Q3 2020 Marketaxess Holdings Inc Earnings Call
[music].
Ladies and gentlemen, please many am I get comfortable will begin momentarily must compete Neal I had a couple of calls begin momentarily. Thank you.
[music].
[music].
Ladies and gentlemen, thank you for standing by at this time, all participants are in listen only mode.
Later, we will conduct a question answer session at that time. If you have a question simply press Star then the number one on your telephone keypad.
If you like to withdraw your question press the pound he at any time.
Please note each person is limited to one question for being acts to rejoin the queue.
As a reminder, this conference call. These people recorded on October 27 2020.
I would now like to turn the call over to Dave Chris <unk> Investor Relations manager at market access. Please go ahead Sir.
Good morning.
Welcome to the market access third quarter 2020.
Well they call repeat Bay, Chairman and Chief Executive Officer.
Highlights for the quarter.
Christy Kennedy, President and CEO will discuss automation and new initiatives.
And then Tony the least chief financial Officer.
View the financial result before.
Before I turn the call over to Rick Let me remind you that today's call may include forward looking statements. These.
These statements represent the companys belief regarding future events that by their nature are uncertain, becoming actual results and financial condition may differ materially from what is indicated in the forward looking statements.
For a discussion of some of the risk factors that could affect the company's future results. Please see the description of risk factors in our annual report on form 10-K for the year ended December 31st 2019, and our quarterly report on form 10-Q for the second quarter.
I would also directly to read the forward looking statement disclaimer in our quarterly earnings release, which was issued earlier. This morning and is now available on our website now.
Now, let me turn it over to Rick.
Good morning, and thank you for joining us to review our third quarter results.
Sustained growth in electronic trading adoption by a diverse range of market participants drove trading volumes higher during the quarter.
Revenue of $164 million was up 25% year over year opt.
Operating income of $88 million was up 33% and operating margins grew to 53.5%.
Diluted earnings per share of one dollar and 78 cents are up 25% from a year ago.
Market share gains fueled the revenue and earnings growth with fully electronic.
Hi, great share up two percentage points to a record, 22.2% and high yield share up over four percentage points to a record 16%.
Open trading volume was up 41% year over year, driving estimated client transaction cost savings of over $250 million for the quarter.
Trailing 12 month EPS growth of 37% and revenue growth of 31% show an acceleration of growth rates over the last four quarters.
Slide four provides an update on market conditions credit market trading conditions were mixed for our business during the quarter credit spreads and spread volatility both trended lower versus the elevated levels earlier this year.
New issue volume dropped substantially from Q2, but was 30% higher than Q3 last year.
Corporate debt outstanding is up approximately 9% this year to 10.4 trillion dollars.
Trace high grade and high yield market volumes declined approximately 28% from Q2 levels, but show high single digit growth from last year.
We are pleased to see the positive trend in average years to maturity for our high grade volume.
This demonstrates growing client competence trading high quality long maturity bond volumes on our system.
It is also one of the factors driving our average fee capture higher.
Slide five provides an update on open trading.
Open trading continues to show strong year over year growth in spite of the return to more normal market conditions with lower volatility in Q3.
Our unique all to all market place delivered a volume increase of 41% and revenue growth of 53% versus last year.
For the third quarter in a row estimated transaction cost savings of $252 million delivered to our clients exceed company revenues.
We are adding value to liquidity takers and liquidity providers by delivering over 25000 credit trading opportunities per day at over $14 billion in daily notional volume.
For the quarter open trading represented approximately 33% of our trading volume and 27% of our commission revenue.
Dealer initiated open trading volume grew 37% year over year.
Nearly 1600 unique client firms completed at least one traded open trading and nearly 1000 firms provided liquidity on the system during the third quarter.
We believe our large and growing lead it institutional customer order flow substantial investor and dealer network and unique technology solutions create a sustainable competitive advantage in electronic credit trading.
We're also excited about the new trading protocols and product areas, we are adding to open trading.
Now, let me turn the call over to Chris to provide an update on automation and new initiatives. Thank you Rick slide six demonstrates the growing momentum of automation in credit trading automated trading volumes rose to over $30 billion in the third quarter up from $22.6 billion in the third quarter of 2019.
