Q3 2021 Tradeweb Markets Inc Earnings Call
Call.
Before I start my prepared remarks, I just wanted to say how excited we are to welcome Sarah Ferber.
As our new CFO, Sarah brings a wealth of experience. Most recently as CFO of the IX group, having previously held senior roles in financial markets banking Investor Relations technology and electronic trading.
She will be taking the reins from Bob who is retiring after a tremendously successful 12 year run of trade web.
And I want to thank Bob for all his contributions at the firm, especially the vital role. He played in our 2019 IPO.
Bob has been and will continue to be a very good friend and our partner.
Thanks, Lee for all the kind words as I sit here 12 years into my 10 year trade web.
Very happy about what we've accomplished but more importantly, the tremendous opportunity that lies ahead for the company as part of this future. Sarah is a great addition to the trade web team.
I would like to especially thank my entire team for their hard work over the last 12 years now I would also like to thank all of you our investors and sell side analysts that I've had the pleasure of meeting over the years.
I'll pass it on to Sarah say, a few words.
Thank you Lee and Bob for the kind introduction and excited to join the trade web team and I look forward to meeting many of you in the coming months.
In my short time here and been amazed by the range of opportunities that the team is working on to capitalize on all the secular drivers that continue to power the business and we'll be back to review our financials, but for now let me turn it back to Lee for his prepared remarks.
Thanks, Sara for the third quarter saw a continuation of subdued volatility.
Despite these less than ideal conditions revenue growth remains strong.
We believe the combination of our global network deep integrations, leading technology and hiring the best people continues to pay off as the fixed income and ETF markets grow and further electronic <unk>.
While the macro environment continues to fluctuate our team remains focused on broadening our growth foundation by collaborating with our clients to create new trading solutions.
Turning to slide four we believe this client first mentality I. Just described was on display as the strength. We saw in the first half of the year continued during the third quarter <unk>.
Specifically gross revenues of $265 million were up 24, 6% year on year on a reported basis and 23, 9% on a constant currency basis.
The three main drivers of our growth in the quarter or U S credit global swaps in U S treasuries the.
The revenue growth and the resulting scale translated into improved profitability year on year as our adjusted EBITDA margin expanded by 270 basis points to 51%.
Year to date, our revenues are up a robust 21, 2% on a reported basis and 19, 1% on a constant currency basis.
This is ahead of our long term average and reflects our innovation ongoing electronic location of our markets and the diversity of our growth profile.
Turning to slide five this quarter was marked by strong performance across many of our asset classes with rates and credit accounting for 45% and 42% of our revenue growth respectively spin.
Specifically rates posted another strong quarter.
Driven by broad based growth across U S treasuries European government bonds and swaps.
And cash rates.
Revenues were partially helped by a healthy central bank issuance, which continues to fuel government bond trading and the addition of <unk>.
Swaps revenues continued its robust performance with strong market share growth, while mortgage revenues declined slightly.
Credit was another highlight driven by strong U S and European corporate credit trading.
Equities revenue growth was driven by institutional Etfs, and our efforts to diversify and grow our other equity products.
<unk> performance was fueled by organic growth in institutional repo that overcame continued rate headwinds in the retail sector.
Finally market data saw broad based growth across our affinitive redistribution license HPA and proprietary data products.
Moving on to slide six let me provide a brief update on our four main focus areas.
Starting with interest rate swaps.
While industry volumes remain well below previous highs, we believe our organic growth continues to power the business towards another record year.
We can continue to attract new clients and.
And deepen our existing client wallet share.
Leading to overall swap volume growing by 38% year on year.
As a result swaps market share increased year on year to 14, 3% as measured by Clarus.
We believe we continued to gain share versus our closest competitor Bloomberg in both the U S and Europe.
Longer term, we remain excited by the multi year opportunity. We believe we have year as we scale our growth initiatives the market electronic <unk> and the rate cycle turns.
Billy will give you an update on our strategy in a few minutes.
Moving on to treasuries.
Another rates product that continues to perform well with volumes up 43% year on year led by both the institutional and wholesale business and aided by our <unk> acquisition.
Market share rose to a record 19, 9% of the 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 and further inroads into the <unk> market.
