Q3 2020 Tradeweb Markets Inc Earnings Call
Well, ladies and gentlemen, please standby your conference will begin momentarily once again, ladies and gentlemen, please standby.
[music].
Ladies and gentlemen, please standby your conference will begin momentarily once again, ladies and gentlemen, please standby.
[music].
Reminder, today's call is being recorded and will be available for playback to begin the call I'll turn the call over to.
Head of corporate development and Investor relationship actually Cineworld. Please go ahead.
[music], Thank you and good morning, John.
Joining me today for the call our CEO Lee Olesky, who will review the highlights for the quarter and provide a business update I personally hope who will dive a little deeper into some growth initiatives and Bob Barr show, Oh, CFO, who will review our financial results.
Our third quarter earnings release prepared remarks, and accompanying presentation are available on the Investor relations portion of our website.
I'd like to remind you that certain statements in this presentation and carried a coupon they may relate to future events and expectations.
And as such constitute forward looking statements, but in the meaning of the private Securities Litigation Reform Act of 1995.
Statements related to among other things our guidance, including full year 2020 guidance and the coordination pandemic.
Actual impacts which are inherently uncertain forward looking statements after.
Actual results may differ materially from these forward looking statements information concerning factors that could cause actual results to differ from forward. Looking statements is contained no one actually into yachting reports filed with the FCC.
In addition, today's call we will reference certain non-GAAP measures into.
I mean, she regarding these non-GAAP measures, including reconciliation to GAAP measures are now posted earnings release and presentation.
Lastly, with White city market industry data, which is based on management's estimates and various industry sources.
<unk> posted earnings presentation for more details.
To recap. This morning, we reported GAAP earnings per diluted share of 19 cents, excluding certain non cash stock based compensation expense acquisition significantly DNA and set an FX items and assuming an effective tax rate of 22%. We reported adjusted net income per diluted share.
Studies.
We see the earnings release and the form 10-Q to be filed yes, you see additional information regarding the presentation of our historical results.
Now, let me turn the call over to Lee.
Thanks, Ashley good morning, everyone and thank you for joining our third quarter earnings call.
The world remains uncertain place among numerous political climate health and social challenges.
A trade web cyclical macro headwinds from subdued read volatility and lower yields continue to partially masked encouraging sector or inorganic growth across our rates credit and money market assets classes.
Our team remains focused on the future operating purposefully to execute on our growth roadmap by managing what's within our control which.
Which is relentlessly engaging clients innovating with technology and improving trading workflows to gain share.
As we continue to focus on revenue growth. We believe we are increasing our earnings power.
Is this your trade web to eventually benefit when volatility resurfaces and secondarily when interest rates.
[laughter] our message to our investors is unchanged.
We remain laser focused on capitalizing on the secular tailwinds underpinning our business to drive revenue growth and margin expansion for the remainder of 2020.
2021, and beyond as both our existing and pending investments to scale globally.
Turning to slide four we reported the strongest third quarter in our history.
The new market share and volume records across numerous products.
Specifically gross revenues of $213 million during third quarter, two mortgage loans were up 5.9% year on year on a reported basis and by 4.7% on a.
Constant currency basis.
Revenue growth and the resulting scale translated into improved profitability.
Year over year, as or third quarter, adjusted EBITDA margin expanded by 91 basis points to 47.4%.
On the investment front, we continue to innovate by rolling out several early stage initiatives.
We launched our enhanced specified pool platform after collaborated for a year with leading mortgage originators to design a feature rich offering to automate this large market, which traded 26 billion a day on average during the first nine months of 2000 each one.
We believe this offering builds upon our strength in the TV market.
The frequent high volume and spreadsheet driven nature of the specified pool market makes it well suited for automation as we estimated electronification levels today are less than 5%.
Similarly, the culmination of another year long project led traded to becoming the first offshore platform to offer for investors electronic access to the China Interbank bond market for C.I.B.M. direct.
Complementing our existing bond connect offering.
We now give clients access to the two most popular northbound trading channels and nearly doubling powerful drugs to market.
Finally in U.S. corporate credit.
We continue to lead the next generation of innovation in the space.
Moving on the growing adoption of spotting and portfolio trading are rolling out rematch, which connects or wholesale liquidity to our institutional and retail liquidity pools.
Looking ahead, our sales team remains highly engaged in our technology. She was a busy pipeline as we look out over the next 12 months.
Turning now to slide five this quarter was marked by strong credit and market data.
Which more than offset flattish performance in other asset classes.
Specifically credit grew by double digits at 26.9% while.
While rates and money markets were relatively minor last year as organic growth more than offset strong rate headwinds.
Our post March performance in rates continue to be earmarked, let us see mix or tailwinds and headwinds we discussed last quarter.
Cash rates posted its second highest revenue and volume quarter as record as record Central bank issuance fueled institutional government bond trading and low interest rates sparked higher refinancing activity, thereby boosting mortgage tree.
On the other hand subdued rate volatility took its toll on most of the rates franchise with interest rate swaps. The most pressure equities.
Equities fell 3.9% against an exceptional third quarter 2019 comparison and market data grew by 10%.
Moving on now 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 each year.
Starting with interest rate swaps, a tough macro environment characterized by low volatility continued to pressure, our volumes, which fell 36% year on year, but outpaced industry volumes as measured by corners.
