Q2 2021 Tradeweb Markets Inc Earnings Call
Good morning, and welcome to trade Web second quarter 2021 earnings conference call. As a reminder, today's call is being recorded and will be available for playback.
To begin I'll turn the call over to head of the U S corporate development and Investor Relations Ashley Serrao. Please go ahead.
Thank you and good morning.
Joining me today for the call our CEO Lee Olesky, who will review the highlights for the quarter and provide a business update.
Our first.
Our president Billy Hult, who will dive a little deeper into some growth initiatives and Bob Warshaw, Our CFO, who will review our financial results. We intend to use the website as a means of discourse from material nonpublic information and complying with the disclosure obligations under SEC regulation FD.
I'd like to remind you of certain statements in this presentation and during the Q&A may relate to future events and expectations and of such constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Statements related to among other things our guidance.
<unk> of forward looking statements.
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 in our earnings release and periodic reports filed with the SEC.
In addition on today's call we will reference.
Certain non-GAAP measures information regarding these non-GAAP measures, including reconciliations to GAAP measures are in a posted earnings release and presentation.
To recap this morning, we reported GAAP earnings per diluted share of 27.
Excluding certain noncash stock based compensations.
<unk> expense.
Acquisition related transaction costs.
The acquisition and definitive really the DNA and certain FX items, and assuming an effective tax rate of 22%. We reported adjusted net income per diluted share a 39 cents. Please.
Please see the earnings release.
And the form 10-Q to be filed with the SEC for additional information regarding the presentation of a historical results now let me turn the call over to Lee.
Thanks, Ashley good morning, everyone and thank you for joining our second quarter earnings call. We have previously talked about how historical.
It's the hygienist events like the acceptance of the Internet.
For the waves of regulation that of unfolded in the financial markets created opportunities for trade web to drive change and in doing so we continue to move markets forward on their journey towards more of electronic vacation.
This time is no different.
More than a year after the pandemic, we believe our second quarter results are a testament to the ability of our people to innovate with our customers and solve complex trading challenges.
And more importantly drive enduring behavioral change.
Despite a macro environment that was relatively.
Really subdued compared to last year trade web experienced a record first half marching up for months, where clients traded in excess of 1 trillion dollars.
On average daily.
Turning to slide for.
This enduring behavioral change I just described.
Was on display as we reported our second best revenue and volume quarter.
Specifically gross revenues of $261 million.
We're up 23% year on year on.
On a reported basis and 22% on a.
Inc currency basis the.
The 3 main drivers of our growth in the second quarter were U S credit.
Global swaps in the U S treasuries the.
The revenue growth and the resulting scale translated into improved profitability year on year.
Adjusted EBITDA margin.
Constantly by 280 basis points to 56%.
Turning to slide 5 this quarter was marked by strong performance across many of our asset classes.
With credit and rates accounting for 47% and 43% of our revenue growth.
Expansively.
Specifically credit posted its second best quarter, driven by a record U S high yield and strong U S investment grade and European credit trading.
Cash rates revenue were another highlight driven by a healthy central bank issuance, which continue.
Continues to fuel global government bond trading while mortgage revenue growth was flat given the subdued volatility and tight spreads, which led to meet a trading activity.
Swaps revenues continued its robust performance hitting another market share record.
Equities revenue.
Growth was driven by European institutional Etfs, and our efforts to diversify beyond Etfs that more than offset a decline in a more volatility sensitive wholesale ETF business.
Money markets performance was fueled by organic growth in institutional repo the.
The trumped continued rate headwinds.
Wins in the retail sector.
Finally market data saw broad based growth across our Affinitive redistribution license.
And proprietary data products.
Moving on to slide 6 let me provide a brief update on our for my focus areas.
Starting with interest rate swaps, which is our largest and fastest growing right product a relatively more challenging macro backdrop versus last year was more than offset by continued organic growth.
We continue to attract new clients and deepen our existing client wallet share by introducing new.
The products and protocols.
This led to overall swaps volume growing by 23%.
As a result swaps market share increased to a record 14, 7% as measured by Clarus.
We believe we continued to gain share versus <unk>.
Clothes closest competitor Bloomberg.
In both the U S and Europe.
Longer term, we remain excited by the multi year opportunity. We believe we have here as we scale of our growth initiatives the market electronic buys in the rig cycle turns.
Billy will give you an update on our.
Our strategy in a few.
<unk> minutes.
Moving on to the U S treasuries another rates product that continues to perform well with volumes up 16% year on year led by both the institutional and wholesale business.
Market share rose to a record 16, 5%.
U S treasury market.
The backdrop of healthy issuance continues to support the institutional channel and our share gains have been driven by existing clients doing more business competitive share gains versus Bloomberg and further inroads into the <unk> markets.
Looking ahead, we continue to.
Of the east and driving the adoption of our early stage institutional streaming protocols like trade growth plus.
Volume Seer rose substantially versus last year.
Our wholesale U S treasury, offering which has been centered on disclosed streams and session trading posted another strong quarter we.
And value to onboard new clients and take share from streaming platforms.
We believe our efforts to lead with proprietary technology and really understand what our clients want are paying off.
We are excited about the next chapter of our wholesale business with the closing of the NASDAQ U S fixed income acquisition on.
On June 25th and the integration is proceeding as planned.
Clients are looking for more competition on the cloud space and we believe we can be an ideal partner as we leverage our DNA in the U S treasuries to revitalize the business.
We believe the central limit order book, which today represents approximately 70% of the wholesale.
Market will remain an important protocol.
Our clients now have the ability to complement the streaming activity with a liquid klopp, especially in more volatile environments.
