Q2 2020 Tradeweb Markets Inc Earnings Call
As a reminder, today's call is being recorded and will be available for playback.
Again, I'll turn the call over the head of U.S. corporate development Investor Relations Ashley Serrao. Please go ahead.
[music].
Q and good morning.
With me today for the call excuse me Olasky will review the highlights every quarter, it's quite a bit from Sterne Agee.
I shouldn't be halt who will dive deeper into some great initiatives and Bob warfare. She has spoken about do you often actually yourself.
Second quarter earnings release preparing for March and accompanying presentation are available on the Investor Relations Fortune Akshay.
I like to remind you that certain statements can be presentation and you're in human nature may relate to future events and expectations and that's church constitute forward looking statements within the meaning of to private Securities Litigation Reform Act 1995.
Statements related to among other things all the guidance, including 40 or Twentytwenty bad didn't Nicole good 19th and dampening the potential in actual picture inherently uncertain of forward looking statements.
Actual results may differ materially Sunday school students.
Information concerning factors that could cause results to differ <unk> looking statements is contained in our earnings release periodic reports filed with the FTC.
In addition on today's call will reference certain non-GAAP measures.
Make sure regarding these non-GAAP measures, including reconciliations to GAAP measures are now posted earnings release and presentation.
Lastly, we provide sturgeon Mac due to industry data, which is based on management's estimates and various industry sources.
C O posted earnings presentation for more details.
To recap this morning, the reported GAAP earnings per diluted share of 16 catch.
Excluding certain non cash stock based compensation expense acquisition or spin related DNA and certain ex items and assuming an effective tax rate of 22% reported adjusted net income per diluted share 80 cents.
We see their earnings release in the form 10-Q to be filed with the FCC for additional information regarding the presentation about historical ourselves.
Well, let me turn call over to me.
Thanks, Ashley good morning, everyone and thank you all for joining our second quarter earnings call.
[noise] World remains uncertain plays and we remain appreciative of all the efforts.
Basket spires.
To restore the economy.
We also recognize the various efforts both buyer employees and external organization to promote equality.
On the business from second quarter saw a broader market stabilization.
Jim that's material and [noise].
A trade web we continue to operate remotely focusing on engaging with our clients from innovating to develop new solutions.
The quality and frequency of collaboration with clients has increased along with their willingness to work for the entire trade what products [laughter] proactively.
This pandemic forced them to reassess their electronic strategies.
We remain excited by the opportunity ahead of us and remain committed to driving revenue growth and margin expansion over the next few years as our investments scale globally.
Today, we are investing in developing and scaling your protocols across rates and credit expanding our geographic reach especially in Asia Pacific region with early signs of success in Australia and commercializing our data so just to name a few.
Our sales team remains high Reengaged and our technology team has a busy pipeline as we look out over the rest of the year.
Turning to slide four we reported the strongest second quarter in our history and set multiple new reps due to volume records across our products, despite a challenging macro environment.
Specifically gross revenues of $212 million during the second quarter 20.
Up 11.4% year on year on a reported basis and by 11.8% on a constant currency basis.
Our financial performance.
Was once again characterized by strong growth our concern you double digit revenue growth and the resulting scale translated into improved profitability year over year.
Our second quarter, adjusted EBITDA margin expanded over 200 basis points to 47.2%.
Turning to slide five you can see the diversity of our revenue.
While rates and money markets saw growth, but slower rates in previous quarters, you other growth engines of our business Ron displays as credit and equities both grew by double digits, 24%.
And 38.6% respectively.
Within rates cash rate revenues mortgages, and U.S. treasuries benefited from fed actions, while our core swaps business continued to do well true.
Moving on to slide six let me provide a brief update on our four main focus areas global interest rate swaps U.S. treasuries U.S. credit and global yes.
Starting with interest rate swaps and a tougher macro environment carrots characterized by lower interest rate volatility, where core IRS volumes dropped by 14%. According to claris, our core swaps volume higher fee per million longer duration swaps grew by 5%.
Our total volumes were down 10% year on year during the second quarter as a 30% decline in lower fee per million shorter duration swaps more than offset volume growth in a higher fees per million longer duration swaps.