Our main focus area and higher fee per million more longer duration swaps held up relatively better falling only 17%.
All in our market share hit a new record.
Glimpsing, 10% for the first time as we continue to focus on what we can control deepening our client wallet share and scaling new products and protocols, because we own more new electronic options for clients.
We believe we gained meaningful share versus our closest competitor Bloomberg, both us and Europe.
Longer term we remain excited.
By the opportunity here as the rate cycle improves and the market continues to electronics.
Billy will give you an update on our strategy momentarily.
So moving onto us treasuries, our volumes increased 6% year on year led by the institutional business pushing market share to record levels exceeding 15% of the U.S. treasury market.
Amidst the backdrop of heavy stimulus driven issuance the composition of the U.S. Treasury market has shifted towards the institutional sector as client activity served well wholesale activity slowed.
A trade web share gains within institutional have been driven by existing clients doing more business competitive share gains versus Bloomberg and further inroads into the tivo market capitalizing on the recently short dated issuance.
Looking ahead, we're also investing in driving adoption of our early stage protocols, such a stack trade with applause and request for market RFM.
In the wholesale arena.
Our disclosed streaming protocol registered its second best quarter as trading behavior continues to shift away from traditional central limit order books, given better price discovery and reduced information leakage as clients respond positively to our proprietary technology investments relative to the competition.
Looking ahead, we believe the mix of our organic growth initiatives and the growing to be rest treasuries.
Outstanding.
Courtesy of the feds ever expanding deficit bodes well for earnings power as we emerge from this pandemic into a higher and more volatile interest rate environment.
Shifting to credit the asset class continued with strong growth and generate 50 million in revenues, our U.S. corporate credit market share continues to rise and set new records in both investment grade and high yield driven primarily by our institutional our Q business recent innovations like.
Portfolio trading that spotting and growth of our suite of anonymous trading protocols.
Our wholesale session trading business rebounded back to levels seen in the first quarter with activity accelerated in September.
The retail business saw significantly less activity as low yields reduce the appeal of credit products for financial advisors.
Looking ahead, we continue to see a lot of opportunity credit as our platform continues to scale.
We remain focused on serving both voice and electronic workflows and electronically connecting our three pools of liquidity.
Finally within equities institutional each yes were down 8% year on year as volumes were in the hampered by subdued European market activity, especially in August which displayed a typical summer fall relative to the heightened volatility that characterize August 2019, when recession and trade works years.
Grip the market.
Fundamentally we continued to add new clients globally and remain excited about the prospects for the business.
Our progress was recognized when our GTS platform was recently named as the best ETF platform by DCF Express U.S. worse.
We believe our intelligent retrade liquidity provider selection robust electronic audit trails, and deep integration with own best providers continue to drive the success of our offering.
Our other initiatives to expand beyond our flagship each year franchise are also Barry.
Yeah.
With momentum continuing in equity options Delta, one and convertibles.
During the quarter, we also announced the partnership with CBS, we forget pieces.
Which will leverage our leading wholesale ETF platform a primary destination for DFI treatment.
Looking ahead, we believe we remain well positioned to benefit from the continued growth of EPS globally, with our newer product additions and expanding client footprint.
With that.
I will turn it over to bill.
Thanks Lee.
Turning to slide seven for a closer look at swaps swaps remain a critical component of the trade web story, and one with considerable room for growth and innovation.
We continue to operate with a growth mentality investing for the future.
The broader industry backdrop in the third quarter for interest rate swaps remain secret pretty challenging given low interest rate volatility.
Industry volumes as measured by Claris were down 38% year over year during the quarter, driven primarily by 56% decline in lower fee per million overnight index, Slops, Elias which were pressured by reduced speculation on the front end of the curve.
The higher fee per million core IRS market fared relatively better industry volumes here declined 29% year over year.
But as Lee indicated our volumes outperforming the overall market as our targeted investments continue to pay off.
Specifically, our market share increased to a record 10.2% from 9.8% last year, driven primarily by gains within core IRS, our main market focus where shares rose where share rose to a record 17.5%.
We were also pleased to be recognized by global capital as the LTC trading venue of the year for our consistent ability to pioneer the next generation of tools to access liquidity and informed trading decisions.
We are continuing to innovate by responding to structural changes in the swaps market be it the growth of emerging market swaps clearing for the transition to alternative reference rates, we're launching new protocols like RFM, adding new products like electronic fries and package swaps and expense.
Ending regionally in APAC.
Specifically during the third quarter, we posted our highest single revenue day for M. swaps as large asset managers that are fully integrated into trade web for major currencies leverage the same infrastructure to trade EM currencies.
Clients have now traded 386 billion over the last 12 months.
During the third quarter, we added three new currencies, bringing our total to 13 and completed our first Chinese interest rate swap trade.
The momentum is building and today, we have more than 40 clients and 15 dealers both numbers doubling since the third quarter 2019.
Looking ahead, we continue to add more currencies and actively onboard dealers to provide liquidity for specific currencies.
Clients are also utilizing list trading to trade risk.
My great positions from LIBOR or two new risk free indices, like Sonia and so forth and switch portfolios between Central Park Central Counterparties in anticipation of Brexit.
