarter and we had a record quarter for block trading volume. So you.
You see really positive signs in trading automation and dealer investor confidence.
You see more block trades coming into the system, Tony mentioned earlier the increase in average maturity in the system that those are all very positive signs in terms of our clients are now comfortable using the system.
Yes, great to hear thanks for the detailed there.
Thank you we have a question from Chris Allen with Compass point Your line is open.
Hi, Good morning, guys wanted to ask a question on velocity, Rick you mentioned earlier that youre seeing encouraging size losses, increasing wonder if you give us some additional color there.
How that may relate to the quantum funds you mentioned and then also where do you think velocity can get to its still well below equity levels.
Not that whatever exposed to get there, but where do you think it could possibly approach one less coming years.
Sure.
Prior to bank capital.
Right capital reform it was common to see annual turnover in high grade corporate bonds that add 0.95 or 1% of debt outstanding and we we recently bottomed out at more like 0.65, and a weve recently come back up to about 0.7, So we're still well.
Well below the levels you would see pre Reg reform on capital requirements for the banks. So if I had to target what a reasonable goal would be.
The.
Extension of market participants into credit and the benefits of trading automation and don't forget how important need tee up market is said yeah that was an active part of this solution over the last four months is both dealers and investors using F shares.
For critical liquidity needs, which then intersects with bond trading on market access. So I think its market innovation and it's and it's the increase in market participation. This brought about through all to all trading that's starting to show a brighter picture on market turnover. So we bounced.
From the lows and I do think getting back to something that we would have seen prior to 2008, that's more like 0.95 or 1% turnover per year would be a near term goal.
Thanks system.
Thank you and we have a question from Chris Shutler with William Blair. Your line is open.
Hi, guys. Good morning could you give us an update on your rough market share.
Within high grade by trade size bucket, and what kind of market share gains did you see in the quarter across each of those pockets.
Yes so.
Chris on the market share side.
And I will give you the details, but the market share gains were.
We experienced market share gains across all trade sizes, and all maturities and when you look at them. If we just broken up between.
Block trading.
And non block trading.
On the non on the block side, our market share was up about.
2.3 percentage points and our overall market share was up.
In 2.8 percentage points.
And then the non block was also up about 2.8 percentage points. So regardless of of trade size market share was up if you looked at a heat map based on maturity you would see market share up across all maturity side today as well.
Okay got it thank you.
Thank you and we have a question from Jeremy Campbell with Barclays. Your line is open.
Hey, guys just couple of follow ups on on that one I'm not but just the prior question again, you had some pretty aggressive market share gains in the quarter, especially in the on the back of a lot of numerous years that came out during the quarter. So kind of by our back nimble looks like your market share of new issue bond trading was actually higher than in prior years.
I'm wondering what if that's correct and then too if that's true. When you think this is a bit of a structural shifts and maybe be less of a headwind in future years or maybe more transitory due to low kind of working conditions.
Yeah, I I think I would agree with all parts of your comment that we.
We did do better in trading of newly issued bonds during the quarter.
And hard to know how much of that was the work from home environment versus a longer term.
Change in behavior.
But we also did even better than.
The the high level share gains when you look at season bonds and trading after the first four weeks.
So a nice combination of both but.
Our progress on new issues is has been encouraging but we also think this is going to be a perfect place for our new live markets protocol.
And that was set back because of the extreme levels of volatility in some of the key market makers that are supporting that initiative, having plenty to deal with through their crisis and the work from home environment.
But we continue to hear very encouraging things about new issues and liquid bonds.
Through our live markets protocol, and that's something that we will continue to work on developing during the second half of the year.
Got it and then Tony.
Can you update us on the self clearing initiatives for for the U.S. market and maybe when that might now be expected to go live in light of shut down the variable Clarence with them.
Yes, so on on the clearing side right now, where we're expecting to transition to self clearing in the us.
And to to a new clearing broker in the UK in the third quarter.
It's a little bit a little bit later than than what we'd anticipated but.
Probably understandable given the pandemic impact on us enough on our vendor partners.
What we're doing it once we do go live in the third quarter.
We do expect clearing costs as a percentage of open trading revenue for our credit business to decline. So remember we had to really two components to clearing costs. We have it on our open trading credit business. We also had.