86 firms, including large asset management clients used our auto execution functionality in the third quarter up from 64 of the prior year Auto acts now represents 14% of total trade count as more clients and dealers realized the efficiency gains of automated trading strategies.
The use of dealer algorithms continues to grow in the platform with approximately 3.7 million algo responses in the third quarter, resulting in 296000 trades.
As the market increasingly adopt electronic trading solutions, we continue to see strong growth in our automated trading capabilities. We saw our short sharp rise in the average number of responses per inquiry, which ultimately improves the likelihood of execution. Our average number of responses per incurring has risen instead.
Really from four responses poor per inquiry in 2017, nearly doubling in the recent quarter.
Slide seven outlines our strategy for new product initiatives even.
Even while working remotely during the pandemic, we have remained focused on driving innovation and bolstering our global footprint, we announced last week a commitment from Goldman Sachs to provide streaming from prices for us investment grade credit into our live markets Order book five markets aims to bring new liquidity did occur.
Credit markets and reduce trading friction through efficient technology designed to enhance liquidity improved transaction costs.
We also recently launched a session based protocol called mid EPS launched as part of our open trading marketplace. Our mid ex offering provides participants with access to a broad and diverse liquidity pool, while achieving significant cost savings by potentially matching at our award winning composite plus mid point price.
Minex is currently available for European products, and we plan to add more products in the coming quarters.
In the third quarter, we also announced two acquisitions, which team to enhance our existing trading data and post trade businesses are both acquisitions are relatively small on their own we believe in the aggregate they will add significant value to our full trade lifecycle solution the acquisition of Muni brokers ISP.
Entrail electronic venue, serving municipal bond in this deal or brokers and dealers aims to expand our existing municipal bond trading solution for global institutional investors and dealer clients.
The acquisition of which forces groups regulatory reporting hub extends our leading regulatory reporting business across Europe, and strengthens our data capabilities with improved transparency and post trade data services, we expect both acquisitions to close this quarter.
Slide eight provides a summary of our trading volume across product categories. Our us high grade volumes were up 70%, 17% year over year to 305 billion for the quarter largely due to market share gains and the increase in market volumes estimated us high grade market share increased by two.
Percentage points year over year to 22.2%, while estimated us high grade trace volumes were up 6% year over year.
Our other credit credit category volume was up 11% year over year led again by significant growth in us high yield trading over our platform us high yield volume was up 46% as estimated market share reached a record 16% up more than four percentage points and estimated Tracy.
Good volumes rose, 9%, while our emerging markets trading volume was flat year over year. We're pleased with the results as estimated market volumes were down more than 20%.
Our rates business maintained its dealer to dealer market share compared to three Q2 thousand 19 in a difficult market environment. However, our investment in new rates trading capabilities continues with the rollout of our net hedging solution expected later this quarter. We also expect to launch our new fully.
Integrated streaming click to trade rates front end within the market access work station this quarter, allowing thousands of current credit trading users to access our rates trading solution.
Live streaming U.S treasury liquidity will be made available to our institutional clients and dealers through our existing market access workstations with full post trade and own. This integration, we see tangible benefits for our investor and dealer clients for both of these offerings.
Our Green Bond trading initiative continues to support clients SG related investment mandates in the third quarter over 5.8 billion worth of Green bonds were traded on our platform, resulting in nearly 30000 trees being planted in critical regions across the world over 90000 trees have been planted thus far this year as.
As a result of our Green bond trading initiative.
With four important trading days remaining in the month overall market volumes in our core credit trading products remained flat to last October. However, our October average daily volume on the platform is up more than 20% from last year as we approach. The month end now let me turn the call over to Tony to provide and.
Update on our financials.
Thank you Chris on slide nine we provide a summary of our quarterly earnings performance.
Revenue was $164 million up 25% year over year.
The 14% increase in credit trading volume higher fee capture and the inclusion of US Treasury trading resulted in a 26% uplift in commissions.
Information services revenue was up 11% to $8.5 million.
And post trade services revenue was up 24%, reflecting the introduction of new STR reporting services in the third quarter.
Operating income was up 33% year over year and operating margin reached 53.5% during the quarter.
On a year to date basis operating margin was up five percentage points to 54.7%.
The effective tax rate was 23% in the third quarter and reflects $5.9 million of excess tax benefits related to share based compensation awards.