Like we have always done we are partnering very closely with our clients to help them navigate regulatory change.
We're also continuing to grow our electronic solutions for historically voice traded products, such as Swaptions and multi asset package swaps client.
Clients have now traded 74 billion in multi asset package swaps since our launch in August last year.
Given the momentum we intend to add more currencies as we build this offering out.
Our efforts to build a competitive wholesale for offering continue and the early signs are encouraging.
We traded nearly 18 billion daily a new record during the third quarter.
Protocol wise, we are growing RFM or request for markets, which help clients protect their intent to buy or sell by requesting two sided market.
We continue to onboard dealers to support this market.
In sum.
With global Electronification levels in swaps hovering around 20% to 25% we.
We continue to strategically collaborate with our clients.
To migrate more business online.
Real change is rarely instantaneous, but rather a series of day to day evolutions that combined to drive behavioral change.
We are focused on listening to our clients across all our products to create win win outcomes for them and trade web.
One product, where we have had several wouldn't when leipold moments is us corporate credit on slide eight.
We continue to invest to build a franchise that supports both electronic and voice workflows by leveraging our unique and diverse liquidity pool shared across our wholesale reef retail and institutional sectors.
Our volume our value proposition is resonating strongly with our clients as our network continues to grow with more than 720 clients signed up the trade on trade web at the end of the third quarter.
As a result market share and block share continued to increase both our I.G. and high yield offering as our liquidity pool devens.
In terms of drivers the comp is the composition of our share continues to be led by our institutional franchise, which helped drive trace high yield market share to a monthly record of 5.3% in September and high grade market share to a record 18.2% in August.
Clients continue to increase their engagement with our pioneering and innovations like portfolio trading in net spotting and are also ramping up their disclosed an all to all our Q activity on the platform.
Portfolio trading continues to see increased adoption as clients across a variety of financial institutions champion the protocol sufficient price discovery fast.
Faster risk transfer greater certainty of execution and reduced information leakage.
Specifically, we estimate portfolio trading has increased to compromise approximately 3% to 3.5% of trace from about 2% at the end of the second at the end of 2019.
And trade will be accounted for 28 billion single and multi dealer portfolio trades in the third quarter alone.
Behaviorally as comfort with the protocol gross clients are increasingly putting dealers in competition and increasing the size and complexity of their trades.
As a result, the number of line items and portfolios on our platform also hit a new record.
Our advanced net spot or net net spotting offering.
Another healthy quarter with $73 billion of activity and over 225 billion year to date as clients increasingly commingle electronic invoice trades can maximize savings and eliminate the inefficiencies of manual processes.
We estimate we saved clients over $50 per million during the third quarter.
We also continued to invest in creating the broadest anonymous trading offering in the market trading volume here rose to over $50 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.
We're also pleased to be included as an all to all counterparty for the New York Fed secondary market corporate credit facility building on our existing relationship for disclose trading.
As Lee mentioned, we are very focused on connecting our three pools of liquidity to this end our effort to incorporate retail streaming orderbook liquidity into institutional our Q trading continues to see increased adoption and we recently launched our rematch protocol, which will enable unmatched wholesale inc.
Worries to interact with the liquidity on trade, but.
We're very focused on leveraging our technology and sector wide presence to optimize price discovery and maximize matches by connecting inquiries across sectors and we believe we are in the early innings of this story.
We are also heavily investing in expanding our leading automated trading capability AI X within credit.
We recently rolled out and enhanced offering given traders more control over the degree of automation and we saw a record levels of activity in September.
We also continued to invest in increasing the coverage of AI price.
Our evaluated pricing offering and credit, which today prices more than 20000 box.
Turning to the rest of our credit business. We believe one of our strategic advantages lies in the diversity and liquidity of our product set.
As such we are pleased to offer our insight on the corporate and municipal bond market at the Fccs fixed income market structure Advisory Committee meetings, our credit default swap business posted the strongest third quarter to date as we continue to gain more market share in both the us in Europe, and our China bond volumes.
Hit a new record.
Municipal activity declined year over year, given by driven by reduced buying in the retail sector. However, our effort to build an institutional offering continues with double digit average daily volume growth, putting us on course for a record year.
In sum, we believe our credit business has tremendous room for growth and we have an exciting roadmap to lead the innovation across the credit markets.
We are arming execution traders across the market with a variety of protocols to intelligently find liquidity and optimize their their execution objectives.
And with that let me turn it over to Bob to discuss our financials in more detail.
Thanks, Kelly and good morning.
As I go through the numbers all comparisons will be to the prior year period, unless otherwise noted.
Let me begin with an overview of volumes on slide nine.
We reported quarterly total average daily volumes of $780 billion down, 4.5%, but up 5.4% when you exclude short tenor swaps areas.
Areas of notable growth include mortgages us corporate credit global CBS Chinese bonds equity derivatives and bilateral repo.
Slide 10.
In summary of our quarterly earnings performance.
Despite the lower volumes, which were mainly driven by short tenor swaps third quarter volumes translate into gross revenues, increasing by 5.9% on reported basis and 4.7% on a constant currency basis.
We derived approximately 36% of our revenues from international customers recall that approximately 30% of our revenue base is denominated in currencies other than dollars predominantly in euros.