We continue to focus on what we can control.
Deepening our client wallet share and scaling your products like the M. swaps.
The focus drove global IRS share for the second quarter to nearly 10%.
Growing substantially year over year.
We believe we gained meaningful share versus our closest competitor Bloomberg and both the U.S. and your post March as our deep liquidity pools and recent investments continue to pay off.
Longer term, we remain excited but opportunity here as the rate cycle improves and the market continues to electronified.
Really will give you an update on our strategies momentarily.
Moving on the treasuries are volumes were up 14% year on year.
Sure recovered nicely from a loose seen in March was voice execution was more prevalent.
As the exceptional volatility drift to U.S. treasury markets.
Amidst the backdrop of heavy issuance and fed purchases, our organic growth initiatives have helped us to continue to take share using just variety of trading protocols in both institutional and oversell sectors.
We estimate that our share during the second quarter increase year on year to a record 12.7% of the entire U.S. treasury market.
The institutional business had several record days during the second quarter driven by record levels of U.S Treasury bills issuance.
We continue to sign new clients and pushing on functionality to both further differentiate our offerings from the competition and Electronify the market.
A recent our recently launched institutional streaming effort, which rebrand stack continues to be continues to see more interest from clients as new dealers are onboarded as liquidity providers.
Yeah, JAKKS resumed its critical role in our clients workflow. Some re further enhanced our functionalities during the quarter, giving clients the ability to automatically extra key I pretty set times.
On the product front, we also added 20 year bond to our offerings.
One of our formulas for success has been our ability to scale or technology across sectors on that note amidst the more challenging backdrop for the U.S. So they took a wholesale U.S. treasury market, we continue to onboard new dealers to our streaming platform as an alternative to the traditional order books.
Since the recession trading has also continued to recover.
Dealers more actively manage their balance sheets has comfort around working from home brew and as the fed purchase activity tapered, putting the onus on secondary markets to exchange risk.
Shifting to our credit business, which continued its strong gross generating nearly 50 million in revenues driven by strength in both the cash a derivative franchises in credit our U.S. market share rebounded from March was driven primarily by the normalization of the RQ institutional business.
Altered innovations like portfolio trading and that spot and continue to see increased adoption and the growth of bar anonymous trading protocols.
The wholesale session trading business also rebounded as a generated higher revenue in each successive months versus March as spreads tightened.
Our session trading business continues to trend towards highs seen earlier this year.
Looking ahead, we see a lot of opportunity in credit and continued to be very focused on connecting the various components of our offerings as we use technology to converge, our institutional retail and oversell liquidity pools.
Finally with equities this quarter was highlighted by institutional.
Volumes were up 39% due to the combination of volatility in our targeted growth efforts to continue to add your clients globally.
Our other initiatives to expand beyond or flagship Jeff franchise are also bearing fruit with momentum continuing in equity options the delta one business and convertibles.
Looking ahead, we remain well positioned to benefit from the continued growth of VTS globally.
Our newer product additions and an expanding client footprint.
In sum despite the macro challenges we continue to operate with a group mindset and we're focused on collaborating with our clients to capitalize on the various opportunities ahead of us.
These opportunities are spread across our multi asset class offering.
And this quarter showcased the diversity of our revenue growth as robust trends and credit in equities led the way.
Right and our money market business continuing to grow as well.
In addition to organic growth, we're spending a lot of time evaluating M&A opportunities as cash builds on our balance sheet.
With that I'm going to turn it over to Billy.
Thanks, Lee turning to slide seven for a closer look at swaps the broader industry backdrop in the second quarter for interest rate swaps was a challenging was challenging given the decline in interest rate volatility industry volumes as measured by claris were down 30% during the quarter driven primarily by nearly 40 per.
Year over year decline lower fee per million products, such as overnight index swaps and forward rate agreements the higher fee per million core IRS market shared relatively better down 14% year over year.
But as Lee indicated while core market volume declines our core swaps business grew an increased its share.
Amidst it's tough operating environment, we continue to invest for the future and remain very engaged with our clients as a result.