Clearing costs on our match principal treasury business as well.
Well, we talked in the past about.
What kind of savings we can deliver one once we do go live in.
Typically clearing costs in the credit side as a percentage of open trading revenue has been 11 or 12% and.
And John.
We do think we could drive that down into the single digits. It's even more important today has a view.
If you look at open trading revenue in 2019 or credit revenue was about a $100 million. If it goes down for example, three percentage points that $3 million in savings you look at the first half of this year and we're on a $170 million run rate for open trading revenue so the.
Cost savings are much more significant given what we're pushing through open trading today.
So we've got we've got our.
Go live date targeted right now and we would expect.
Some savings as we go into the fourth quarter, we do expect Thats part of our expense guidance. We do expect some some favorability on the clearing costs line in into the fourth quarter.
Great. Thanks, a lot.
Thank you and as a reminder, if you would like to ask a question press Star one.
Next question comes from Shrieks Kumar with Goldman Sachs. Your line is open.
Hi, This is trying to closing in Florida, Alex Blostein.
Because the R&D portfolio, we're creating side.
It's a fraction that you're seeing or were there and this going door and any color on how the volumes have been following the books when the trading into Q.
Sure as you recall, we launched our portfolio trading solution near the beginning of the year.
We have seen a growth in that product.
I'll remind you that.
Today, 3% overall treats from is estimated to be portfolio trades. So it's still a small subset of the overall market but.
Most of the portfolio trade solutions are really targeting a single dealer solutions that provide more of a trade processing solution and not really a a full trading solution our trading solution our portfolio trading solution does both single dealer, but also multi dealer.
So you can point your portfolio in competition for price among a number of dealers and that's something that many of our clients find attractive.
We are providing additional enhancements and improving.
How those portfolio trade seamlessly move through processing into the illnesses, which is a critical piece of the portfolio trade.
So since our launch were.
Just over.
1.3 billion in volume in portfolio trades, there was a slow down obviously in portfolio traded during.
The most recent market.
Volatility given the difficulties in pricing portfolios in a fast moving market.
Great. Thank you.
Thank you. Our next question comes from Rich Repetto with Piper Sandler Your line is open.
Yes I.
I just wanted to get back to the sort of the.
The impact the issuance in the quarter and Tony you've done and I, because sort of mentioned early but.
Calculation that sort of Oh removes the issuance and sort of normalizes the market share excluding the issuance and could you go through that.
You calculate hi to Q as and then.
Also maybe one last thing the variable fee capture you know its elevated cause a longer duration. You know would you expect that the fall back somewhere between you know.
Say this quarter and the first quarter is at a reasonable rate.
Going forward, how how would you view variable fee capture.
Sure.
So so rich I cant said did I hope.
Yes, a little science project here on what what market share with you know with and without the new issue as well. This is what I what I can tell you it.
When you look it.
The portion of trace volume that related to newly issued bonds and let's just take this second quarter. If you look at just the first four weeks of trading it was about a quarter of trade volume.
Related to newly issued bonds and if you look.
For any period prior to that it may have been.
10% or 11% or 12%, so clearly to get a portion of the market related to newly issued bonds increased increased dramatically.
And you look at our market share our market share gains year over year were up for high grade were up 2.8 percentage points again without without getting too to scientific give you pulled out the new issue piece you would see our market share gains would have any would have been either even healthier I want to the earlier questions that Rick.
Responded to one on.
Our market share go up in newly issued bonds. It did not appreciably, but if you look at the first four weeks our market share is typically around five or 6%. It was up a little bit but not a lot. So you can see when you when you do the math around a big increase in the portion of the market that really.
It's a newly issued bonds the market share gains were even healthier.
And rich on the variable fee capture.
Yes, there's so many factors in is particularly for high grades that we're talking about.
The fee capture for high yield Euro bond emerging market very stable and not.
Duration impacted at all it's the U.S. high grade plan, where it is dependent on trade size. It is dependent on duration, which is year to maturity and yields.
It's dependent on protocol.
So the use of lots and lots of factors that that can move at the item. We flagged was was on years to maturity.
You look over the past.
10 years now the years to maturity is range between seven years in 10 years, we're not at the absolute high.