Looking ahead, we continue to invest in driving the adoption of early stage institutional streaming protocols like trade war, plus where volumes rose substantially versus last year.
Our wholesale U S treasury offering, which now provides our clients with a more liquid club disclosed streams and session trading posted another strong quarter.
Our streaming protocol continues to take share from peer platforms as we onboard new clients.
One quarter into our ownership of <unk> the integration is progressing well.
Early client dialog has been encouraging and the business is exceeding our expectations so far.
We've augmented the team with a few strategic hires to not only help with the integration process, but also to revitalize the NFIB business and create a foundation to drive long term revenue growth.
Shifting to credit this was another great quarter as our business continues to surge ahead generating more than $72 million in revenues.
Year to date revenues of 218 million have already exceeded what we did in all of 2020.
It's amazing to see the consistent share gains being made an investment grade credit with electronic share, reaching a record 12, 6% in the quarter.
It's also encouraging to see our success spread to high yield with electronic share hitting a record of six 2% for the quarter.
Outside of the U S. We recently expanded our China bonds offering with the addition of southbound trading in partnership with CFS.
We believe this is another milestone in our long term China growth initiative.
Looking ahead, we continue to believe there is a lot of opportunity in credit as our platform scales and when retail activity eventually normalizes in a higher rate environment Billy.
Billy will dive into more details on our strategy momentarily.
Finally within equities institutional Etfs produced a healthy quarter with average daily volume up 59% year on year, as new client wins and healthy industry volumes helped drive the growth in the quarter.
During the quarter equity Etfs comprised 62% of our global volume with fixed income contributing 33%.
Our other initiatives to expand beyond our flagship ETF franchise.
Are also bearing fruits with momentum continuing and equity derivatives.
Specifically revenues in these newer growth products were up double digit year on year.
Looking ahead, we believe we remain well positioned to benefit from the continued growth in Etfs globally.
And as our growth initiatives scale.
With that I will turn it over to Billy.
Thanks, Lee turning to slide seven FERC closer look at credit.
As Lee mentioned, we produced another very strong quarter with both IAG and high yield hitting new records for market share. Our formula remains the same problem solved with clients build efficiencies for them and get into business. The right way when we think about what trade web does best we think about our network and how we can create more liquidity by using the vast.
Work that we have we are doing this by offering a variety of execution protocols and leveraging our strong feedback loop to shape the future of electronic credit trading clients.
Clients have responded to a brand of innovation by increasingly adopting all trade portfolio trading and net spotting.
<unk>, our biggest institutional protocol produced another healthy quarter with average daily volume up 36% year over year.
The strong growth in credit goes beyond our institutional channel our fast growing wholesale business continues to perform well with revenues up significantly year over year to diversity of our credit offering has never been stronger and while we are pleased with the progress made so far we strongly believe that we have the potential to do even better.
Portfolio trading, which are often referred to as a light bulb solution continues to shine bright.
We believe we are proving that portfolio trading improved liquidity by tackling some of the limitations of list of list trading using traditional RQ and all to all.
Clients have accepted it as a table Stakes protocol and we believe the debate has shifted to how big portfolio trading can be.
We believe we are still in the early innings of this innovation and once clients understand the value of the solution and see there appears benefiting from the innovation they are on boarding and testing it out and then expanding their usage.
Trade web facilitated a record $80 billion in portfolio trades in the third quarter in 2021, an increase of more than 180% year over year.
Clients are also increasingly putting dealers and competition are in comp portfolio trading reached record levels, comprising 78% of portfolio trading volumes up from 43% in the third quarter of last year.
The strength in portfolio trading was matched by the rapid growth of our anonymous liquidity solution, all trade, which saw $88 billion in volume an increase of over 75% year over year, we continue to invest in our all to all network by enhancing dealer RF Q, integrating <unk> and improving responder function.
<unk>.
We have historically and continue to believe that the role dealers play as liquidity providers will remain key to our healthy trading ecosystem.
As technology continues to advance we believe it has become clear that a large amount of liquidity is increasingly difficult to access through voice traders as much of this activity migrates to algo and portfolio trading desks and alternative liquidity providers. We recognize this trend a few years ago with the launch of <unk>.
<unk> and today, we believe that we have the deepest and fastest growing liquidity pools for dealers to manage their risk. We continue to build this pool leveraging the strength of trade lips credit offering and by developing innovative tools for the different dealer workflows and our diverse marketplace.