During the quarter. We also recorded an additional reserve for uncertain tax positions of $4.8 million.
We expect that the full year effective tax rate will be within our previously stated guidance range of 20% to 22%.
Our diluted EPS was one dollar and 78 cents.
The year over year increase in our diluted share count was largely due to the 146000 shares issued as part of the liquidity edge acquisition.
On slide 10, we have laid out our commission revenue trading volumes and fees per million.
Total variable transaction fees were up 28% year over year, driven by the increase in credit trading volume higher us high grade fee capture and the inclusion of use trade you ask us treasury trading commissions.
You hit high grade fees per million was $18 higher on a sequential basis and $26 higher year over year, mainly due to longer duration.
Average years to maturity on bonds traded over the platform. It 9.5 years in the recent quarter compared to eight years in the third quarter of 2019.
Our other credit category fee per million increased by $12 year over year, principally due to a shift among products favoring high yield volume.
Fee capture at the individual product level and product mix within other credit was similar to the second quarter.
Total distribution fees were $1.3 million higher than the second quarter level, principally due to a rise in unused minimum fees and one dealer transition to a distribution fee plan.
Slide 11 provides you with the expense detail on a year over year basis expenses were up 16% for the quarter with compensation and benefits accounting for close to half of the year over year change.
The main contributors to the rise in compensation and benefits was an increase in head count of 88 personnel in support of our growth initiatives and an uplift in the variable bonus provision, which is tied to financial performance.
The increase in depreciation and amortization reflects the continuing investment in product development, along with the amortization of acquired intangibles.
Clearing cost were up more than $2 million, reflecting a 41% increase in open trading volume and inclusion of match principle Treasury trading volume.
The reduction in marketing expense for both the quarter and year to date is due to cope with limitations on sales related to any expense.
We expect our full year 2020 expenses will be will be near the upper end of our guidance range or close to $314 million.
The 2020 expense view includes approximately $2 million of acquisition related transaction costs.
But excludes any post acquisition impacted the muni brokers and Deutsche abortion regulatory reporting of transactions that are expected to close in the fourth quarter.
On slide 12, we provide balance sheet information.
Our balance sheet at several new line items related to self clearing, including segregated cash and receivables from and payables to broker dealers clearing organizations and customers for unsettled trades in deposits.
Cash and investments as of September Thirtyth were $341 million compared to $536 million as of June thirtyth.
During the quarter, we paid a quarterly cash dividend of $23 million. We also repurchased 33000 shares in total during the quarter, including 9000 shares under our buyback program and 24000 shares associated with the exercise of employee stock Awards.
We went live with self clearing for us bond trades on on August 10.
We funded certain clearing house and settlement agent deposit requirements customer reserve account and settlement physician activity, which aggregated $260 million at September month end.
These requirements will fluctuate with open trading volumes market volatility and settlement experience.
As a result of our conversion to self clearing for us bond trades.
We expect clearing costs on a per ticket basis to decline by upwards of 30%.
Based on the third quarter results. Our board has approved a 60 cents regular quarterly dividend.
Now, let me turn the call back to Rick.
Thank you Tony we are pleased with the ongoing business momentum reflected in our third quarter results market share trends in core products are accelerating and new products and trading protocols look promising to expand and diversify our sources of revenue.
We are excited about our growing client networks for trading and post trade services through the recent acquisition announcements, we would now be happy to open the line for your questions.
Thats online attached to question you need to press star one of your telephone.
A question.
Yes could you please limit yourself to one question then rejoin the queue for any additional questions you somebody on composites Roni roster.
Our first question comes from Rich Repetto with Piper Sandler Your line is open.
Yes, good morning, and congrats on a strong quarter.
What particularly.
Yes to me is a self clearing Tony So right now you did say that it would go down 30% per ticket and I guess Im just trying to see the zap immediately hit in the fourth quarter and how does that soda aligned with the prior guidance squared.
I think it's been running about 12% of.
Open trading revenue and how you thought you could get it down to mid single.
Single digits over time.
Will there be any more progression the timing of this savings.
The self clear sure sure yes, so rich just a just a little reminder, that clear.
Clearing cost today, it's a combination of open trading related clearing costs on our credit business, but also for for treasuries. We do have clearing costs on the treasury side as well and right now in the near term, we're leaving that the clearing model in place and the treasury side and just get but.