We're in the middle of that range. It did extend out a little bit in the second quarter here.
Hard to say, what what will happen going forward, we've given some color in the past that.
And this is just.
Okay, all else equal a one year change in maturity could move the fee capture by something like 10 to $15 per million. So we moved from say nine to 10 years all else equal fee capture move up went from 98 years fee capture would move that tough digit it's really really hard to predict though.
Okay got it. Thank you that helps very much.
Thank you and we have a question from California KBW. Your line is open.
Hey, Thank you for taking my follow up.
Maybe just one just on that on that point on high grade fee capture what was it helped at all by by lower yields as well or was that just.
Hi.
A negligible.
Back in the quarter.
Yes, good Kyle it was it was much more on.
On the years to maturity, because even though you're right that yields were lower spreads were higher. So we're treasury yields were lower spread to treasury with higher so it was much more about the year maturity and if anything we had a slightly negative offset because we did better in larger trade sizes.
Not only our market share with.
Up in larger trade size at the average trade side moved up as well. So if there was there was more of the offset came from the tier tiering under our under our feet plan than it did from yields moving.
Right got it.
And then just another question on the high yield business just wondering if we get an update on how sizable the market makers, where as a percentage of your high volume into Q and just wondering how that compares to where thats average historically.
Tyler it's not.
I can't say to get to the sort of scientific project around as we do look at the to yet participants typically this is going back over the past five years.
The Ats participants for high high yield business have ranged between.
15% to 30% of our business.
That 30% actually you may recall it was the blow out in the energy sector going back almost five years ago now.
The second quarter that percentage was below 20%.
So you know what it does show is that our our real money business and activity.
Has increased significantly.
Hi, good critically important to our high yield businesses.
But you're seeing growth.
Growth from other market participants in clients on the platform as well and I would just add that it's becoming very difficult to target who is an ETF market participant anymore. Given the banks have grown their E. T F desks dramatically in the credit space.
And a number of new participants have come onto the platform.
And.
Obviously, we launched.
An effort made last year to target a systematic fund strategies and they do make use of DTF arbitrage strategies in other signal based strategy. So we've seen a huge growth in the systematic fund side just in the second quarter, they traded over 42 billion in volume.
So just a big move in a number of players that use both direct credit, but also the EPS as well.
Got it thank you very much.
Thank you we have a question from Patrick O'shaughnessy with Raymond James Your line is open.
Hey, Good morning, guys can you speak to the market dynamics in emerging markets right now the industry wide volumes that you guys track are not up to the extent that you us high yield Neos high grade our.
In the market share gains have well positive has not been quite as strong as in some other products. So what are you seeing right now in EM.
Yes, I think parts of the market have been a risk off environment for investors over the last couple of quarters and.
With some very difficult market conditions in places like Argentina that are important markets for us any.
So there is greater caution among investors about adding exposure.
To emerging markets right now because of some of the economic difficulties in high debt levels in some of those markets.
So it's not growing the same way to develop credit is right now.
I still think.
It's likely to normalize and get back on track, but as a product area market volumes of have been more muted in the end than what we see and in developed market corporate credit.
Okay.
And then can you talk about the market opportunity that you see for your newly launched dealer direct tool and should we think of that tool is comparable to true mid term to trade you protocol or or is it a different approach.
It's a great question. So we're pretty excited about the dealer feedback on the dealer direct.
Streaming tool what's great about it is it allows dealers to customize.
Streaming liquidity direct to a disclose clients so it's a private.
Way to stream liquidity to select clients. So in that regard, it's very similar to the true mid solution, but it's not identical the feedback has been positive obviously, it's a it leverages apia ice for the dealers. So it's a fairly.
Streamlined set up for them and and it allows the dealers to protect their data as well the data that they show the clients is only for the client size, we don't aggregate that data into any of our data feeds. So it is truly a private market streams private market.
First select clients.
Great. Thanks, Chris.
Thank you and I'm showing no other questions in the queue I'd like to turn it back to Mr., Rick Mcvey for any closing remarks.
Thank you for joining us this quarter and please stay safe and staying healthy and enjoy the summer months and we look forward to catching up with you next quarter.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
[music].