Today, we are seeing dealers actively offload their portfolio trading risk in our sessions.
We're also connecting our liquidity pools with rematch where trade web session participants can seamlessly access our all to all in retail liquidity by leveraging their inventory uploads.
Finally, our advanced net spotting offering, which leverages, our deep U S. Treasury liquidity pool saw another solid quarter with over $85 billion and volume up 18% year over year.
All clients are now enabled for multi client net spotting, which we launched in the first quarter and we believe further extends our lead against competitors at.
At four PM alone our most popular time to spot on the platform net spotting savings increased by 67% with multi client net spotting.
Turning to the rest of our credit business, we achieved record revenues and institutional European credit and institutional Muni revenues grew over 20% year over year.
Our Cvs revenues also saw healthy double digit year over year growth across regions.
In sum our strategy of attacking the entire market not only by product, but also by protocol geography and client type helped drive the strong quarter in credit.
We believe this diversity provides us with tremendous room for growth and as we look ahead. We are excited by our roadmap to drive innovation across the credit markets to create better outcomes for our clients and dealers.
Moving on to swaps, which is the biggest revenue bucket within our reach franchise just like credit the multi year growth story continues as swaps registered another strong quarter, despite weaker industry volumes.
The combined low volatility in rate environment drove a 2% year over year decline in the third quarter 'twenty, one industry volumes with year to date trends registering a 20% decline.
In Stark contrast, our variable swaps revenues grew over 40% year over year, driven primarily by market share climbing to 14, 3% and supported by increased trading in higher fee per million protocols.
We believe our brand and swaps continues to strengthen as we focus on things we can control.
We continue to collaborate with the marketplace solve for problems in a customized way and work closely with market participants to drive electronic vacation higher.
This mantra hasnt changed since we leveraged our network to enter this marketplace. Many years ago. Today, we are driving our market share higher by innovating across products protocols and geographies with international swaps growth being a particular highlight.
Specifically during the third quarter, we saw broad gains across our products and our momentum in major currencies continues with record share in euro and other gene 11 dump denominated swaps.
I want to spend a little time on how we partner with clients and innovate.
For many years, we have had a compression tool to help firms reduce the number of trades sitting on their books at clearinghouses. Once it became clear that LIBOR would be phased out we responded by tweaking this tool to help our clients switch from their legacy LIBOR positions.
And into other risk free rates globally.
These switch trades represent a low single digit percentage of our 2021 volumes and is another example of how we help our clients navigate regulatory change.
We have seen significant progress made to date in Sterling Swiss franc and yen denominated LIBOR transitions as we help our clients they are coming back to us and putting new risk trades on the platform with the percentage of sofa risk trading reaching record highs in the quarter.
We think thats a win win for us.
And our clients.
Beyond the risk free rate transition, we continue to respond to structural changes in the swaps market such as the growth of cleared and swaps RFA protocol adoption and multi asset trading <unk>.
During the third quarter, we saw record EM and RFP activity as we continue to onboard additional dealers and clients and deepen our liquidity pool.
It is also interesting to see the electronic vacation of clear Dms swaps spurred the electronic vacation on non cleared swaps. We have seen this evolution before in the early innings of dollar and Sterling swaps electrification and are encouraged to see it unfolding yet.
We also expanded our multi asset package innovation to euros.
To complement our already successful sterling offering.
Looking ahead, we believe the long term swaps revenue growth potential is meaningful with the market's still only 30% electronic side. There remains a lot that we can do to help digitize our clients manual workflows, while the global fixed income markets and broader swaps market grow.
Finally, we continue to invest in our leading automated trading capability.
The number of ex trades grew by 38% year over year in the third quarter. This is another light bulb solution with our with our most sophisticated clients and it is deployed globally across asset classes inbound inquiry about AI X continues to be strong and our clients are expanding their usage across products we launched.
<unk> in 2012 with one client for U S treasuries.
Today, we have over 100 firms using AI to ask for more than 25 product groups across rates credit and equities.
As I have highlighted last quarter institutional clients love the data driven intelligence that AIA is able to provide and it gives them a way to automate the entire trade lifecycle in.