By way of reference or background clearing costs on the treasury side run something like 25% to 30% of Treasury revenue and then on the credit side Thats. What the number you were referencing on the credit side, you've typically been.
At about 11 or 12% of open trading revenue. So when we talk about clearing costs until we get some of the commentary that I've made on past calls that we thought we could drive that percentage clearing costs as a percentage of revenue down into the single digits Im getting we're providing a little more clarity now saying that if you.
On a per ticket basis, which is which is a really a better way of looking at the clearing costs on a per ticket basis.
We think we can drive those those clearing costs down by upwards of 30%. If you translate that into percentage at saying, we can drive it down into six or 7% of open trading revenue.
Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.
Hi, Thanks. Good morning. My question was on the fee per million, which obviously continues to do come in very strong you mentioned yield to maturity, increasing but just curious about sustainability and.
Maybe update on October if there's been any real change in terms of behavior on the activity side.
Yes, so Dan on the question on that.
Where can it go and as.
The high grade side is a lot of factors that influence fees per million, we've got duration, which is which is influenced by years to maturity and yields you've got trade size under our tiered fee plan Weve got dealer mix, we have dealers on distribution fee plans on all variable plan, even even the protocol side there are differences between.
Been disclosed our Q open trading live market. So there is a lot that goes into the mix.
Yes.
What I would tell you that you know when you look at the third quarter.
This is not a post crisis high we we've seen years to maturity above 10 years post crisis. We've seen if you go back to 2009 2010 2011, you had us high grade fee can be captured hovering around $200 per million so tough.
Tough to say, where it's going to go in terms of sensitivity that we've talked about this before.
Every one year change in years to maturity plus or minus $10 per million. If you had a one percentage point change in yields across the yield curve could be $10 plus or minus either way. So there's just a lot of variables into the mix, but right now with where yields are.
Clients are tending to trade look longer dated paper, we're doing better from a market share standpoint, we're doing better in longer dated pay for success.
I don't think any of us and help them nowhere its going to go but.
You are a lot of factors that that could influence one way or another.
In this month's Tony I'll start and this month, so so Daniel Vesta this must be captured.
Were 15 days into a 60 month 60 day quarter. So early in the quarter when you look at.
Recapture on May give it to you overall for credit. It is it is almost identical to what we're seeing in the third quarter now Thats, an overall credit number I'm not going to getting more granular than that but but we're not seeing a big move in fee capture in these first 15 or 16 days.
Thank you. Our next question comes from Ken Hill Capital. Your line is open.
Hey, good morning.
So I have a question on the regulatory reporting hub units should be acquiring from Deutsche Boerse can you talk about how that's going to be working to pre trade or pre and post trade data services I think you'd mentioned that increases the footprint with European clients provides opportunity for technology solution. So it's kind of hoping you could maybe flesh those out a little bit and then maybe any.
I think you can provide on profitability because I don't believe the expenses for that are in the forward guidance moving forward here. Thanks.
Great. Thanks, and I'll take the first part of that question, obviously, we're acquiring the arm and EPA regulatory reporting business from Deutsche Boerse.
We do expect that deal to accelerate our margin expansion in the post trade business.
Obviously, it does add data into our footprint within our data business the real value of that deal is how it scales exceptionally well onto our current platform. There are close to 500 clients within the Georgia Bourses Reg reporting hub.
And we plan to transition clients over a 12 to 18 month process.
With some initial costs in the build for our platform to allow that many clients to migrate over during that timeframe, but largely only adding.
Minimal expenses to our overall platform to support the ongoing business.
Migrating over from from the Deutsche Boerse Reg hub. So we're excited about not only the current business, but also the opportunity to up sell those clients with additional services.
And obviously.
Extract the value of the data that all their data reporting can bring in the future.
I'll, let Tony just add any details on on some of the costs.
So from a.
And Ken will give you a little bit of color on both the.
Revenue side and the cost side.
You want on the revenue side that this business will add.
Year, one somewhere around $10 million in revenue and EPS.
As Chris mentioned.
Fairly high margins expected on that business is transitioning over there.
That client base there are some cost in front to move through that transition, but we would expect we would expect this.
You'd be at fairly high margin.
Acquisition upwards of 50% margins on it.
I have to add on the amortization of acquired intangibles, but.