We believe we will also be able to lower their connectivity costs and enhance our U S treasuries data offering with a depth of book.
Book as a reminder of this transaction is accretive to adjusted earnings and we believe we can improve EBITDA margins to a lease trade words adjusted EBITDA margin.
Getting the first year of a 2 year integration period.
Shifting to a credit this was another great quarter as our business continues to surge.
A head generating more than $72 million in revenues.
Our first half revenues of $146 million nearly matches, what we did in the first 3 quarters of last year.
It's amazing to see the consistent share gains being made in <unk> credit with electronic share, reaching a record 13, 1% in June.
It was also encouraging to see the progress being made in a high yield with electronic share eclipsing 5 per cent for the first time in June.
Looking ahead, we believe we continue to see a lot of opportunity in credit as a platform continues to scale and when retail activity eventually normalizes in a higher rate environment.
Billy will dive into more details on our strategy momentarily.
Finally within equities institutional Etfs produced a healthy quarter with average daily volume up 29% year on year as new client wins more than offset the substantial pullback in the.
And European ETF industry activity.
During the quarter equity Etfs comprised 62% of our global volume with fixed income contributing 32%.
Our other initiatives to expand the honor of flagship ETF franchise are also bearing fruit with momentum continue.
U S and the equity derivatives, specifically revenues in these newer growth products were up 51% year on year.
Looking ahead, we believe we remain well positioned to benefit from the continued growth in Etfs globally, our newer product additions and expanding client footprint.
With that I will turn it over to Billy.
Thanks Lee.
Turning to slide 7 for a closer look at credit.
Just another very strong quarter with both IAG and high yield hitting new records for revenue and share our formula remains the same listen to our clients offer a variety of execution protocols and.
With that mostly innovate to shape the future of credit trading.
Clients have responded to a brand of innovation by increasingly adopting all trade portfolio trading and net spotting.
Equally important to the growth of our U S credit business has been the rapid increase of <unk> activity as we cross sell on continued to gain more wallet share.
And we left Q is our biggest institutional protocol with volumes growing 39% year over year during the second quarter.
The strong growth in credit goes beyond our institutional channel, our fast growing wholesale and retail middle market businesses continued to perform well with revenue up significantly year over year stepping back.
The diversity of our credit growth has never been stronger and while we are pleased with the progress made so far we strongly believe we of the potential to do even better.
Portfolio trading, which I referred to as a light bulb solution has become synonymous with trade web. It is a prime example of the strong feedback loop, we have with our.
It's a great protocol that has cemented itself as an efficient risk transfer solution by improving upon some of the limited limitations of list trading using traditional RQ, an all to all for.
The portfolio trading of structurally change in client behavior and demand continues to build.
The trade war facilitated.
Our client grew 74 billion in portfolio trades in the second quarter of 2021, an increase of more than 125%.
Clients are also increasingly putting dealers in competition, our income portfolio trading reached record volumes, comprising 73% of volume up from 39% in the second quarter of last year.
The rate in the U S. We estimate industry a portfolio trading now regularly makes up 5% of trace volumes versus 2% at the beginning of 2019 with June hitting a new record of <unk>.
Recent survey of the buy side by Outgroup expect portfolio trading to growth of 10% of trace volumes within the next 12 months.
Moreover, a number of large asset managers expect portfolio trading to comprise up to 25% of their future trading activity.
And a response dealers have built out dedicated portfolio trading desks anticipating future demand.
We continue to leverage our first mover advantage and launch the next generation of our portfolio.
The trading solution a few days ago.
The use case for a portfolio trading continues to multiply as the sophistication around price discovery and portfolio construction increases exam.
Examples include a fund managing large inflows or outflows or a long short systematic fun buying and selling bonds at the same time.
Another use case relates to active managers looking to tilt the portfolio towards a specific duration credit rating sector or region portfolio trading is also replacing smaller size or a Q lists for clients that value of the certainty of execution given hit rates in excess of 95%.
It is also.
Allowing clients to trade large blocks and in fact, our largest multi dealer trade during the quarter exceeded $2 billion.
That is a significant amount of risk being transferred electronically and speaks to how portfolio trading is quickly, becoming a table Stakes protocol and credit.
All.
Indeed, the broadest suite of our anonymous protocols on the market today connecting liquidity between our 3 sectors also reached a record levels of clients traded more than 88 billion, an increase of over 135% year over year as our investments to grow our all total network integrate AI ex and improve.
Proved responder functionality continues to pay off.
The <unk> trading another key all trade protocol also hit a new record our newest innovation rematch is still early in its rollout, but is seeing growing adoption.
Finally, our advanced net spotting offerings saw another solid quarter.
All trade for a 107 billion in volume up 9% year over year.
On a busy days, we see thousands of trades across clients dealers and protocols that are benefiting from our net spotting functionality.
We recently rolled out our multi client net spotting offering in the first quarter, which we believe further.
With the things are a lead against competitors. Since then we have on boarded the majority of our largest clients who have increased their savings by over 10% versus traditional net spotting.
Turning to the rest of our credit business, we achieved a record revenues across the European credit interest to institutional munis.
It's for Cds revenues also grew year over year, despite volumes falling 15% led.
Led by growth in E M. A C D S.
In some of the.
The diversity of our business shine through the quarter not only a byproduct, but also by a protocol geography and client type. We believe this diversity provides us.
With tremendous room for growth and we have an exciting roadmap sleep innovation across the credit markets.
Moving on to swaps the biggest driver of our rates franchise of the multi year growth story continued a swap registry of swaps registered its second best revenue quarter despite industry volumes.
On the lowest levels since the third quarter 2017.