Our variable revenues increased by 7.1% and our total trading revenue increased by 5.5%.
Total fixed revenues related to our four major asset classes continue to grow as expected uptick.
3% year over year, and 1% on a constant currency basis.
Credit fixed revenue growth was primarily driven by the addition of new dealers in us credit and additional clients in Chinese bonds right.
Great fixed revenue growth was driven by the addition of new do dealers in swaps and the impact of FX.
Mark It did increase by 10% year over year led by refunded.
Okay and proprietary data products.
Adjusted EBITDA margin came in at 47.4% and expanded nicely by 91 basis points relative to third quarter 2019, as we continued to benefit from scale.
All in we reported adjusted net income per diluted share of 30 cents.
Moving on to fees per million on slide 11, the trends I'm about to describe are driven by a mix of various products within our four asset classes.
In sum our blended fees per million increased 12% year over year, primarily as the result of mix shift away from lower fuel familiar in short tenor swaps and towards higher fee per million.
High grade and high yield credit.
Excluding lower fees from million short tenor swaps and futures are blended piece coming was up 1% year over year.
Let's review the underlying trends by asset class all trends will be discussed on a year over year basis, starting with rates.
Average fees familiar for rates was up 14% year over year overall for.
For cash rates products, which include government bonds and TB A's seasonally decreased 6%, primarily due to a mix shift to mortgages, which carry a lower fee per million then the cash rates average.
Long tenor swaps piece familiar was up 12% year over year due to an increase in average maturity and less compression activity.
In other rate derivatives, which includes rates futures and short tenor swaps average fees per million increased substantially year over year due to growth in.
Hi, guys, which carry a higher fees per million than overnight index swaps.
Continued credit.
Average fees per million for credit increased 13% year over year overall drilling.
Drilling down on cash credit average fees from the increased 9% due to a positive mix shift towards U.S. high grade and high yield activity, which carry higher fee familiar than the cash credit leverage.
Looking at the credit derivatives electronically processed us cash credit category Piecemealing decreased 4% higher electronics, we processed high yield volumes and more roll activity in CBS.
Continuing with equities average fee familiar for equities was down 23% year over year overall.
For cash equities average fees per million decreased 27% due to mix shift towards wholesale each yes, which carry lower fees from William than institutional EPS.
Equity derivatives average fees increased 2% due to regional mix shift towards U.S. options, which carry a higher fees from me then the equity derivatives average.
Finally within money markets piece from nine decreased 17% this.
This was primarily driven by mix shift away from higher fee per million retail Cds Cds, given the low interest rate environment and towards bilateral repo, which reached record levels carries a lower fees per million then other money market products.
Slide 12 details our expenses.
At a high level, we continue to invest for growth there has been no change to our philosophy here.
As a reminder, adjusted expenses excludes noncash stock based compensation expense related to options issued primarily as result of the IPO acquisition, a repetitive related DNA and certain FX related gains and losses.
Adjusted expenses for third quarter increased 4.2% recall approximately 15% of our expense base is denominated in currencies other than dollars from predominantly in Sterling.
Third quarter 2020, operating expenses were higher as compared to third quarter 2019, due to increased employee compensation cost and technology and communication expenses, partially offset by lower DNA.
Compensation costs were higher year on year due to higher head count as well as higher performance related compensation.
Adjusted non comp expense decreased 1.2% on a reported basis increased 1.4% on a constant currency basis.
Specifically DNA declined primarily due to less travel and entertainment sense, we continue expect $7 million to $8 million in expense during the fourth quarter longer term, we are reviewing our level of spend.
Technology and communication costs increased primarily due to higher clearing and data piece as a result of higher trading volumes as our anonymous credit volumes and streaming U.S treasury volumes continue to grow.
In addition, this quarter also saw the impact of our previously communicated investments in data strategy and cyber security.
Color guidance, Embeds, a $4 million to $5 million increase versus 2019, which we expect to continue ramped going forward.
Slide 13 details capital management and our guidance.
First on our cash position and dividend policy.
We ended third quarter in a strong position quoting $677 million in cash and cash equivalents and free cash flow reached $380 million for the trailing 12 months.
We have access to a $500 million revolver remains undrawn as of quarter end.
Capex and capitalized software development for the quarter was 10.2 million a decrease of 16% year over year, primarily due to timing of investment spend.
We continue to expect capital expenditures and capsules capitalized software to be in the range of $45 million to $50 million for the full year.
This quarters earnings the board declared a quarterly dividend of eight cents per class, a and class b share.
Turning to other guidance items for 2020, we now expect adjusted expenses to trend in the lower half of our previous 495 to 505 million range for 2020.
We continue to believe we can drive operating margin expansion compared to 2019 at either end of this range.
For forecasting purposes, we continue using assumed non-GAAP tax rate of 22% clear.
Finally, we have updated our quarterly share count sensitivity for 2020 Cup you calibrate your models for fluctuations in our share price.
Now I'll turn it back to Lee for concluding remarks.
Thanks, Bob in some despite macro challenges market share gains and volume increases continue to drive growth today, and we believe increase our future earnings potential.
The secular trends powering electronification in automation remain intact, we continue to operate with a group mindset and were focused on collaborating with our clients to capitalize on the various opportunities ahead of us across asset classes.