Our market share increased to 9.8% from 7.6% last year, driven primarily by gains within core IRS, where share rose to a record 16% as our growth efforts continue to pay off.
These growth efforts, our powering a next generation of our swaps offerings, we are adding currencies expanding our products that introducing new protocols responding to changes necessitated by the replacement of LIBOR.
Strengthening benchmarks and Electronifying more more of the wholesale swaps flow.
Specifically.
In the second quarter, we saw record M. swap volumes as large asset managers that are that are fully integrated into trade web for major currencies leverage the same infrastructure to treat EM currencies.
Clients now have traded 289 billion over the last 12 months the momentum is building.
And today, we have more than 30 clients and 12 dealers both numbers doubling since since the second quarter 2019.
Looking ahead, we continue to add more currencies and actively onboard dealers to provide liquidity and satisfied that the demand we're seeing from our claims in 2020.
We also are continuing to grow our electronic solutions for historically voice traded products, such as Swaptions and multi asset package swaps clients have now treated 65 billion in multi asset package swaps since our launch in August last year.
Our efforts to build a competitive fraud offering continue and the early signs are encouraged we treated nearly 15 billion daily during the second quarter.
Protocol lies.
We are growing RFM or request for market, which help clients protect their intent to buy or sell by requesting a two sided market.
We're also investing to add other swap types to our platform.
Clients also continue to use our this trading protocol extensively with a record number of swaps executed in the second quarter [noise].
Line for utilizing this trading to trade bespoke risk migrate positions from lied works you knew risk free indices and switched portfolios between central Counterparties in anticipation of Brexit.
And finally on the data fun, we recently partnered with ice on their swap rate, which will now feature treat what institutional quotes to improve the resilience of the benchmark used to price swaptions and rate linked swap rate link structured products in some we're offering to tools and Kate.
Abilities to further Electronify global swaps Mark.
[noise] honing in on US corporate credit on slide eight we continue to invest to build the franchise that can handle both electronic and voice workflows by leveraging our unique and diverse liquidity pool shared across our wholesale retail and institutional sectors.
On the last earnings call, we spoke about our belief that the pullback in our market share in March was temporary.
As the quarter unfolded markets your rebounded as expected trending higher in each successive months booking levels seen at the beginning of the year.
Our network continues to grow.
We now have more than 700 clients on our platform.
In terms of drivers.
The composition of our share has changed the rebound in share has been led by our institutional franchise, which saw record I do you share in June as our innovations such as portfolio trading and net spot and continue to resonate strongly with our clients and that's our network continues to grow.
Specifically portfolio treating cross the 100 billion cumulative volume threshold since launch with more than 30 billion single and multi dealer portfolio trades in the second quarter alone.
Clients continue to increasingly put dealers in competition and the number of line items and portfolios on our platform also hit a new record.
Our advanced net spotting offering saw another record quarter with nearly 100 billion if activity as clients increasingly commingle electronic and voice trades to maximize savings and eliminate the inefficiencies of manual processes are blocks your continued to increase.
Would it be pool deepens.
We also continue to invest in creating the broadest anonymous creating offering in the market, which today includes our all tall offering testing trading and middle market franchises.
Trading volume here rose to nearly 40 billion driven by growth in our all to all volumes, which have doubled over the last year to record levels as liquidity continues to build along with our network of responders.
As we mentioned.
We are very focused on connecting our three pools of liquidity to this end our effort to incorporate retail liquidity into institutional RQ trading continues to see increased adoption.
Today, we had billions and unmatched inquiries that interacts with our platform.
We're very focused on leveraging our technology to optimize price discovery and maximize naches by connecting inquiries across sectors.
Turning to the rest of our credit business.
We believe one of our strategic advantage is the diversity of our credit franchise, which allows us to participate in the electronification of a variety of credit products.
Our credit default swap business posted another strong quarter as we continue to gain more market share.
Our efforts to grow our institutional beauty business also continues to pay off setting a new volume record.