Variable revenues grew 50% driven primarily by market share of climbing to a record 14 points of 7% and increased trading in higher fee per million protocols.
The low interest rate and volatility environment pressured.
The industry volumes in the quarter, which were down 19% year over year.
The lower industry volumes were driven by a decline in Fry and overnight index swaps.
<unk> conditions remain in flux as client debate continues regarding inflation expectations and the shape of the yield curve, while the overall rate mixture act as a headwind.
And for the business.
We continue to focus on things in our control.
Specifically, we are driving our market share of higher by innovating across products protocols and geographies.
The market share increases in the quarter were driven by a broad gains across our 3 products with June overall market share climbing to.
We're at 16% as measured by Clarus on a currency basis or a momentum in major currencies continued with record share in dollar and GBP denominated swaps.
We continue to respond to structural changes in the swaps markets such as the growth of a M swaps clearing or the transition to alternative reference rates.
In fact, the second quarter, we saw a record of EM and RFP activity in the first electronics sofa swap spread and Japanese tone of switch trades.
On the E M front, we added the Brazilian real in April and continued to onboard additional dealers and clients and deepen our liquidity pool.
Looking ahead, we believe the long term swaps revenue growth potential is a meaningful with the markets still only 25% to 30% electronic but there remains a considerable amount of business done via voice and that's our opportunity innovating to digitize manual flow, while the global fixed income markets.
And broader swaps market continues to grow.
Finally, we continue to invest in our leading automated trading capability a IX. This tool lets clients streamline their workflow identify cost saving opportunities and free up time to focus on managing more complex trades.
And client relationships.
Adoption continues to increase as clients get increasingly comfortable with low to no touch trading the number of AI ex trades grew by 81% year over year on the second quarter with growing usage across rates credit and equities.
Institutional clients love.
Data driven intelligence that a I X is able to provide these day zero technology build costs and can fine tune more than 100 pre trade parameters.
Can choose to have their flow interact with several of our protocols such as all trade to maximize the probability of finding a match or a Q.
To minimize information leakage posed trades clients to quantify transaction costs using a proprietary TCA tool the.
The solution, which automates the entire trade lifecycle is really resonating with clients and we expect momentum to continue to build from here.
Love the that let me turn it over to Bob to discuss our financials in more detail.
Yeah.
Thanks, Billy and good morning.
I go through the numbers all comparisons will be to the prior year period, unless otherwise noted.
Let me begin with an overview of our volumes on slide 9.
We reported.
Our second highest quarterly average daily volume of $976 billion.
Up nearly 26% year over year, and a 25% when excluding short tenor swaps.
There is a notable growth include U S government bonds European government bonds swaps greater than 1 year U S corporate credit European corporate credit.
Institutional U S Etfs and repos.
Slide 10 provides a summary of our quarterly earnings performance.
The second quarter volume has translated into gross revenues, increasing by 23% on a reported and 22% on a constant currency basis.
We derived approximately 37% of a revenues from.
International customers and recall that approximately 30% of a revenue basis denominated in currencies other than dollars predominantly in euros.
A variable revenues increased by 33, 7% on our total trading revenue increased by 24, 4%.
Total fixed revenues related to a 4 major asset classes.
Continuing to grow up 7.9% and for 4% on a constant currency basis.
Credit fixed revenue growth was primarily driven by the addition of new dealers in the U S credit and additional clients in Chinese bonds.
Equities fixed revenue growth was driven by the addition of new dealers and the impact of FX.
Other.
The other trading revenues were up 2.5 per cent and as a reminder, this line item is lumpy and is affected by periodic revenue tied to technology enhancements for them for a retail clients.
Market data increased by a 2% due to growth in refinished of API.
And proprietary data products.
Adjusted EBIT.
<unk> came in at 56% and expanded nicely by 280 basis points relative to second quarter 2020, as we continued to benefit from scale.
All in we reported adjusted net income per diluted share of 39.
Moving on to fees per million of on slide.
On the margin the trends I'm about subscribers driven by a mix of various products within our 4 asset classes.
Our blended fee per million increased 5% year over year, primarily as a result of a stronger growth and higher fee from a credit and improving fee per million of greater than 1 year swaps due to the previously stated growth initiative.
<unk> 11 for a few markets IRS and RF M <unk>.
Excluding lower fee per million short tenor swaps and futures our blended fee per million was up 6%.
Let's review the underlying trends per asset class.
Starting with rates average fees per million per rates was up 12% for cash rates of products, which include government bonds and <unk>.
Fees per million was up 4%, primarily due to growth in higher fee per million U S. Treasuries.
For a long tenor swaps fee familiar was up 25% primarily due to growth in E M swaps and of our firm.
In other rates derivatives, which includes rates futures and short tenor swaps average fees per million increased 52.
<unk> future growth and for us, which carries a higher fee per million than overnight index swaps.
Continuing to credit.
Average fees per million for credit increased 48% as higher fee for a million cash credit products saw a strong growth was a record volumes in U S high yield while lower fee per million Cvs activity declined compared.
To a volatile second quarter of 2020.
Drilling down on cash credit average fees per million increased 3% due to stronger growth in U S high yield which carries a higher fee per million of overall cash credit.
Looking at the credit derivatives electronically processed U S cash credit category.
He's familiar of increased.
<unk>, 8% driven by growth in the U S high grade electronically processed volume, which carries a higher fee per million than the credit derivatives average.
Continuing with equities average fees per million for equities was down 30% overall for.
For cash equities average fees per million decreased by 15% due to a decline in fee per million was.
In the U S. Etfs this was driven by rising asset values inflating notional traded recall on the U S. We charge per share and not for notional value traded.