Regional product and asset class diversity of our revenues was on display with another strong quarter for credit with rates equities and money markets, having multiple growth levers. Despite the noted macro challenges. In addition to organic growth. We continue to spend a lot of time evaluating potential M&A.
Hey opportunities that we believe would further augment our growth has cash builds on our balance sheet.
With a couple of important month and trading days left in October.
Firm wide volumes are up double digits relative to October 2019.
We are happy to provide more detail during the Kieran ads.
I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter and I want to especially thank my colleagues for their efforts that contributed to our strongest third quarter in our history.
With that I'll turn it back to Ashley.
For your questions.
Thanks, Lee as reminder, please limit yourself to one question only feel feeding hop back into queue and ask additional questions at the end.
To enable end at 10 am eastern time.
Operator, you can now take our first question.
Our first question comes from Ari goes.
Switch your line is open.
Hey, Thank you good morning, everyone. So we doubled the leads business night now.
These macro challenges, but they also seem to be like several pockets of opportunity.
As we look at the overall business. So can you talk about maybe the structural deal wins, a new initiatives that perhaps a less impacted by the low vol. See backdrop as you look out over the next 12 months.
Thanks, sorry, good morning, Yes, it's an important question and I I do think it merits spending a little bit of time on on this one.
One of the one of the aspects of our rates business that we believe is still under appreciated by the market is our our product set is not as mature.
We've been doing this for over 20 years, so behaviors still changing our products are still electronifying, which is why our volumes are able to outperform the more mature rate.
Sectors like futures and cash rate venues you know our biggest competitor we used to always say this when we started off and I think it's still largely the case, our biggest competitors actually the phone and the cultural change to get people to go electronic.
The other point I'd make is that our rates business it.
It isn't one product or one client sector. We have treasuries, we had European government bonds. We have mortgages, we have interest rate swaps and the diversity is important because lower volatility in rates hit these products differently right. So some you might have more issuance.
Or prescriptive monetary policy messaging.
Creates both tailwinds and headwinds for products that we can't lose sight of the fact that we are primarily institutional marketplace between the buy side and sell side, which is a bit different from futures markets for the energy end markets, which were also man, but but are not as large as part of our business.
So.
This combination of be levered to institutional growth.
The diversity of our product set.
Our organic investments that drive behavior change.
Change that really allows.
Gross.
So to be more specific right.
With respect to government bonds, where were hitting you market share records here.
Here, we are focusing on.
We'll share.
Onboarding new clients, we've got things like AI, x. drilling or streaming protocols.
In both wholesale and institutional these are all engines of growth.
Structurally you know behavioral change towards streaming protocols, especially in wholesale.
And potentially the market composition changed larger institutional versus wholesale sector, which is where we've seen a shift to in this last quarter. We're themes themes to watch.
So on our other cash products.
We have things in rates, we have things like mortgages, which have been benefiting from the higher refinancing activity and.
Pretty good housing market.
Which sort of bodes well for origination in CBVA activity. So in this space, we're focused on the specified pool market broadening our base of liquidity providers spec pools. We said this in the prepared remarks, that's that's a market that's.
Less than 5% electronic so and finally, we get to the derivative products in the swaps are more sensitive to interest rate volatility in the shape of the yield curve so activity.
Slowed in the whole market, which we pointed out but we have seen our clients reacting to bouts of volatility.
In some of the days in September and October trading significant volumes at levels that were similar to or higher than than actually 2019. So in swaps were focused on.
Electronifying traditionally voice traded markets like multi asset swaps and therefore, our A's broadening our product set we've moved into emerging markets expanding into cross currency swaps.
Growing the RFM protocol.
And our view is as clearing houses more currencies to into their clearing houses will tend to benefit on the execution process. So.
No that was long winded, but I think you can tell the macro.
Macro matter right, we're not we're not saying that we're not as captive to macro as some of our peers.
And our volumes are showing that we continue to operate with this growth mentality and see plenty of opportunities to drive change and nudge the electronification higher in the rates space, while we're winning on a competitive basis.
That's great color. Thanks, so much.
Our next question comes from Rich Repetto with Piper Sandler Your line is open.
Yes, good morning, Lee Good morning, Billy and Bob.
Sorry to stay on the rate question, but it does drive so much of your revenue.
So this is the first quarter you had single digit year over year percentage revenue growth.
Because of the.
Because of the rates.
And I guess I sort of wanted to get the benefit of your experience here clearly you've been through cycles before so could you talk about.
Any time in history.
Where we had a growth has slowed and you had growth opportunities, which you outlined dramatic.
Dramatically on the call you know is a growth opportunity bigger is this slow down more.
And that's one part of the question and you also mentioned the guidance.
In the prepared remarks.
They just put in some new.
Our proposal for our rules on.
Treasury trading platforms and to regulate them as a ts is et cetera, and whether that will have an impact on the different platforms you have in breaking treasury.
Right so.
Let me take a crack at that I think the first the first part was have we seen slowdowns like this before the stork Lee and I don't know if this is just a reflection of my years of doing this of course, we have no.
Been doing this for 20 years and.
There are periods when we have a slowdown I mean, we haven't seen this exact set of circumstances, obviously with the growing the virus.
The euro interest rate environment.
But but.