In sum, we believe our credit business has a lot of room to run and we have an exciting road map to lead innovation across the credit markets. This includes investments in the next generation technology that we have already launched like net spotting and portfolio trading and also the next wave of technology.
To drive the convergence in our three liquidity pools enhance anonymous trading and optimize AI acts for credit.
Stepping back.
Innovation is it seem that continues across all our products and not just.
Credit as we focus on growing share by helped by helping markets digitize.
We are investing in our electronics specified pools, offering which has seen a surge in demand as traders work from home given currently highly manual and spreadsheet based workflows, we enhanced our agency bond platform given clients the ability to now request prices from all dealers in a single inquiries improve.
Price discovery.
We continue to onboard new dealers and clients to our repo platform, both domestically and in Europe.
Where we expect upcoming SFG IR regulation to encourage automation in this very manageable market.
We are expanding RFM from swaps to other read products and maximizing the value of our data during the quarter, we introduced to treat web ice CMT rates for market comment.
Innovation remains critical to everything we do a trade web and we continue to work tirelessly to move markets forward.
And with that let me turn it over to Bob to discuss our financials in more detail.
Thanks, Julie and good morning.
As I go through the numbers all comparisons will be to the prior year period, unless otherwise noted we begin with an overview of our volumes on slide nine.
After posting record envy last quarter across all asset classes momentum in the business continues to be saw record avian global cash credit and posted our second highest AGBT course global catch rates repo and equities.
We reported quarterly total envy of 778 billion up 3% with the mix growth products. For example, mortgages swaps over one year U.S. credit CBS any shifts the supported double digit revenue growth.
Slide 10 provides a summary of our quarterly earnings performance.
Volume growth I, just described translated into gross revenues, increasing by over 11.4%, our reported and nearly 11.8% constant currency basis.
We drive approximately 34% of our revenues from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars predominantly in Europe.
Our variable revenues increased by 17%.
Trading revenue increased by 12%.
Fixed revenues related to our four major asset classes continue to grow as expected.
Information services increased by 5% led by repetitive and our APC business.
Adjusted EBITDA margin came in at 47.8% expanded nicely relative to second quarter 2019.
I used to benefit from scale.
All in reported adjusted net income per diluted share of 30 cents.
Moving on to fees per million on slide 11.
Enzymes that subscriber driven by mix of the various products within our core asset classes.
In sum our blended piece, probably increased 13% year over year, primarily as a result of mix shift away from lower deeper million short tenor swaps.
Excluding lower fees per million sure tenor swaps in futures, our blended piece from million increased by 8% year over year.
Let's review the underlying trends by asset class.
All trends will be discussed in the year over year basis, starting with rates average fee trolling for rates was up 10% year over year overall.
Cash rate projects, which include government bonds and TV A's peacefully increased 5% due to positive mix shift in mortgages, which saw more income institutional activity during the quarter.
Prolong tenor swaps piece really stayed relatively flat year over year.
Quench would decline was due to a normalization compression activity.
In other rates derivatives, which includes rates futures and short tenor swaps I refused to really increased 160% year over year due to growth in for great agreements, which carry a higher fees per million an overnight index swaps.
Continuing to credit.
Average between credit declined 13% as a result nics include a higher proportion of lower fee probably credit derivative volumes.
Drilling down cash credit Irish piece familiar increased 3% due to positive mix shifts towards us high grade and how you would activity, which carries a higher piece company than the cash credit average.
Looking at the credit derivatives electronically process us cash credit category piece really increased 5% higher volume tier discounts to the growth in credit derivatives.
Continues equities.
Total asset classic cash equity piece for me were relatively unchanged.
Equity derivatives average between decreased 32% due to mix shift towards equity futures, which carries a lower piece familiar than the equity derivatives average.
Finally, we didn't money markets peacefully decreased 12%.
This was primarily driven by growth in Rico, which carries a lower fees per million than other money market products.
Slide 12 details our expenses.
Hi level, we continue to invest for growth there's been no change to our philosophy here.
As a reminder, adjusted expenses excludes noncash stock based compensation expense related to options issue, primarily as result of the IPO acquisition refinished related DNA and certain FX related gains and losses.