Equity derivatives average fees per million decreased 41% due to growth in the U S and European derivatives, and U S equity futures, which carry a lower fee per million than the equity.
It is average.
Okay.
Finally within money markets piece per million decreased 26%. This.
This was primarily driven by growth from repo, which reached record levels repo carries a lower fee per million than other money market products.
In addition, the higher fee per million retail money markets business remained pressured.
<unk> drilled low interest rate environment.
Slide 12 details of our expenses.
At a high level, we continue to invest for growth there's been no change to a philosophy here.
Since going public in early 2019, we have now grown quarterly revenues by 40% and expanded adjusted EBIT of <unk>.
By the over 750 basis points.
And we continue to believe Theres more revenue and margin upside from here.
Adjusted expenses for a second quarter increased 15, 6% and 12, 8% of on a constant currency basis recall, approximately 15% of our expense base is denominated in currencies other than dollars predominantly.
<unk> and Sterling.
Second quarter sales in 'twenty, 1 adjusted operating expenses were higher as compared to the second quarter 2020, primarily due to increased employee compensation, G&A and technology and communication.
Compensation costs increased 14% due to higher head count to support our growth as well as higher performance related.
Margin session.
Adjusted non comp expense increased 19, 1% on a reported basis, primarily due to G&A.
And technology and communications and unfavorable movements in FX.
Adjusted non comp expense on a constant currency basis increased 15, 4%.
Specifically.
<unk> technology and communication costs increased primarily due to higher clearing and data fees as a result of higher all trade volumes and credit and streaming U S Treasury volumes, which continued to grow.
In addition, this quarter also saw the continued impact of our previously communicated investments in data strategy of infrastructure.
Adjusted General and.
<unk> concentrated a increased primarily due to an increase in travel and entertainment as we gradually recover from the pandemic higher marketing spend and unfavorable movements in FX, which resulted in a 300000 realized loss in second quarter 2021 versus a 200000 realized gain in second quarter 2020.
Recall, we adjusted out.
Unrealized FX hedging gains or losses, and the impact of FX on a cash balances.
Professional fees increased 12% due to increased consulting fees related to our investment in data strategy of infrastructure technology.
Slide 13 details capital management and our guidance for.
On a cash.
And a musician capital return policy.
We ended the second quarter on a strong position holding $680 million in cash and cash equivalents subsequent to the <unk> acquisition and free cash flow reached $434 million for the trailing 12 months.
We have access to a $500 million revolver the remains undrawn.
Cash flow undrawn as of quarter end.
Capex and capitalized software development for the quarter was $12.9 million, an increase of 19% year over year, primarily due to timing of investment spend for this quarter's earnings the board declared a quarterly dividend of <unk> <unk> per class, a and class b share.
We spent 50.
$9.7 million offsetting equity dilution during the quarter, specifically, we spent $52 million under a regular share buyback program, leaving $98 million for future deployment at the end of the quarter.
In addition, we withheld of $8 million and shares to cover payroll tax obligations upon the exercise of stock options.
As a reminder, we.
As a use our share repurchase authorization to mostly offset ongoing equity compensation.
On slide 14, we've updated a quarterly share count sensitivity for 2021 to help you calibrate your models for fluctuations on our share price.
Turning to other guidance items for 2021.
We will continue to invest in 2021 and are now expecting adjusted expenses to range from 565 million to $580 million, which incorporates a recent <unk> acquisition and expectation of a strong revenue environment in the back half of the year and increased investments to support our growth businesses.
We continue to believe we can drive substantial operating margin expansion compared to 2020 at either end of this range.
For forecasting purposes, we continue to use an assumed a non-GAAP tax rate of 22% for the year.
We expect Capex and capitalized software development to now be 49 million a $53 million given the <unk> acquisition.
Acquisition.
And the acquisition of Rofin, a transaction, where we laid the DNA, which we adjust out due to the increased associated was pushed out of accounting and the impact of the end of Phi acquisition is expected to now be a $124 million.
Now I'll turn it back to Lee for concluding remarks.
Thanks, Bob.
On the operating market remains subdued.
So credit volatility and low rates are certain of.
Certainly not supported.
However, we continue to focus on helping our clients digitize their workflows to drive market share growth and what we believe is shaping up to be another record year for trade.
Well this focus coupled with the multiyear secular trends powering of electronic vacation on automation point to potential for a long runway for growth.
We are moving forward to capitalize on these trends as Bob mentioned by continuing to invest in our people technology.
In the network.
In addition to organic growth, we continue to spend time evaluating potential M&A opportunities that we believe will further augment our network given our cash position.
With a couple of important month and trading days left in July momentum from the second.
For has continued with the overall volume is up double digits relative to July 2020.
The strong volume growth is being led by all asset classes electronic credit market share is running in line with the last quarter, while electronic high yield credit share is running higher with notable strength across.
The quarter's portfolio portfolio trading and all trade.
Before I conclude.
I'd like to welcome Bob Gearboxes, <unk> to our board of directors.
<unk> brings in the enterprise perspective shaped by a wide range of risk management roles as we continue to grow and broaden our reach this perspective.
<unk> will be vital to our board and management team.
I would also like to thank Brian West for a 2 plus years of service on our board and wish him all of the best in his new role of CFO for Boeing.
I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter and I want to thank all my colleagues.
<unk> for their efforts that contributed to a strong quarterly revenue and volume of trade web.
With that I'll turn it back to Ashley for your questions.
Thanks, Lee as a reminder, please limit yourself to 1 question only feel free to hop back into queue and ask additional questions at the end.
Q&A will end at <unk>.
Am Eastern time, operator, you can now take a first question.
And thank you.