In Europe, we recently rolled out a new enhancement that allows traders to inspect their AI ex trades in flight, allowing them to approve trades that get rejected because they don't need preset execution rules.
This enhancement allows traders to save time.
Avoid redundant work and ultimately achieve higher hit rates.
Looking forward as with all our technology innovations, we will continue to invest to provide more features to improve the client experience.
And with that let me turn it over to Sarah to discuss our financials in more detail.
Thanks, Billy 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 our volumes on slide nine.
We reported our highest third quarter average daily volume of 964 billion up nearly 24% year over year and up 20% when excluding short tenor swaps.
Areas of notable growth include institutional Etfs repaired and global government on swaps and corporate credit.
Slide 10 provides a summary of our quarterly earnings performance.
Thank you volumes translated into gross revenues, increasing by 24, 6% on a reported and 23, 9% on a constant currency basis.
We derived approximately 37% of our revenue from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars.
Predominantly in euros.
Our variable revenues increased by 35, 4% and total trading revenue increased by 26%.
Total fixed revenues related to our four major asset classes continued to grow up 11% and 10% on a constant currency basis.
Right fixed revenue growth was primarily driven by the addition of the MSI acquisition.
Other trading revenues were down seven 9% as a reminder, this one item. This line item is lumpy as it is affected by periodic revenues tied to technology.
Enhancements performed for our retail clients.
Data increased by 10, 3% growth in refinish, API and proprietary data products.
Adjusted EBITDA margin came in at 51% and expanded nicely by 270 basis points relative to <unk> 'twenty as we continue to benefit from scale.
All in we reported adjusted net income per diluted share a 39.
Moving onto fees per million on slide 11, we'll trends I'm about to describe are driven by a mix of the various products within our four asset classes.
In sum our blended fee per million increased 10% year over year, primarily as a result of stronger growth and higher fee per million credit greater than one year swaps and cash equities excluding.
Let's review the underlying trends by asset class, starting with rates average fees per million per rates were up 6%.
Our cash rate products is per million, we're up 6%, primarily due to growth in higher fee per million U S. Treasuries.
Long tenor swaps, Keith <unk> million were up 11%, primarily due to growth in Ian swaps and RSM.
In other rates derivatives, which include rate features and short tenor swaps average fees per million decreased 18% growth in OIS, which carries a lower fee per million than fraud.
Continuing to credit average fees per million for credit increased 31% as higher fee per million cash credit products saw strong growth, while lower fee per million high grade electronically processed activity decline compared to the third quarter in 2020.
Drilling down on cash credit average fees per million increased 13% due to stronger growth in U S high yield which carries a higher fee per million in overall cash credit.
Looking at the credit derivatives and electronically processed U S cash credit category fees per million increased 2% driven by growth in Cvs fee per million.
Continuing with equities average fees per million for equities was down 5% overall.
Cash equities average fees per million increased by 20% due to an increase in fees per million with a U S and EU ETS.
U S ETF fee per million was driven by a decrease in volume per share traded.
Recall in the U S, we charge per share and not for notional value traded.
Equity derivatives average fees per million decreased 45% GDP growth and U S derivatives, which carry a lower fee per million in equity derivatives average.
Finally within money markets fees per million decreased 14%.
This was primarily driven by growth in institutional repo, which reached record levels.
Institutional repo carries a lower fee per million than other money market products. In addition, the higher fee per million retail money market business remained pressured by the low interest rate environment.
Slide 12 details our expenses at a high level, we continue to invest for growth. There has been no change to our philosophy here at <unk>.
Adjusted expenses for <unk> increased 17, 4% and 17, 5% on a reported and constant currency basis, respectively.
Recall, approximately 15% of our expense base is denominated in currencies other than dollars predominantly in Sterling.
<unk> 21, adjusted operating expenses were higher as compared to <unk> 20, due to increased employee compensation, G&A technology and communication and the inclusion of MSI.
Compensation costs increased 16, 5% due to higher head count to support our growth as well as higher performance related compensation.
Adjusted non comp expense increased 19, 3% on a reported basis, primarily due to G&A and technology and communications, partially offset by favorable movements in FX.
Adjusted non comp expense on a constant currency basis increased 22, 1%.