This is over time, while this is an extreme situation for everybody on so many different levels, it's not unprecedented to see this sort of activity and I think what we would stress here is look at the diversity of our.
Business.
We had.
The credit business grew 27% in the last quarter.
Which I would say is a leader across the board in terms of growth percentage wise.
Now $50 million business last quarter alone. So certain markets are going to be more active than other markets and we think it's this is one of the reasons. There's many reasons for being diverse but this is one of the reasons to be diverse you have different.
Different situations the rates market, we've seen a surge of government bond activity of issuance and focus even though we have had very low rate environment, but you know derivatives have slowed.
Because of the volatility in the way derivatives are often treated so.
I don't think that we should be.
Overly concerned with it a few weeks or a quarter or even up a slightly longer period of time. The most critical thing has been really this secular trend of moving markets electronically and you know in many of our markets. We are still barely at the halfway point in terms of the person.
As of the markets that are electronic and derivatives is a good example of that but we have many other markets like that so we we stay.
Very optimistic about future growth recognizing we're going to have given how diverse our our different product offering is we're going to have different products that will over perform or underperform based on what's happening in a particular market.
So were we continue to be very excited about our rates business.
On the second part of your question I think it was the Sim Sad thing.
So we had a the last public meeting.
For films that focused on the events that occurred in March and April and without getting into too much detail trade web spoke about the.
What was happening in the corporate bond market, what was happening in the muni market and I the way I would characterize it really is just to say.
We all had surges and obviously more TV for we're incredibly challenging moments when in a matter of days, we had literally tens of thousands of clients.
Going home.
And needed to log into remotely to work from home.
I would characterize it as an incredible performance of that of the infrastructure of the market during that period, we had massive massive volatility surge is a volume that were in terms of data in trading.
Absolutely unprecedented we had one day, we created a trillion and a half dollars worth of activity and I think March averaged about a trillion today. So it was an incredible surge at a time when everybody went remote.
It's actually at the same time and you know I'll take some credit for trade whether in that we handle that incredibly well our team our thousand people went home and performed and connected up the clients, but it was well beyond trade web.
Tire market function incredibly well given given the stresses in terms of.
Some of the regulatory.
That was starting to come out I would characterize that really as you know a bit of a.
Tim Sac has been doing this quite admirably focusing on the fixed income markets and you know.
Where we can improve some of some of the situation I would say our biggest comment on that is really just getting a common regulatory framework, right, where regulators and Ts as a broker dealer as a result of the.
The different regulatory structure.
No. It affects a number of things and I think it is it would be useful to get.
Some some things in sync.
So that it would just be a little easier to interpret a number of things in a little bit.
Smoother in terms of.
Having a common regulatory platform is think things have changed so much in terms of fixed income platforms.
In electronic trading I think it's worth a new focus too.
You know kind of modernize that in.
In sync it up.
Thank you.
Thank you our.
Your next question comes from Mike carrier.
Erika Your line is open.
Hey, guys. This is dean Stephan on for Mike Carrier. My question is for Billy given attractive volume growth in Threeq you can you update us on the outlook for both portfolio trading in net spawning had.
Have you guys seen any significant shifts in either client behavior utilization and then finally, what are your thoughts on the competitive landscape given new launches in collaborations from several competitors. Thanks, Yeah sure. That's a great question. Thanks, Thank you for that lead.
Lead lead described really well this kind of you know this big thing that happened around work from home and I think in a certain way if we could design a perfect product around the work from home environment it might be something around.
Portfolio trading where it kind of solves these issues around execution leakage around information leakage. It solves these issues around certainty of execution, it's almost like a perfectly designed product for this moment in time.
And we're seeing very clearly the results kind of following that.
We've talked a lot on these calls around net slotting in that hedging in the way that we've kind of created this light bulb moment for clients and we feel really good about the efficiencies and the dollar savings that we provided for our clients. So as we've made this growth in credit that we as described I would say for sure.
Net spotting in hedging and portfolio trading and then on some level. We feel also equally excited about this rematch that we described which is again you know we've always felt like from a market structure perspective create optionality.
Get into the wholesale business get into the retail business because the market structures tend to change quickly and we never want to be kind of left out in the cold as these changes happen. So we're going to be in front of all of this stuff and so these are the kind of thought processes and innovations I think that have helped us kind of grow the way we.
Having credits so we feel you know ultimately to your question, we feel really good about where we stand.
Around that listen around.
Around the competitive landscape and you know specifically maybe for a second.
You know in credit, we said very consistently that the market you know we feel like the market wants competition in this space.
And over the past period of time, obviously, we have built a significant business and we are clearly a competitive threat and a force in credit and I think I think theres. Some version of kind of acknowledgment around that as we will see more entities getting into the credit space because.
It is as lucrative as it's as big as it is and I think we're going to see more entrants coming coming in but we're going to focus always on what we do best which is problem solve with clients build efficiencies for clients and get in business is the right way.
And thanks for the question.
Great. Thank you. Thank you.
Next question comes from Jeremy Campbell with Barclays. Your line is open.
Hey, Thanks, Lee I know you spent some time on rates already had high level in response to our his question earlier, but just wanted to dig in a little bit on MBS and leverage puts MBS prepays into focus.
Can you remind us first how.