And our first question comes from Chris Allen from Compass Point. Your line is now open.
Good morning, guys, a wood the ESP closing.
About a month and I was hoping you could maybe provide a a little bit more granularity around the deal in terms of what you're hearing from clients a what the opportunity set is from from a market share perspective, we're kind of currently stands and what are the opportunities are there to improve the platform moving forward.
Thanks, Chris.
Good.
Question, Yeah. So we're a we're very excited about the the.
<unk> for the business.
It's now a <unk>.
<unk> within our dealer web franchise.
From our perspective. This is a market that we've been involved in literally for decades.
Our collective relationships the clients we have the connections that we have with those clients are a really very strong.
And essentially this is really our R. R.
Our beginning of our company of you know I referred to it as our kitchen.
So it's in our DNA.
So it's part of our business.
Think that with respect to your question.
We look at this as if it's an opportunity for significant growth because the customers want competition in this space and the central limit order book space. The historically has been split among a couple of different.
<unk> E speed broker tech.
And I think the customers the dealers and other participants of really looking for a more balanced situation.
So.
That's the starting point I think the other the other thing that we have.
Really helps us on this whole structure is it's a it's a combination.
A nation of.
Of all different protocols now that we're offering across the the <unk>.
Treasury.
Treasury market right. So even when you look at the dealer market.
We'll be able to combine both a club and a streaming offering.
Which will be unique.
That'll be eventually moved to a single API.
From park, which will reduce connectivity costs for our clients and save the money.
But overall, it's this outreach to customers the relationships we have.
That's really an advantage for us here and the kicker I think really gets back to what we always talk about trade web which is.
People and with respect to this business.
We'll invest in the team and the talent, we recently hired.
Dan Cleaves.
The former leader at the broker Tech who is back at the business. When I started a broker tech many years ago very experienced hand, we're really thrilled that him on board.
We've got Chris aim in running the business Joe no of yellow, who helped build the speed from a technical standpoint, so it's really a world class team and several of their individuals'.
We're excited about it.
We're going to bring a lot of new energy to this business, we think will revitalize the business and I can say, it's only a month.
<unk> into it but the.
The initial signs are a really encouraging is strong and.
We think theres a lot of potential.
And thank you and our next question comes from Brian Bedell from Deutsche Bank Your line.
It is now open.
Great. Thanks, very much for taking my question.
Maybe a oriented towards the <unk>.
Total refocusing on on portfolio trading in the in the corporate bond markets.
A multipart question.
First of all the if you can attribute some of your share gain.
In the last few months a 2.
The Leo trading versus other protocols within the within credit and then the I think Bill you mentioned, the 25% of of trades a in that survey being done through a portfolio trading. It I guess, maybe if you can offer some perspective.
On when do you think the market would move to that or if it would move to that the proposal.
A portion of a trade.
And in a portfolio trade and then just the dynamic you mentioned about certainty of execution versus the quality of execution.
That's an endless trading of can we comment on.
On that and then just your long term defensibility of your portfolio of trading protocols.
Sure Hey, Brian how are you.
Thanks for the question of what's interesting on these kind of market innovations and definitely as we all know portfolio trading is kind of having its moment in the sun. There's always this kind of interesting sort of back and forth debate kind.
On a conjecture on like how sort of the impactful this innovation will be and.
As we were kind of really getting behind the steering wheel on this a bunch of years ago I think we did.
Sort of exactly what you would expect us to do which was like highly engaged with our clients collaborate with our clients in the kernel was always about what you referred to which is.
How do I get my hard to price line items, a better execution rate and so that all became around certainty of execution hit rate minimization of information leakage right and so today, we sit back and yes, absolutely. It is a big driver of our credit market share, 100%. We think we're playing the leadership role.
<unk> <unk>.
Around portfolio trading as you know June was a record month for us and portfolio of trading. It's now I think I quoted thats, 5% of of the trace volume and really what that evolution now is all about and where it's going is this kind of this further evolution.
<unk> around portfolio trading becoming a REIT.
Real risks transfer a protocol a real risk transfer mechanic.
So as we kind of look at the stats I mentioned I think it was.
In the quarter was all of the average was 107 line items at $82 million.
We did a trade that was like almost 900 items line items over 2 billion right. So now we are really and truly getting into the kind of a risk transfer a game right lease always mentioned.
<unk> is 1 thing, but then how do you continue to kind of further innovate. It once you have that leadership position what is that.
It's kind of a feedback loop and how are you continuing to kind of a whole new or skills. We've always said this like very healthy respect for the competitive landscape in the space right. So there's no sleeping on our leadership position, we're going to continue to innovate portfolio trading of continuing to kind of a buildup mode part of that is going to be about things like now we're doing alone.
The dealers to quote portfolio of prices on a reference price not just outright that's going to be something meaningful that's going to help us get at more of those kind of a voice trades and at the end of the day, we feel like we're really kind of a onto something significant with the portfolio trading and it's continued to be 1 of the big drivers of our credit market share.
And thanks for the cash.
Yes, thanks very much.
Thank you.
And our next question comes from Rich Repetto from Piper Sandler Your line is now open.
Good pointing at Lee and Billy and Bob.
Just to keep hammer on Huawei on the credit issue here.
A way from well.
First of all.
Thanks, Billy for the.
The prepared remarks because of sort of.
Thank you said.
We have a portfolio.
Hello.
Months.
Sure.
On what whoever you use that sort of a prediction, but I guess my question is can be a had.
100% of the 5% it doesn't explain all your.
Credit markets, you're a great game.
Again over the past year and over 600 basis points. So can you explain believes sort of why you've done well, where we see peers.
Thinking about the the low volatility tight spreads.