Purely on a.
Do you want an accretion basis, it will be accretive year one.
Thank you. Our next question comes from Ari does Steve.
Your line is open.
Hey, good morning, everyone.
A quick one for Rick on the high yield business. So you hit record market share last quarter I'm seems like begins appeared to be driven by several factors.
Moving to Maui, EPS activity, but higher for the high yield names can make small simple means will you also seems like you know you have new market participants treating a different slice. So can you talk about the portion how that might be a little more transitory in terms of volume can share lessons, Justin addressable market, although such laws.
Sure. If you guys are the result of some of the organic initiatives.
Sure happy to do that are clearly open trading is a key part of the high yield liquidity solution that we delivered to clients.
And that is not only improving the overall investor client experience. It's also attracting.
More new market participants into our high yield platform and more broadly in the open trading. So you see a really healthy dynamic there were transaction cost savings are increasing investor client order flow and new participants are very active in our high yield product.
And as you point out it's been growing hand in glove with the ETF marketplace in high yield share trading.
So those dynamics I think are sustainable.
The other part that we're seeing as there is actually increased comfort with larger trade sizes going through the platform and high yield as well.
For a long time, our high yield business has been dominated by trade sizes under 1 million, we're seeing really good adoption and trends coming into $1 million to $5 million category in high yield as well. So it's a combination of our client comfort with trading larger size in high yield the transaction cost savings and the new mine.
Market participants.
At our active on the high yield platform.
Thank you. Our next question comes from Chris Allen with Compass point Your line is open.
Hi, Good morning, guys wanted to ask about the Muni business wondering if you could give us an update in terms of how current activities on the platform Electronification trends there and then.
And maybe some details on many brokers.
That's going to help enhance your platform I'm any colors on any color revenues expenses around that deal. Thanks.
Sure, Chris I'll take that.
On the Muni business, obviously, I think a year ago I was.
Talking about our muni business and the excitement around it and certainly if we look at this quarter Muni revenue grew 37% to 2.5 million in Q3 over Q3 2019.
A key factor in the growth of our Muni business, particularly in the in the tax exempt Muni businesses our open trading.
Solution, obviously open trading immunities grew.
By over 60%. So we're seeing a lot of that growth being driven by the open trading solution our penetration in open trading for open trading and Muni.
Is close to 60% in our tax exempt Muni bond. So certainly open trading is playing a key role in the growth drivers of our Muni business, obviously, we're adding more functionality more dealers. We also launched the MTF.
In Europe for Muneeza, So European clients can now access our muni is through our MTF, which is a fairly important solution for.
European clients looking to access the U.S. Muni market.
And on the deal on the deal itself Muni brokers, obviously, it's a it's a it's a small deal, but an exciting one for muni Muni business meetings.
Muni brokers is an electronic marketplace that currently supports 14 of the beating Interdealer brokers.
Close to 400 million in taxable and tax exempt volume going across the platform.
It is it is an aggregator of muni content and that's an important part of the strategy around Muni broker acquisition is that content thats. So important to us as we look at the content on our current market access platform. So a lot of the integration of the Muni brokers platform will be around.
Linking the two platforms together and making use of of their content in both platforms to grow overall volumes on on the on both platforms.
With regard to the Muni brokers costs in the deal expenses I'll, let Tony.
Answer that.
Yes, so on on media group It is Chris Chris mentioned fairly small company today largely.
Largely a subscription model. So we actually we have clear visibility on on both of the transactions clear visibility on what the revenue revenue outlook is in the near term month on Muni brokerages.
Revenue for next year would be somewhere in that five or six or $7 million range and the expenses will be a couple of million dollars excluding.
Amortization of intangibles and just you know weve talked about that we've talked about the Deutsche imports of deal Weve talked about Muni brokers and just to be clear so were not estimate to edit pieces.
We're looking at a revenue contribution next year somewhere in the $15 million to $17 million range. When you look at expenses inclusive of amortization of intangibles, its probably 10 or $11 million in expenses for the two deals in the aggregate.
Thank you. Our next question comes from Talcott with KBW. Your line is open.
Hi, good morning.
So multi part question related to wind markets.
I guess first can you give us a sense of the pipeline and the timeline for onboarding of other market makers and.
And how many market maker he think to ultimately have on the platform.