How overall refile originations and MBS prepayments correlate with a total MBS trading volume on the trading platform and then maybe second.
Spend some time inspect tools with a low prepay characteristics and the currently in demand I know you mentioned that that market was less than 5% electronic and you recently.
Enhance your electronic platform just wondering if you could provide some color around the client demand for that enhance platform and any.
Goals and how quickly that platform could get some traction to meaningfully move that needle up from 5% electronic in that sub sector.
Hey, Thanks are you know what Billy built our mortgage business I'm going to let him take take this one and just chime in but I.
I think we've.
We've got sort of the foremost expert on that space on the call with US My partner, Billy So I'm going to let him short tackled.
Yeah, I mean, so sure your questions are really good when he described it really well and look where we are we have this really strong TB mortgage trading franchise, we are very hooked into the originator community. The more re fi the better and this is a moment in time that kind of place to that business.
Very well.
As we kind of move forward in mortgages around specified pools, what's interesting in some ways is that you know clearly our TB a.
Focus and our TB franchise is going to help us dramatically because we have the clients. We have the end users were connected we have the brand we have the credibility, but what I would also say is in an obvious way specified pools trade on spread and a very similar way that corporate bonds trade onsite.
Brad and so the domain understanding of how these securities trade is very very helpful to us as we kind of build out this specified pool platform going forward, we have all the kind of pieces of the puzzle putting them together and so our our feeling is very confident as we kind of move on.
And with our specified pool platform.
Great. Thanks.
Our next question comes from Alex Kramm with.
Your line is open.
Hey, good morning, everyone.
Lee I guess, you mentioned I'll give it you never get a quick look about October I think double digits. Overall was the comment you made since nobody else has ask.
I would be interested what additional color you can give us by asset class and cash versus derivatives. So we have a better idea how things are trending so far in the fourth quarter. Thank you.
Oh, thanks, Thanks, Alex.
He is a tricky one right so.
Let me just say.
We still have a couple of very important month and trading days.
For October.
Had a particularly interesting time for everybody.
But but the one comment I'd make is October is trending.
The double digits.
In terms of revenue growth, just rather than getting into the detail of volumes, which are.
It can be confusing I'm not going to get specifically into volumes we release that.
Next week.
We believe we continue to gain share across many of our products rates, we've seen a continuation of the themes that characterized the third quarter swaps are better but remain challenged mortgages and government bonds continue to grow you know the the credit space with ideas.
Those markets are running higher than September 2020 at really a record record levels for us.
The acceleration walk all network and other things.
Money markets is particularly strong month.
Growth in repo.
Joe Klein focus on that.
Equities is goodman for DCF and driven space overall, our our team our client Onboarding sales team has really been very busy engaging clients.
Our technology team of 300, plus are you know they just rolled out another software release recently and are continuing to crank out.
Features new functionality.
And are working hard on the next set of.
Innovations.
And enhancements so we're feeling pretty good about October, but we have to do more days to go here.
And.
But but things have.
Things have been as I said sort of in this.
Trending towards the.
Close to double digit revenue growth.
Fair enough. Thank you very much.
Thank you. Our next question comes from Ken Worthington with JP Morgan Your line is open.
Hi, good morning.
Hi, Ken Worthington. Thank you for taking my question here.
I wanted to ask maybe on the transition from LIBOR or to other benchmarks like selling it. So for you know to what extent is that having an impact on.
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Trading trading activity are these transitions, having any bearing on either usage or adoption of your trading you're trading tools and products. Thank you.
I'll take that Ken.
One of the challenges of solving different locations.
We can't look at each other.
Yeah, So I'll start off and leave room for anyone to chime in on our team.
No it's.
We have been the first in so many things and I think we've clearly been preparing for this for some time as the market has we just executed.
One of the first one of the first trades.
And Sonya those linked trade.
If it's moving along I think that we are well.
We're ready we're ready for this transition in the market is starting to make the changes over.
And it's interesting because there's just so many other things happening in this market is probably not getting.
The attention that would in another.
Another scenario between.
The markets and the politics and everything else, but.
But we're you know we're confident.
And this is I don't see this as a fundamental change for our business, it's a pretty big change in general for sure.
But we're well prepared for it I think the clients are by and large prepared for it it's like a lot of things that the larger firms are all over this and as you get to smaller organizations.
They are they are ready or getting ready, but there are some of them are a little bit further behind the firms that have a lot more to invest in attention on these kinds of issues, but I don't see this as a.
In a material issue for for trade web and I think ultimately the markets too, but I don't know if anyone wants to add anything for marketing.
We'll run out of time.
Okay. Okay.
Thank you very much I appreciate the response.
Thanks, Ken.
Thank you and our next question comes from Ken Hill with Loop capital. Your line is open.
Yeah. Thanks for taking the question.
I just wanted to follow up at the end of your prepared remarks, you mentioned, you're spending a lot of time value and potential M&A opportunities I was hoping you kind of flush that out a little bit maybe talk about what capabilities. The opportunities you see in the market right now that might look more attractive given the cash build do you guys have on your balance sheet. Thanks.
Sure.
Well look I mean, the bottom line is we do spend a fair amount of time on this we have.
Whole team that is focused on on M&A and.