Of course.
The positive for lose market share other than the portfolio trading.
It was rich that's a great question right, it's putting the pieces of the puzzle together and way back when we sense. There was an opportunity for the company on credit, but we knew we needed to differentiate ourselves and that differentiation was really around.
You heard us talk about this net spotting and net hedging that was the first version of it and now we feel like we are really playing a leadership role in portfolio trading some of the other business now is coming as a consequence of that right. So our RF business is up significantly and I do point to this very.
Basic principle and a.
I do think it is important which is the marketplace really does want to support competition in credit and so as we're doing these things I think that are really adding value for clients and really creating a differential for clients. We're starting to see some of that other type of business come our way as a follow up.
And now with that I would describe for you guys. The traditional kind of our acute business, which has done exceptionally well for us this past quarter.
Thanks, I'll get back in the on the queue, but congrats on this year a game.
Thank you rich and thank you and our next question comes from Alex last.
And from Goldman Sachs. Your line is now open.
Okay Awesome, Hey, good morning, everybody.
So maybe continuing along the questions with respect of credit I was hoping for is done in on the old trade as a bucket for you guys lots of growth.
A particularly this quarter.
On theirs.
A lot that goes in there. So I was hoping you can.
You could help us sort of parse through.
Some of the composition of the bolts right today, maybe you can talk about it in terms of dealer the dealer versus dealer to client volumes and then specifically any color you can provide with respect to open the all with the old trade specifically.
Either sizing it or any stats with respect to the number of buy side participants are coming into the protocol because obviously, it's been an important industry dynamic as people look to execute on an anonymous way.
Just a kind of ultimate fashion, so it'd be helpful to break that out thanks.
Thanks for the thanks for the question.
It's a.
I'm going to start out by talking a little bit of our auto.
The volumes and what's going on there because I think it's kind of interesting really talked about that in his prepared remarks, and we showed a.
Some of some information about it as well.
It's.
The interesting things about all of our for US as we're starting to see a shift.
Depending what we think is a critical mass why is that.
Happening its happening for several reasons 1 is that we're starting to see more hedge funds coming onto our platform that generally means that there is an acceptance that we've hit the levels of.
Liquidity that we need to have to be able to satisfy the trades.
As a kind of a a good hint of a healthy ecosystem as.
As a further.
The feedback we're getting as well is that the market really wants a competition isn't really just competition is really a competition about Kate.
Capabilities as much of anything else of what features and other things that can we add to the environment that.
That will drive engagement higher and I think that what we think what we.
We built happening is.
And we're starting to see is.
<unk> and high yield a sort of a growing interest in the way, we're doing things and the particularly the volumes and the and the participants that we have we think that we are.
Doing some other things as well as a.
Think we're exposing our out of all the network to retail participants detailed liquidity providers and we're having all of our network participates in rematch protocol. After a session. We've talked about that in the path of the the way that we sort of draw a wholesale interest into the same common universe. So it's really our story of we of these different participants.
A really important and the al.
They share the ability to get to our liquidity pools, which increases the viability of those pools and the importance of those items and so I think that's that's a really.
Important part of about price discovery and all of the other parts of what the true.
Racks and builds volume.
Yes, I think Alex just a.
Add to bobs.
<unk> point sort.
A really good question, but it's the sum.
It's this virtuous circle I think that we've been after where we're trying to you have heard me use of US express from before connect the dots between different markets between different protocols between different customer segments and.
<unk> that is that is the differentiator for trade web so not only do we have the all to all and what we call all trade not only do we have a portfolio trading.
We also have session trading and the session trading comes from our price generation right. So these matching sessions occur because we have such.
The on pricing information, which is coming from our AI pricing that's a.
A combination of all of these sources of data that gives the market confidence to match at a point that we set the standard at <unk>.
And so you have to think about these things I do think holistically.
Best.
Strong hand to connect them, Bob was giving an example of well if it doesn't match in a session. We kind of waterfall. It to the next thing so youre going to continue to see from us the use of.
It really is almost the algorithms and pricing and the links between different customer segments and different type.
The types of protocols.
That allow for a larger aggregate number of matches, where you've got the buyer and the seller of meeting.
True what I would say is an assisted sort of software enhancement through all of these different protocols different customer segments and different.
Types of protocols.
Thank you Anne and thank you.
And our next question comes from Ken Worthington from JP Morgan. Your line is now open.
Hi, good morning, Thanks for taking my question.
I wanted to go to the durability of credit trading and how the durability of that business.
Is improving as your market penetration grows and I think we saw volumes and market share trail off in the early days of Covid.
I think it exposed sort of session trading.
I was being a bigger part of your of your business and I am wondering ultimately how you see the durability of credit kind.
Kind of evolving in different environments with initiatives like rematch of portfolio trading growing.
And then for initiatives like Treasury spotting on.
It looks like I think on 1 of your slides that treasury spotting is a shrinking part of credit.
And I know you spoke about the continued success of Youre seeing in spot.
But is that part of credit, becoming a or is quite a becoming less dependent on that service over time.
Let me take a crack at that Ken Thanks for the the question.
So.
Look I think when you when you talk about the I'm not sure a 100 per se.
I understand your question I think when you were talking about durability in different market conditions, you are referring to volatility and if you go back to the beginning of <unk> and <unk>. We had this extreme situation and our market share dropped because of all of the extreme activity happening in credit.
Obviously, a rebounded pretty quickly and we are at a point now where we've accelerated considerably over a number of months.
I think it's a mistake to get too caught up in the moment of what's happening in the markets the markets are going to.
The go up and down in terms of volatility volumes will.