Secondly in terms of pricing could you help us think about where this is.
Going to be quite strong can tier standard our RF Q protocol.
And lastly can you just remind us how big the story bond market or the story on new issue more active market is as a percentage of the total secondary market and what your current market share is sorry about that.
Okay.
So three questions in one question.
I'll jump on the log markets and what we're doing with dealers and market makers, obviously, we announced.
The Goldman Sachs relationship online markets, where they'll be streaming log prices and our streaming today log prices currently.
Currently across 132 bonds.
Most of the most active bonds that we carry on the platform.
Average size is around 500000 per order.
And it's a two way streaming prices so a full.
Bid and offer across all those bonds.
That's an exciting announce.
Announcements for us and that partnership.
We do expect others to joined right now there are close to 300 clients approved for live markets and 17 dealers approved for like markets. We expect a number of large dealers to.
Connect to log markets for streaming pricing as well and.
And those plans are already in the works. So we're excited about what that market will look like in this quarter and into early next year, given the excitement from the dealer community.
And the dealer community is both large bank.
And non bank ETF market makers that are excited about a lot of pricing the other exciting.
Exciting thing about live markets is a completely different dynamic it is a click to trade solution. So you can click against those lot prices, but more importantly, you can a client can join the log prices trade at midpoint.
Ed.
On on either side of the market. So it does facilitate clients avoiding the cost of cost crossing spread that facilitate.
Hi, its leaving live orders available for execution. So it's really the dynamic of both the streaming liquidity coming from committed market makers as well as clients being able to use the LIBOR order book.
With regard to pricing Tony do you want to cover that so on on the pricing side you know, we we have different.
Fee schedules for reach product and protocol and those fee schedules are typically set a base.
Based on bid offer spread and the expectation around live markets. It it'll be trading it will tend to favor more on the liquid bonds at an even larger trade sizes that have a tighter bid offer spread.
It's also a model where to to promote liquidity into liquidity taker pay model or market model to promote liquidity, we're incorporating some incentives and rebates for liquidity providers. So the capture rates going to be lower than our than our headline.
Hi grade fee capture and.
Yes.
Not exactly sure where that will settle out once once were.
Actively trading in live markets, but but as we've said in the past and we view this as largely additive revenue since.
Since our share today in that addressable market tends to be lower.
And Carl you asked that the third part of the question around.
What what is the addressable market and then what's our share in the addressable market.
When we look at the newly issued bonds.
Say the first four weeks of trading it typically runs around 10% to 15% of trace volume second quarter was much bigger than that with the massive new issuance, but if you look at and say the third quarter or which is a more normalized.
The new issue standpoint, it's in that 10% to 15% range. It the other piece where light market to the dressing is story bond actively traded bonds.
Any given month or quarter that could be another 10% to 15% of the addressable market. So you're looking at something like 20% or 25%. We're this is really targeted our share as well as as you know our share tends to be lower in those newly issued bonds in most actively traded bonds and I'll give you.
One just want one statistic.
Would be in that in that first week of trading where it's it's.
It's probably the most.
The most obvious one in that first week of trading.
After a new issue breaks our market share is around 7%, 7.5%, it's up from where it was a year ago, which is around 5%, but right now it's around seven or 7%. So you're not yet obviously a lot different than what you see in our market share for seasoned bonds. So this is why this this protocol so important to us.
Thank you. Our next question comes from Chris Shutler with William Blair. Your line is open.
Hi, everyone. Good morning couple of questions first.
Unlike markets.
Do you view life markets is creating new liquidity in the market.
Thanks secondary market turnover or is it more.
More more efficient way to trade.
What are already pretty liquid bonds.
And then secondly, maybe just an update on your market share of block trades by Boeing and Airbus.
So on and live markets it's.
Honestly, it's both right. We are we are aggregating new liquidity.
Streaming liquidity in the credit market is new at institutional sizes, while there are a retail platforms out there that provide.
Slide liquidity this is new because his institutional sides with institutional access. So it's it's a new type of liquidity that we are placing on the platform. It also allows a as I mentioned clients to provide liquidity as well. So it's it's an efficient way for KLH.
Clients to broad provide liquidity outside of the traditional.
Our Q solutions and responding to our skews because its always live and available for a client to post on so it is we view it as new liquidity obviously it is.