No the non organic side of things and we continue to look at a number of things were kind of given some direction on what we focus on we're obviously going to be focused on what we think is strategically sensible with FIS are our business.
You know we have.
As you mentioned, we are very well aware of.
The the cash building.
In the excess cash we're sitting on.
We believe the space is going to continue.
Consolidate there will be a.
A number of opportunities we're always looking in this is a bit of a repeat from what I've said on on areas, where we can expand our network with customers.
In the past, we thats, how we got into retail and the wholesale side.
We're very focused on adjacent markets and expanding into adjacent markets new geographies.
Adding.
Ability, which.
As everyone is well aware you know theres a huge premium on tech talent across the board.
So M&A as a way of.
Of getting a little bit more tech talent in the door. So we're focused on that as well.
Bob I don't know if you want to add.
Add anything.
Terms of M&A side.
Yes, sure I think one of the things to that can you mentioned that we was we are building cash we have we have a lot of credit. This 500 million drawn down. We certainly think we could go is three and a half times, maybe even four times.
EBITDA that that basis all of that is to say that we think is really important at this moment given all the changes marketplace, we talked about consolidation and some other things over time that we in effect be ready for.
Identified when we would we don't pull the trigger that we have the right assets and capabilities to do that and.
It's part of what we're doing and we've talked internally a lot about this is let's make sure that it meets what you described are the things we're trying to grow.
Grow but also meets all the performance criteria that we did meet in terms of understanding how we make it.
The acquisition accretive as well and so it's been a.
A lot of we're sort of ready in armed and spending a lot of time understanding what the opportunities might be.
Got it thanks for all the detail there Bob.
Thank you.
Next question comes from Alex Blostein with.
Goldman Sachs. Your line is open.
Great. Good morning. Thanks, Thanks for squeezing the question here on I was hoping you guys could comment on the new approval you received with respect your bond connect business in China.
No maybe speak to to what extent this improves the addressable market for you and ultimately kind of the framework of thinking how that could translate into better revenue growth.
And the impact on the kind of profitability of that business. Thanks.
Sure Thanks for that.
Question.
Yes, well, let me let me just set the stage we're still in the early stages of evolution of the of the market.
But as you know more foreign institutions are connecting.
So bond connect via trade web.
We start we were the first ones right. So we we were over there many years ago, but.
Really it was 2017 that we opened up this channel for our customer base and we now have I don't know close to 400 institutions and over 1700 funds the newest initiative.
The.
The access to the CIO DM, the China Interbank bond market.
That's it that's a relatively new channel northbound channel.
We give.
UBS.
All of our clients the electronic access.
For price discovery transparency efficiency Thats going well, we think the opportunity is a very exciting China's third third largest bond market in the world.
13 trillion of debt.
And yet you know it's less than 3%.
In far in foreign hands, and you compare that to the us which is like a 30% so.
We've invested with the boots on the ground, we've got our office opened in Shanghai to capitalize on this first mover advantage, we've got streaming prices were really.
Kind of getting our feet underneath us with respect to to China, and we see it as a really big considerable opportunity Weve you know it's about innovating. So it's not just that we were the first in 2017, but now we've we've got the messaging tool from CFS integrated.
As the as the index inclusion gross.
We see Chinese bonds, becoming increasingly more part of the global benchmark.
We've got puts you Russell and.
So so I think.
This is a huge opportunity, but as I've said before.
It's a little challenging to forecast timelines a lot of it will be down to liberalization.
From the government in China, and the market's acceptance.
Of this huge amount of debt.
We can we continue to invest there we continue to see it grow.
And think it's a very significant opportunity for us.
Thank you.
And our last question comes from Kyle Voigt with KBW. Your line is open.
Hi, Thanks for taking my question maybe.
Maybe just a question on credit trading I think one of your private competitors is seeing significant success and new issue trading and your largest public competitors also launching.
I am a club like offering to address that more liquid part of the corporate bond market. So just wondering if we can get an update on the strategy for attacking that more liquid part of the market.
And also wondering if you're seeing any institutional client demand for a clobber club like trading for us credit.
Yes.
Hey, it's really asphalt so listen to you know I'll make the job that we're not going to give away too many kind of company secrets exactly in this forum, but we're we're watching all all of the developments around new issuance in a way that you would expect us to.
And it's certainly a business that we've that we've looked at and that we're sizing up and that that we are very well aware off.
In terms of your question, which is a good one around sort of the central limit order book pricing in credit that's a little bit kind of if you think about it that's a little bit out of our rates playbook and it's a type of business that we know extremely well.
So again kind of eyes wide open we are very well aware of how things are developing in that space.
We are going to kind of continue to do what we sort of are focused on in credit and some of those things I would describe around kind of continued innovation around portfolio trading.
We love the concept of axes, and inventory and credit and we are going to have kind of eyes wide open around potential kind of changes in the market structure around credit and we are certainly aware of everything that's happening around from pricing.
Thats helpful. Thanks, Doug Yes.
And at this time I would like to hand, the call back over to Mr.
For any further comments.
Oh I would just I think you guys all for joining us.
Good morning, and for your thoughtful questions.
And we look forward to talking to you after our fourth quarter.
And work through some really interesting period of time here, especially in the U.S. and also in Europe. So.
Stay well.
Joining us this morning take care.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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