Emerge they'll retreat and I think what's really critical here is not <unk>.
Predicting what the next bout of volatility will be in a market, but rather to be focused on having a complement of tools and types of ways firms can match with other firms.
We call protocols to deal with any type of environment right any type of market environment and Thats.
Billy was talking before about innovation and our ability to kind of stay 1 step ahead of the competition, which we've been doing historically now for a couple of decades.
That is the key.
Right figuring out what is going to be an acceptable protocol linking it together rather than necessarily kind of focusing on the durability of a particular moment.
With respect of volatility that's just not.
That's not what we try to do we're trying to solve for problems.
Customers have in a variety of different environments different segments and the advantage of that is 1 thing feeds upon another right. So you just take all go up a point a little bit, but you take the portfolio stuff that we built years ago, because the team led by Chris Bruner, an ability of course sorry.
At our coming years ago, we're able to innovate and take it to the next generation next generation and move it into different asset classes and moving into different regions and Thats true of things we've done going all the way back to art you. So.
We try not to get too caught up in the moment what's happening at this.
This particular second in terms of yields in terms of volatility because we know for certain of these moments will change.
The second question was spotting.
It was it was out of the gate can the net spotting and the net hedging. It was it was a great way for us to open.
Open the door on credit.
Because of the because of our foundation and rates and because of our ability to solve the workflow and as we've done better.
Hear you as you are quoting those kind of a stat, it's actually not surprising at all to us that in some level that piece of it gets minimized because were doing so well in other spots now.
But it was 100% the kind of the big door opening for us on credit and it continues to play a large role for clients.
It's a piece of the puzzle and you've kind of heard us both.
Totally and I use that expression of a lot. It's an important piece, but it's a piece of the puzzle and now we're seeing a lot of other type of business as a consequence of us putting the.
Some of that leadership role a around.
Around net spotting and hedging.
Great Yeah that was the intense of the question. Thank you.
Thank you and our next question comes from Michael Cyprus from Morgan Stanley. Your line is now open.
Hey, good morning, Thanks for taking the question I noticed that the share buybacks picked up a bit in the quarter.
Just hoping you could talk a little bit about capital management, and how youre thinking about that and and more bigger picture. If you could just update us on how you're thinking about the opportunity to enhance your footprint of growth through end of M&A I guess, what the what gaps remain at this point of the platform or where do you see opportunities in the marketplace, where M&A can really help.
Quarter on iterate your penetration as you did with a.
For the NASDAQ fixed income business, what other opportunities remain and how do you think about the hurdles on requirements that you have for that.
Thanks, Thanks for the question.
There's a lot of questions actually.
I'll start with the buybacks.
Been talking about this.
This is a program we put together and we started in the second quarter in terms of of the actual activity, it's really aimed at.
Limiting reducing the dilution related to ongoing compensation.
Equity compensation and.
To some extent opportunistic.
We did we.
We did have we don't expect to have the same volume of that of buybacks in subsequent quarters.
Second quarter.
And.
But we have a plan that will continue.
<unk> talked about we have still at about $98 million over a 2 year period, there were a lot.
I'll just spend was the rules associate.
With that and we will do that.
It seems appropriate.
Either under the control of a sort of tips.
So the 75, 1 or an open periods of it makes sense. So.
But it is a longer program there isn't any effort to make it a sudden shifts and we're trying to make some shifts.
And the way we're structured.
So I think because of that piece to it you also asked about.
I'm sorry.
And.
So we.
Let me skip space between the 2 points of the question and I will just give that to lead as a strategy thing I think the key there is the kind of look at on the fact that we're still building substantially.
A relatively.
Like a good amount of flexibility in terms of our cash position.
We had over $400 million in trailing 12 months.
Cash flow.
Even after the end of by.
Transaction, we still have.
The amount of money $680 million on a balance sheet I think and approximately.
It says that we still have the.
The ability.
The revolver, which we haven't drawn down on all of a $500 million. So we still have the ability of supported and we are actively continuing to look for opportunities. We've always talked about those opportunities have to be around.
Networks product technology capabilities geographies debt.
Enhance our current capabilities and.
And that's.
That's an ongoing.
Activity that has a full team of people here in London, who spend their time.
Pretty much focused on looking at opportunities in the marketplace.
Okay.
And so the Q.
And our next question comes from Kyle Voigt from K B W.
Your line is now open.
Hi, just a follow up on a prior question on the credit business.
You mentioned that the RFP business is benefiting because of clients.
Competition.
Youre seeing more RF Q flow, because youre, winning and having success in portfolio trading number of protocols.
I'm curious when you talked to customers of about <unk> why they are doing more business with you.
Is pricing a factor at all.
Your when you're having those conversations.
As to why they are doing.
1 more and then also do you think that there is explicit client switching that's occurring from other electronic platforms or is this are a key growth that youre seeing still really building solely driven by the voice conversion.
Good question.
Well listen it's a.
It's a very reasonable on good question, let's answer.
For like Super Bluntly, we're not hearing that that sort of pricing is the driver.
Right.
We're hearing for sure is that we're doing a lot of things right and as a consequence of that we're getting more of that business, we feel really strong about where our pricing is but.
But we don't feel like that in and of itself is the driver.
Over a business and I'm, just giving you that information because you asked the question sort of directly from clients, that's kind of what we're hearing.
A very bluntly.
What was the second the second part of it was of your question was really.
Do you think theres explicit client switching that's occurring from the other electronic.
Alarms or is the RF SKU growth really being solely driven by a voice conversion at the I think there's a lot of voice conversion happening and it's a great question Theres a lot of voice conversion happening right. This is a moment, where there's just so much momentum around electronic penetration. So we feel really strongly about how that voice.