Adjusted expenses per second quarter increased 6.9%.
Call approximately 15% of our expense base is denominated in currencies other than Dallas.
Predominantly in Sterling.
Second quarter 2020, operating expenses were higher as compared to second quarter 2019, due to increased employee compensation costs and technology and communication expenses, partially offset by lower DNA.
Compensation costs were higher year on year due to higher headcount as well as higher performance related compensation.
Adjusted Noncomp expenses declined 1.1% on reported basis declined 2.2% on a constant currency basis.
Specifically general and administrative fees declined primarily due to less travel and entertainment expense as we come to work from home, we expect teenager trend between 78 million per quarter during the back half of 2020.
Long term our levels spend is under review.
Technology and communication costs increased primarily due to higher clearing data pizza result of higher trading volumes as our anonymous credit volumes streaming U.S treasury volumes continue to grow.
In addition, this quarter also saw the impact to our previously communicated investments and didn't strategy and cyber security.
We call our guidance Embeds $4 million to $5 million increase versus 2019.
Slide 13 details capital management and our guidance.
We had its second quarter and strong position, putting 560 million in cash and cash equivalents and free cash flow reached 353 million for the trailing 12 months.
We have access to a 500 million dollar revolver remains undrawn as of quarter end.
Capex and capitalized software quick quarter was 10.8 billion, an increase of 15% year over year continues to be inline with expectations.
This quarter's earnings the board declared a quarterly dividend of eight cents per class, a and class b share.
Turning to guidance for 2020, given the delay of our New York, whose decision to 2021 and reduce and reduced any expenses. There was only work from home environment. We now expect adjusted expenses trend between 495 and 505 million in 2020.
We continue to believe we can drive operating margin expansion compared to 2019 at either end of this range.
We're forecasting purposes, we are using it as soon as non-GAAP tax rate of 22% clear.
Also expect capital expenditures and capitalized software to be the range of 45 $50 million.
Finally, we have updated our quarterly share count sensitivity for 2020 help you calibrate your models for fluctuations in our share price.
Now I'll turn it back to leave for concluding remarks.
Thanks, Bob the secular trends powering electronification kind automation remain intact.
We have an exciting plan that we are executing against across our asset classes and our diversity affords us a variety of opportunity.
Prove correct client workflows.
Driving strong revenue growth and balancing associated investments with mortgage margin expansion continues to be our priority.
With a couple of important months month in days left in July passion derivative volumes across all our assets classes with exception of rates derivatives are up double digits relative to July 2019th.
Rates derivatives are down double digits, given the lack of volatility flatter yield curve similar conditions, we saw last month.
The same conditions are benefiting our mortgage business set issuance continues to help our U.S treasury. So.
Overall.
Electronic GE and the high yield credit market shares are running higher than June 2020 levels.
I'd like to conclude my remarks by thanking our clients for their business and partnerships and order.
I want to especially thank my colleagues for their efforts contributed to our strongest second quarter in our history.
With that I'll turn it back to Ashley for your questions.
Thanks, Lee as a reminder, please limit yourself to one question only feel free to hop back into queue and ask additional questions again.
Q enable and add any am eastern time, operator, you can now take our first question.
Thank you.
As a reminder, ladies and gentlemen, that's one.
[noise] [noise] out first question comes from the line ups Rich Repetto, what type of Sandler Your line is open.
Yes, good good morning, Lee good morning, Philly and Bob.
Yes, you know the first question is about competition.
And can be yeah, everybody talks about market access, but excluding market access could you give us an update on the competitive landscape and are there any other other other electronic platforms that you feel are.
Beginning beginning to come Bible competitors, I guess this would be for Billy I guess.
Hey, rich how are you.
That's a good question you you know I would answer it a couple a couple ways rich.
You know Lee and I have have kind of mentioned as we've talked about the fact that create web basically day, one kind of grew up competing in our core businesses with Bloomberg. So we feel.
Very comfortable in a competitive environment [noise].
We think can competition is good for the space. It's good for the marketplace. It's good for clients do you think it helps drive.
Innovation.