More efficient to use a click to trade solution to access.
In seconds, a quote first running and our Q. So the efficiency is great. It also is attractive to some of the new participants that we see coming into our market.
Obviously hedge funds and Kwan funds are much more attracted to an order based platform Versant Arts Q based platform. So in that respect it is attracting new new liquidity given the new participants that we see accessing our market.
And Chris on the.
On the market share for block trading it was right around tenant.
And an 8% which was just about the same as it was a year ago, but when you look under the hood at the encouraging part there.
Our our market share in longer dated paper in block trades was where we saw a little decline was in short dated paper, but if I saw on short dated paper block trades or market share at 26%. It was down a little bit yeah. So so there is a little bit of an offset there.
There is so you can see with the years to maturities a little.
Less trading at the shorter end of the curve market share was down a little bit, but the long dated paper.
Market share was up.
I would just conclude Chris by saying that there are many reasons to be optimistic about long term turnover and velocity in global credit markets.
Clearly open trading is reducing transaction costs, but also bringing many new and important market participants into credit and then the stats that Chris shared earlier on the significant growth in automation with dealers embracing.
Algos in clients embracing auto acts.
Feeds into the mix and our thoughts on velocity and then the important trend that's going on with the indexation of fixed income and the growth in ETF assets.
It really creates a new basket tradable form of fixed income trading and not only creates more activity in the Ts shares it creates more activity in the underlying bonds.
So when we put all that together, we start to see a positive story emerging on long term growth in market turnover and trade velocity in the years ahead.
Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.
Great. Good morning. Thanks. So thanks for the question so sort of maybe just building on that last point I was hoping you guys could provide a little bit of color on the composition of the open trading book, obviously, that's been a very strong growth driver for you guys.
But maybe a little bit of color on sort of the mix of liquidity providers that are in there today versus maybe a year ago, so sort of kind of what's more systematic or quote unquote have frequent trading market makers for some of the traditional players.
And any color on the relative size.
Of trades in the open trading book versus the rest of the credit platform.
Sure happy to do so as you know the good news is all aspects of open trading are growing.
And I'm, especially encouraged when you see our dealer initiated volume continued to grow.
Where we think we're providing an attractive liquidity outlet in solution and additive distribution for the dealers on market access as they think about us sitting in the middle of more client trades in doing so with less balance sheet.
We're also seeing movement with long only investors, providing more liquidity and.
And you see records on both sides with dealers initiating orders and investors responding to orders and being price providers on the platform.
There is an important trend in terms of the percentage of open trading volumes still emerging with the new market participants.
And each quarter, we not only see more new names, we see existing participants getting larger.
So there is a trend within liquidity provision where those alternative.
Market makers and liquidity providers continued to get larger as a percentage of the total.
Thank you once again, ladies gentlemen, if you wish to ask questions. At this time. Please press Star then one are you touched on the telephone.
Our next question is a follow up.
Oh, Hi, Stanley Your line is open.
Yeah, Hey, Rick So one question on market structure, and I know you said on the fixed income market.
Advisory Committee.
Could you talk there was some recommendations to.
For the FCC to have a regulatory framework for electronic fixed income trading as well as to defining what electronic trade is now I guess can you sort of summarize what the.
The purpose of that was and what changes that might you know the current if they adopted.
You're the proposal of the Hdinsight Committee.
Sure no happy to rich thanks for the question, but.
Yeah, we're about three years into our work as an industry industry Advisory group with the FCC on Fem sack and really pleased the chair Clayton and the commission took the initiative to invite the industry into advise them on areas where.
The regulatory environment could be improved in fixed income to help with market transparency and liquidity and resiliency and really some important recommendations have emerged from all this subcommittees over the last three years.
This particular, one has to do with.
The fact that today, there really is not one comment regulatory framework across across all fixed income electronic trading venues and as a subset of that there really are not any clear reporting standards for reporting of.
Volumes in fixed income electronic trading and I personally believe that the committee supported that view that there is there is a room for improvement there that would benefit all market participants.
If we can move toward a common framework for regulation in general and for electronic trading volume reporting specifically and whats. Unfortunately today rich as I think many people assume that when they see a press release from one venue that they can compare directly with others and that's just not true ever.