A class of additional voice business is moving our way I think I think customers rotate I think theres, a theres an impulse on customer on customers to rotate but the general piece of it I think that we would say we feel strongly about is that there is continued voice business, that's converting 2 of electronics.
The number.
Tours suggest right, it's a pretty obviously the aggregate number of of the percentages of the overall market growing electronic have surged.
We're getting a really a fair share of that surge.
Obviously I agree with bill.
I think there is an element of rotation.
Number I think that this this.
<unk> on though is really a driver of getting customers to take a look of what we have so whether it was the net spotting that we did early on or.
On the portfolio activity that we're doing as we innovate and we solve customer problems or challenges.
We're more likely to get new customers and customers trying us.
So that's a that's a benefit and they may have been using other systems for sure, but they see okay trader of has got this portfolio of doing that.
They've got the links into their treasury market.
With respect of spotting. These are all really positive developments for the market and so it's not as if those people using us for.
Portfolio or for spotting, we're not trading electronically previously so clearly we're picking up some business from some of our competition in that respect.
But.
Big lift has really been this overall growth.
Of Digitization that we're seeing you on the credit market and those numbers are.
Our public they are out there you can see it.
I'll add 1 more thing which is interesting in terms of our a few we're also seeing our trade sizes increasing.
And our trade sizes of increasing if youre looking.
The investment grade I think it's increasing by 32% and for high of 91% the.
Those numbers almost no matter what matters is that the increasing faster than the trace average trade sizes of accretion.
That gives you some sense of potentially that we are in fact, a set of electronic trades.
Trades that are on electronics.
The because of the.
So the answer to that that formula.
Thank you very helpful.
Thank you.
And we have a follow up question from Chris Allen from Compass point. Your line is now open.
Hey, guys. Thanks for taking my follow up I just wanted to.
This 1 is for Lee I believe.
I just wanted to ask if you of any plans to.
Expand in emerging market credit I know you have a decent footprint in China.
Emerging markets Tds.
It's a high growth area, that's ripe for electronics.
Elektron vacation, so any color there would be helpful.
Sure. Thank you Chris.
Believe yes, we look we we believe <unk> is going to become increasingly important component of our of our growth internationally and domestically a year.
And that there is plenty of room to grow the network.
Our view on this is very similar to what you.
<unk> heard from Billy and Bob and you'll hear.
On the constant which is play to your strength right. We talk about that internally, we have a very strong market position in the derivative space on interest rate swaps on Cts. So when we started in the <unk>, we focused on that particular area of interest rate swaps the volumes and the interest rate swaps.
We're up almost 70% year on year.
When you look at it we just expanded into Brazil as.
The most recent addition back in April we now have 13 currencies.
In IR.
IRS and if you look at the electronic application.
On Mris, that's very low single digits, maybe 5% of that market.
As a electronics so.
Early innings, we've got the software and the design and the understanding of those markets. In addition to the customers connected so we're going to see more and more of that activity a year.
A year on year same thing with the portfolio trading so portfolio trading we realized was a real positive development for the markets over the last several years that we've been in it. So what do we do we want to leverage that pole position.
In the U S and Europe with respect to portfolio of functionality to tactically.
We expand into a cash credit us and our clients can trade.
High yield European E on bonds in 1 portfolio so.
It's a natural extension, we think theres, a big opportunity there to do more and over time, you'll be hearing more and more from us about this.
As we work with our clients to.
Go after the areas, where we can add value.
Thanks all of it.
Okay.
Thank you.
And we have a follow up question from rich Repetto from Piper Sandler Your line is now open.
Yeah.
Yeah.
1 last question sort of a blip here to outperform on a.
On expenses.
The previous guidance was at the high end of the range of $560 million now it by 65 to 580, so let's just take the midpoint of et cetera.
<unk> 72, so it's up about 12 million a.
From a guidance at least the way and analysts would look at it I guess and a.
The NASDAQ fixed income, they're doing roughly 3 million of expenses for the quarter. So that'd be about half of it. So I guess the question is where does the other 6.
Many of you know does a really really need that the innovate.
For a 6 million in the back half of the year.
Well thanks for the question.
I will let bill speak for himself, but [laughter] I think a couple of things a the NASDAQ number has got a little bit more in the incident.
And if I remember as a little bit more and then I think I think we've sort of identified as sort of but with the identifiable expenses. When we take on the business. We also have some DNA the edge to the.
So we sort of see the number of more closer to $8 million, maybe a little bit more than that each time, but in the sort of that range of the numbers and the rest is really just a.
You described it for a series of weird sort of things. We think we can put forward in terms of of the work. We can do in 2021 for things from 2022 that we are thinking about and theirs as revenue has been going up of course, there's still this revenue drives a bit of our compensation expense. So those of the things that are in the number but its housing kind of what the big portion of it really.
And a fine.
Can you identify the capex a little bit more of that.
Yeah.
Yes.
Bill the only needs a $3 million to innovate in the back we're.
We're not we're not negotiating a churn risk we almost made it through a whole call without mentioning you're jogging speed.
Okay.
Come on line on that.
Yes.
And pass on what you think.
Yeah.
Thank you Brett is the only on this.
Okay. Thank you.
I am showing no further questions I would now like to turn the call back over to.
Lee Olesky for closing remarks.
Yes, well I just wanted to say thanks to everyone for joining us. This morning, we started the first half of 'twenty 1 on a very strong note.
We remain very excited about the rest of 'twenty, 1 and tackling the multi year opportunities in front of us.
And obviously, if you of any questions feel free to reach out to Ashley or anyone on the team and have a great day, thanks for joining us.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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