If I were going to sort of assess the landscape a little visions of good question clearly obviously, we're always aware of what's going on.
With Bloomberg.
And we're also aware of what's happening in the in the wholesale space with companies like Fedex.
And there are kind of moves that potentially into more of the institutional space. So we have a sort of fine tuned awareness of the competitive landscape.
That being said I think interestingly rich it's a balance.
And we are also just very much sort of conscious around executing.
Day in day out and not spending too much time worrying about what our competitors are doing and we spent the majority of our time listening to our clients and we feel like that ultimately is the road map for us to continue to flourish and to continue to take market share in the environment. So it's a re.
Interesting balance between being kind of honed and aware of the competitive landscape and that being said day in day out knowing what kind of company. You are how you engaged with your clients and how you continue to move markets forward.
Got it thank you Billy I'll get back in Q.
Thank you.
Our next question comes from the non of area Gosh, Chris Your line open [noise].
Hey, good morning, everyone.
Maybe once a Billy on portfolio trading you continue to see strong traction here and then.
Two you've talked about execution quality and high volume given during the height of the crisis. This yes.
Hoping you could just update us from five changing flying behavior.
Just curious appliance now looking to execute a greater percentage via via portfolio to create average speed sizeable increase is up climbed Korean more up.
And then just the overall any color on the overall impact.
To the credit <unk> million and thank you for the question [laughter] Yeah sure. Thank you for the question I think what we're in this at least talks about the sort of habits that are getting formed in this in this sort of unique moment in time around around work for home I think there I think there are two really interesting issues that are front and center.
On our clients mind, all around work from home environment, one of which is you know how to white increased my certainty of execution.
And the other is how to widen minimize what I would describe that information leakage and I think to your question, which is a really good one there is an elegant around portfolio trading in terms of how it solves for both of those issues and I think it just continues to build momentum and I think these habits are continuing to former.
Around this sort of search for liquidity in the market and I think this is the moment where that light will continues to kind of burn very bright around around portfolio trading and clearly it is a innovation that is leading us around or institutional market share gains in credit.
Got it thanks for that.
If you could any color on.
Back to other people million as these trends there thanks guys.
I'll, let Bob Bob you want to you want to handle that one.
[noise] progress, but you may be on mute.
Sorry, I was only I was only apologize for that.
Sure.
Hi, I want to talk with a higher level, but as you know for credit I agree in high yield this session protocols.
Basis, a bunch of pieces to it and and portfolio trading does have a higher.
As it does have a good promoting.
That we that was that the with its part of it and so as it goes up it does have impact, but the real mix trend there was.
The increase in highway trading in general.
Appreciate it guys. Thank you.
Okay.
Thank you.
Our next question comes from them on a Alex.
Yes.
Yeah, Hey, good morning, Lee. Thank you for the comments at the end there about July seems like generally doing pretty well, but the IRS business. As I think you can see is still fairly fully so any any comments and what you're seeing there I think you've noted your biggest business.
So anything that that's that you see there and what May change that and then maybe to plot very related. These conditions persist is it's a week IRS business enough to to tweak the the compensation a little bit or or is that that's a small of a business really haven't impacts at an offset thanks.
Yeah. Thanks, Alex.
Yes, sure our rates did let me start off at a higher level say our rates business is definitely facing a mix.
Macro environment right. So we have volume headwinds as you're pointing out now due to the volatility very low volatility flatter yield curve.
That reduce.
Relative value trading and slow up the swaps markets and that's really across the board. So that's that's sort of.
Headwind.
The flip side is number of our rates businesses have.
Nice Tailwinds right. So we are growing share and and have some growth.
Things like treasuries mortgages, which.
We are doing quite well.
Of course, the surgeon Tivo issuance is it's been a good thing for us so.
The thing that we are very fortunate to have in our structure today as we've grown over the years diversity. These businesses and so you know that the headwinds and tailwinds, while we're really not in any kind of retirement that we've been in before this is this is largely unique I think for all of us.
You know things change and I and.
So we're not we're not terribly worried about you know a period of vis a vis type and when it comes to the swaps business I think the most important thing when you have this kind of slow down as a result for the markets is to look at our market share to look at how we're doing with our clients and the percentage of business will doing.