Every venue has unique practices in terms of how they report their volumes and there are tons of inconsistency that emerge as some are reporting through Ats others are not some reports single dealer volume with multi dealer volume summer reporting trade processing.
With electronic volumes that is so that it makes it very difficult for analysts for investors for dealers and even for the regulators to know exactly what the trends are in fixed income electronic trading in general and within certain individual venue, specifically and so the recommendation was really why can't we.
Create standards that would make everybody's job easier.
Really understand what's going on with electronic market share and transaction costs across the industry and we're hoping with that that will get to something that looks more standard, but it's it's anything about that today and I I. Just would also point out that there is work going on in the private industry to hedge.
Ill dissect the various reports and I would point to Kevin Department in Greenwich Associates for the work that they do because they try to really talk to all the venues to understand what they're reporting and then equally important they have an industry advisory group themselves they describe their experiences and how the different.
Menus work and what they are reporting so they are trying to.
Aggregate all that information into a standardized monthly report now and I would I think what they're doing is that is the best thing is available now to get through all these differences that exist currently.
Thank you.
Thank you. Our next question comes from Townsend with KBW. Your line is open.
Hi, Yes, just a couple of follow ups for Tony.
On the self clearing I think you mentioned that over 200 million of passive moved over support self clearing operations, who is going to give a number you can talk about whether you'd expect that.
That level of cash starts to grow with open trading or whether that will be more fixed in nature.
Right so.
Hi, where we're.
Couple of things in the mix. There. So you know we've always consciously held access capital.
Regulated entities and that's related to help clients get comfortable when they opt to trade through us and it's it's also to cover any potential.
You know credit losses, we haven't incurred any credit losses that we've always kept excess capital there to the big item. Now is we're also holding excess capital we have capital capital and use right now to meet any liquidity needs and any potential spike in open trading activity or volatility or or any.
You sort of activity from our clearing experience.
I'm, so sorry, it doesnt impact our minimum regulatory capital requirements, but there's a big uplift.
In regulatory reporting in our daily position monitoring these.
These these new deposit and reserve requirements. So.
So we've got a customer reserve with FINRA, we have deposit requirements with the clearing houses in our settlement agent banks and also we're putting money it used to facilitate trading at at at DTC today.
Those numbers aggregate around $260 million.
That could change again, it could change with open trading activity. It could change if there is if there is volatility could change if our settlement experienced changes, but right now we we feel like we have sufficient capital to meet the needs of broker dealers already well capitalized.
We also have a a $200 million collateralized loan available with our with our settlement agent, we have our revolving credit facility at the parent company level.
So we think we're we're more than sufficiently capitalized we also.
Just to put in perspective, we ran some simulations around the activity in March where our open trading activity was elevated it was two X where where it was in the in the third quarter volatility Spike for a number of weeks there, particularly in March and even with the estimated increase in our deposit in reserve.
Garments, we think it's all manageable within our within our current capital profile. So we again, we think short answer is we think where we're sufficiently position from a cap from a capital standpoint, even if we see spikes in volume or volatility.
Got it thanks.
And then just lastly, the distribution fees you mentioned I think there was one dealer migration, but there's also I think.
An increase due to unused and then loans was a majority of the sequential increase related to the dealer migration Im just trying to get sense of how much of that is sustainable on a run rate basis. Thanks, Yes, yes sure. So it was it was more weighted.
Toward the unused minimum fees and.
Just in terms of sort of caution around around guidance, we do give dealers the choice of fee plans and particular in us high grade and high yield.
We have a distribution fee plan, we have all variable plans and then most products.
Had a dealer monthly minimum fee commitment so because we give dealers choices and because the unused minimum fees can vary period to period based on activity. It's hard to you to pin down the forward looking forecast, but right now we are tracking any.
Dealer movement in the fourth quarter were not tracking any fee plan changes. So we would expect that fourth quarter distribution fees to be similar to the third quarter with one caveat and that around these unused minimum fees. So.
So that could cause a swing from period to period, but from say the pure distribution fee line. The fixed monthly fees, we don't expect any any change there into the fourth quarter.
Got it thank you.
Thank you and I'm showing no further questions at this time I turn the call back over to Rick Thanks for closing remarks.
Thanks, very much for joining us this morning, and stay safe stay healthy and we look forward to talking to you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
[music].
[music].
[music].