Specifically technology and communication cost increased primarily due to higher clearing and data fees as a result of growing all trade volumes and credit and streaming U S. Treasury volumes. In addition, this quarter also saw the continued impact of our previously communicated investments in data strategy and infrastructure.
Adjusted General and administrative costs increased primarily due to an increase in travel and entertainment as we gradually recover from the pandemic and higher marketing spend.
Favorable movements in FX resulted in a $900000 realized gain is <unk> 21 versus a half a million realized loss in <unk> 'twenty.
Professional fees increased 19, 1% due to costs associated with the NFC acquisition and continued investment in data strategy and infrastructure technology.
Slide 13 detailed capital management and our guidance.
First on our cash position and capital return policy.
We ended <unk> in a strong position holding $822 million in cash and cash equivalents and free cash flow reached $477 million for the trailing 12 months.
We have access to a $500 million revolver that remains undrawn as of quarter end.
Capex and capitalized software development for the quarter was $10 million roughly flat year over year, primarily due to timing of investment spend with.
With this quarter's earnings the board declared accordingly declared a quarterly dividend of <unk> <unk> per class, a and class b share.
$15 million offsetting equity dilution during the quarter, specifically, we spent $12 million under our regular share buyback program, leaving $86 million for future deployment at the end of the quarter. In addition, we without $3 million and shares to cover payroll tax obligations upon the exercise of stock options.
As a reminder, we plan to use our share repurchase authorization to mostly offset dilution from ongoing equity compensation.
On slide 14, we have updated our quarterly share count sensitivity for 2021 to help you calibrate your models for fluctuations in our share price.
Finally, there is no change to our previously communicated guidance for 2021.
Now I'll turn it back to Li for concluding remarks.
Thanks, Sara last quarter, we raised our expense guidance given the strong trends we were seeing in our business. Despite the subdued operating environment.
Following a strong third quarter. We believe we are on track for another record year of trade web.
Remarkably absolute revenue growth of $140 million. So far this year has already surpassed what we did in all of 2020.
As we look ahead, we believe that the acceleration in electronic vacation spurred by the pandemic is here to stay and all the secular trends powering the growth of electronic trading remain intact. We feel good about the longer term durability of our revenue growth and potential for 2022.
In addition, we believe the macro environment potentially shifting favorably as global governments taper and raise interest rates should also support our growth.
It's a great time to be in our business.
While the macro fluctuates, we will continue to focus on what we can control by staying close to our clients designing new software and investing in our people to drive market share growth.
We continue to attract great talent and are proud to earn a spot on the SaaS company list of best workplaces for innovators.
In addition to organic growth, we're continuing to spend time evaluating M&A opportunities, which we believe would be additive to our network.
With a couple of important month and trading days left in October the momentum we have seen so far this year has continued with overall volumes and revenues up double digits relative to October 2020.
The strong volume growth is being led by all asset classes with cash rates swaps and cash credit being highlights.
Market share in credit continues to increase with notable strength across RF Q portfolio trading and all trade.
Before I conclude I hope everyone has a chance to look at our inaugural corporate sustainability report.
While many of the items. We described in the report have been ingrained in our DNA for a while.
We are happy to provide the additional disclosure as the topic continues to grow in prominence across our investors clients and employees.
On the business front, our CBI screened green bond trading volume increased over 70% year on year, and we continue to be actively engaged with our clients as green bond issuance and trading continues to grow.
In closing I want to thank our clients for their business and partnership in the quarter.
And I want to thank all my colleagues for their efforts that contributed to another strong quarter at trade web.
With that I'll turn it back to Ashley for your questions.
Thanks, Lee as a reminder, please limit yourself to one question only feel free to hop back in the queue and ask additional questions at the end Q&A.
Q&A will end at 10 30, a M. Eastern time, operator, you can now take our first question.
Thank you. Our first question comes from Kyle Voigt with <unk>. Your line is now open.
Hi, good morning.
So even excluding the acquisition.
Fixed income business.
We're still seeing really good growth in the U S Treasury business.
If we try to dissect that growth in your treasury trading business year on year, even the share gains over the last six months. Just wondering if you could provide some more color as to which clients segments have been growing strongly and I am just trying to understand that.
Not really.
With being driven by.
And he said that.
Thank you.
Yeah.
Hey.