On that.
Measure we are doing quite well.
We are not to Doomsday believers, we think markets will continue to go up and down and.
We may have a period here.
Sure some prolonged low.
Low rates certainly on the short end us that's been established.
But we have other markets that were in that.
No actually are doing quite well in the rates space.
In terms of.
Your follow on question about compensation you way, we view compensation is the holistic performance of the company. So.
We we look at how we're doing as a company first and foremost that's how we all stay together and we're very well aligned on that as a team.
And individual products.
Might have ups and downs based on markets.
And we'll adjust accordingly based on our performance and then of course, you look the individual performance to see how individuals are doing but it's it it's a holistic approach.
And I think we had we had a very solid quarter.
And it is a little difficult to kind of see into the future you know given given where we are you overall very challenging environment.
Very helpful. Thank you.
Yeah. Thanks.
Thank you.
Next question comes from a lot of Chris Harris with Wells Fargo. Your line is open.
Thanks, just a follow up a bit on that last question.
The low rates seem to be having a much bigger impact on the derivatives side, then and they are in cash.
So what does that about the cat business, that's more resilience and why wouldn't the low rates and there for low volatility ultimately affect the cash side of the rates franchised.
Well I think the.
Thanks, Chris So another really good good question.
We.
We're seeing right now is kind of a unique situation right. So the massive surge in issuance.
Is you know really unprecedented and there's no doubt well, it's hard to projecting is going forward, but it looks like for can have a lot more issuance in global government bonds in the future.
That seems to have a real positive.
Effect on trading volumes, so that dynamic.
Has supported.
Government bond business.
Were taken market share as Billy pointed out.
Recorded comment which is a positive of course, but we're also.
I'm seeing seeing a nice nice activity in the government bond space really across the world from from China to you're up to the to the U.S.
So that that's a.
A real kind of positive thing that's a relatively unique to this environment. The other thing is we had been very strong mortgage franchise.
That you're aware of and that's.
Reacting very nicely in this environment.
As result of refinancing and a whole bunch other things. So these things tend to.
To to kind of run on slightly different.
Cycle.
You know I would point out there.
The surgeon in cash it issuance goes on the corporate bond side and on the government bond side derivative trading is a byproduct of that.
No doubt derivatives have slowed.
Can see Furthermore from our numbers.
And.
So that's that there's no doubt that's happening on some level of the trading but you know derivatives are a byproduct in a component of the overall rates markets overall credit markets.
So we expect to continue to see them.
The important tools for folks managing risks.
In their portfolio, so yeah, no doubt right now.
A bit of slow down with respect to derivatives, but you know I'd say look look at our results look at the you know look at the business. We're doing in this second quarter, while we've had this the slowdown.
Yep got it thank you.
<unk>.
Thank you.
Our next question comes from the amount of might carrier with Bank of America. Your line is open.
Hi, good morning, and they stay in the question.
Maybe shifting over to capital.
Bodily you guys generated healthy level cash flow you had modest dividend.
Just wanted to see where your hedge at Q in terms of priorities at this point in it in any of the M&A you had opportunities there are skirt.
Good pick up.
Yes.
Bob Bob go off mute given me too.
[laughter].
You're off mute Okay go ahead Bob.
Yes, I think that.
But we're still.
We believe a number things we think there's going to be consolidation. We're lucky we have a very active effort to look at opportunities that are particularly.
Interest as you indicated.
It's really a matter of sort of does it fit our strategies or price.
And all the things that we look at we're very focused in terms of always as we've talked about four of looking for places, where we get new product to new networks.
Technologies, perhaps.
And sort of similar to what we do we added our retail business or wholesale businesses.
Some years ago.
And so that's our sort of drivers to continue look it's we're being very careful because we wanted to make sure that in fact enhances our business it doesn't to sort of sit alongside.
And and we understand that.
The markets looking for Sinclair excess cash and we are and it's our intention to sit on it probably over the long term and so we are but as I said are actively looking at ways in which we can impact.
Hi, things you know the markets are there opportunities the market's submit rich at the moment.
Tend not to be distressed and we'll look at each of those and determine whether the values there for us in each case and we have looked at a good number and we continue to.
Thanks.
[noise]. Thank you.
Our next question comes from Milan, Alex Blostein with Goldman Sachs. Your line is open.
Hi, This is schaddick filling in for Alex on.
On the expense freind long to get a sense of how much accents next do you have as the industry wide rate writings continues to face headwinds and now what is a minimum of trends could only can actually your comps. He was a black scholes marsili on public institutions.
I'm not going to have.
Maybe talk about this exact specifics of teachers dimensions.
Part of our expenses variable. So you know depends on how you calibrate. It's 45, 50% of is theoretically variable, but we have to them.
We need to can you shed to manage and to invest we're not going to really change our investment strategy dramatically in this environment.
Can you invest board and we think thats kind of in the art Traderev over time is taking.
Our investments and looking ahead short term this year and medium to long term 2021 22.
So.
Even with in the current environment on we think that we continue that strategy, we're being very careful how we manage resources on making sure that investments in new hires and in some cases replacement hires people left.
Very much focused on and next thing is we want to do.
And lease talked about in the past started initiatives and data we've talked about goes in general levels, we are already investing money.
As well as what Pete lead Billy talked about in terms of all the swaps initiatives. We think it was important to continue our.
Increasing market share in our growth.
The product in spite of some of the headwinds we're facing sorry, our general motors to continue to focus on investing in the business. Our our flexibility is that its revenue goes down we have a lot of compensation expenses tied to revenue growth and they will have its impact in an actual way if thats what would happen.
Thank you.
Thank you.
Our next question comes from a lot of Chris Allen.
With Compass point.
Okay.
Hi, Good morning, guys wanted to ask about the mortgage franchise you mentioned the strength there maybe can you remind us like what areas within mortgages.
Your business is predominately focused on right now.
What's the opportunity set going forward are you seeing a.
Moving to buy the banks in terms of at least electronic trading within the mortgage is broadly.
No as.
Since slow moving relative to other asset classes.
Hey, Hey, its billing so yes, so so our mortgage franchise as we mentioned has been a very strong ones for us for a long time, it's a big brand with a company we have historically very much slower than what we would describe as the key D.A. the to be announced space. The most.
What aspect of the mortgage market, how many we continue to do extremely well there as the environment kind of.
At this moment very well.
[noise].
A very specific area of focus for us inside of the mortgage world going forward is going to be around specified pools, and I think in a very intuitive way, there's going to be a lot of central efficiencies around the specified pool market, which tends to trade around bid lists and all.
For list and that search for liquidity at various points of time can be challenging there is a certain.
Aspect of how that market trades that resembles a certain way the credit markets. So some of the functionality that we built for credit convicts can be very well leveraged into that.
Slide pool market. So without question that will be an area of focus for us and then the other piece that I would just mentioned to you as a good question just ironic continued sort of marketing aspect to the origination client group, which again at this point in time, obviously with rates as low as they are and in this cobot enzyme.
Jeremy I think the origination volumes will continue to floors that will be an obvious area of focus for us.
And just a quick follow up how big of the specified pool market just from an overall just buttons similar to the TV market are.
It's a smaller markets then the TV market for sure there are environment, where that market she gets bigger.
It's a smaller markets, but the need for efficiency in that market is very strong. So we're getting a lot of feedback from clients, but this is a moment in time, where.
More efficiencies around how specified pools trade is a tremendous value add to that.
Great that's like us.
Yep.
Thank you I'm showing no further questions in the queue I'll now turn the call back over to management for closing.
Okay.
Well listen thank you all very much.
For a joining us. This morning, you know as I said, we're really proud of a solid quarter, we produce in such a challenging environment for everybody I think I'll just say.
We wish you all.
Good how stay safe.
And.
We do see the light at the end of the tunnel here coming I just hope it's not a train.
And we're all for two to talking to you on the next quarter and hopefully to progress our collective situation from where we are today. So thanks again.
Take care.
Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.
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