Thanks, Thanks for the question.
Let me, let me just start off by saying that.
Of course, and we've said this before we really like the diversity of what we've built into our business right now when we look across clients and different protocols that we have on the platform.
When we look at the year to date volumes.
In particular, the treasury market, we've seen strong growth really across the board alright, so in the institutional space.
Got our asset managers hedge funds pension funds.
Sovereign clients. They all continue to do more with us.
In the wholesale space the streaming business, we've seen strong growth from principal trading firms dealers in futures brokers.
So and we highlight this in our in our prepared remarks, we are a client centric firm.
Continue to collaborate with our clients to.
To improve their trading experience and that's really been kind of the north star for the company for many years to be able to hit all of these different aspects of the market.
Sure.
Yes.
Yes.
Great. Thanks, Scott.
Thank you our next.
Question comes from Michael Cyprus with Morgan Stanley. Your line is open.
Hey, good morning, Thanks for taking the question I was just hoping you could elaborate a bit on the contribution from portfolio trading in the quarter. Maybe you can kind of give us an update on where penetration stands today and how do you see the drivers of growth ahead for portfolio trading.
Hey, Michael how are you it's Billy Thanks for the question could you your voice.
When we think about portfolio trading let me put a little frame on it for a quick second right. There are kind of three principles around portfolio trading that I think have really resonated with our client base right. It's all about.
To start with this concept of certainty of execution, that's a big deal for clients I talk a lot about minimizing information leakage, that's a big deal for clients and I've also talked a little bit about the ability to sort of move big slices big chunks of risk all at once.
It's a big deal for clients right. So all of these kind of principles.
Have really resonated right.
I've used the expression of a bunch of sort of that there was this kind of light bulb moment for clients around portfolio trading I've used it. So much leaves kind of kicked me a couple of times under the table.
You're tired of hearing me say that which I understand.
It's a kind of a cool expression, but only tells almost part of the story right. Because we all know this there's this kind of concept of a natural progression.
And it wasn't that long ago I think it wasn't.
And.
In the third quarter of 2020, we had about 30 clients on our system doing portfolio trades right and obviously, we started off where you would expect us to start off in investment grade and it was for smaller size trades. It was working to LIFO were starting to kind of work all of these things were happening and then over a period of time around these principles that I mentioned right.
All of a sudden the big change was now big risk trades are coming are coming through the system right and now all of a sudden the big change has been around how I would say the hedge fund universe and the quantitative universe and credit has really embraced portfolio trading and high yield right.
So flash forward to this moment I think we have right around 100 different companies trading portfolio trades with us right and I would say to you in a very interesting way. The next question is obviously, we've been in one very specific market environment in credit.
Through 2021, I think as we move into a more volatile in a more interesting credit market.
Our feeling and a very strong way as those principles I described certainty of execution minimizing information linkage and really the ability to move these big slices of risk I think.
Outperforms in a in a more volatile marketplace. So as we as we enter into this new world coming in 2021.
Our confidence around what we've achieved in portfolio trading has probably never been higher quick shout out to our credit team. We can I talked about them all the time, they've really kind of nailed it with dysfunctionality, so our confidence around portfolio trading at a super high level.
And thanks for the question.
Great. Thank you.
Thank you. Our next question comes from Rich Repetto with Piper Sandler Your line is open.
Yeah. Good morning, Lee Good morning, Billy and welcome Sara.
So I have this image of Billy holding this shiny light bulb, saying come.
Our fixed income Godfrey come this way.
Okay.
Great.
I like the analogy, though.
Mike.
Ill turn away from credit just for stack, but on the Treasury market, we really saw a lot of volatility towards the end of September and into at least the beginning of <unk> and I know you talked about.
Some of the double digit increase.
Lee, but is there any way to quantify how good that environment was when you see rates jump as much as they did back and forth I guess at least in the beginning of <unk>.
Good mid mid October.
Hey, rich.
Thanks, Thanks for the question and joining us.
Yes look we let me just start by saying, we obviously welcome additional volatility in the markets.
Especially that's come with.
It rises.
I mentioned this in our prepared remarks and you just highlighted in October has been strong we even saw activity just this morning out of Europe.
In Asia so.
Part of the strength is.
As in our rates business and interest rate swaps <unk> government bond trading all doing.
Really well.
As we sort of start to wrap up October.
And I would say.
Change is a good thing we definitely.
We'd like to see that.
Kind of market change.
And along with that a bit of uncertainty in terms of the pace of change the direction of change.
This is a huge debate that's going on out there with respect to rates globally.
As central banks taper in <unk>.
Talk about rate hikes, and when theyre going to kick in so this is all.
A real positive for our markets.
If you look at what's been happening over the last month.
These things are positive for volumes that are positive for not just trade web right. They are positive in the rates market. So you have diverging views.
Yield changes these are all positives.
I think it is important.
To always sort of take a step back and not get too caught up in the day to day week to week.
These sorts of things I know people like to talk about it but we at our core we really try to stay focused on investing in the business and move into markets forward in terms of Digitization.
And responding to what our clients need from us.
Terms of automation and process.
To have a more efficient business.
That's the big secular tailwind at our back is this move towards more digitization and automation.
That's a constant we think thats going to continue for years to come.
And we will continue to accelerate.
It's difficult to give going back to sort of your question, it's difficult to give a real concrete.
<unk> answer in terms of the scale benefit of volatility.
We've been doing this a long time I can make a general comment that we we will commence and that it's a positive for our business.
Certainly.
Should help our earnings power it should increase.
Should should help us grow.
Our business.
And you layer on top of that a surge in sort of debt outstanding. So I mean, all of these things are a real positive for our business. It sets us up well, we expect to see a bit more volatility we're seeing that right now in the month of October.
We're excited about that.
Got it thanks keep shine the light.
Shine the light.
Thank you. Our next question comes from Alex Kramm with UBS. Your line is open.
Yeah, Hey, good morning, everyone.
Wanted to just ask a longer term question on the swaps business I think Billy talked about the LIBOR transition how thats been helping.
Curious how you feel about that marketplace. Once we're done with this transition and I'm asking because sometimes when I talk to people in the rates business.
They are wondering if a new wells may look a lot different and what I mean by that is LIBOR was a very complex animal there's a lot of different trading strategies that are based on trading and it seems like some of these new rates in agency and much more.
Maybe much simpler one just wondering if there's a risk that is.
Microphone, just let us <unk> in the future. If they are today and I know nobody has a crystal ball, but I'm. Just curious if you have any views on how long, yes. That's a really good question and I totally get where you're coming from I think for sure and without question a really important moment for the swaps market I would say high level the industry in general has been sort of hyper.
We're focused.
Prepared at the top levels kind of throughout the industry on getting this transition right.
As a company.
I would say.
Actively helping our clients migrate to alternative prices were not being kind of passive on this we are having a very active role with our community.
On this and just so you know as we're kind of doing a lot of these in your question is a little bit of this and it is we're doing some of this transition through.
The switch trade there is no material financial impact for us in other words, we feel really good.
Our volumes going forward, what I would say for sure is that we have a strong feeling as this migration happens the swaps market is going to continue to be very deep and liquid marketplace that clients are going to continue to use to manage interest rate risk period and to your point I think some of those questions around sort of.
The markets looked like forward I think our opinion is affect things more like the CLO market and the pure rates market.
And we feel like we've done all of the preparation and we feel like the industry is in a really good place and we think the swaps market is going to be an extremely vibrant place going forward for us.
And thank you for the question.
Yes. Thank you.
Thank you. Our next question comes from Alex <unk> with <unk>.
Goldman Sachs. Your line is open.
Hey, guys. Good morning. Thanks for the question. So just continuing with the question around the rate swap business for a second but maybe slightly from a different angle. So.
Up 30% of the business you sounded like as electronic today curious to see what happened with turnover rates in that market as the world becomes more electronic right. So there is obviously as a general note around fixed income market things go electronic turnover picked up we haven't quite seen at the same extent in credit maybe it'll get there when credit gets a <unk>.
Larger as a percentage of total electronic what are you seeing in swaps and is that an reasonable analogy to sort of think about.
Yeah, Hey, Alex It's Lee Thanks for the thanks for the question.
It's a bit of a.
Hate to say it but it's a bit of a philosophic just philosophical question because it's an it's a tough one to answer.
I think the general thesis is correct I think when you have more participants more transparency in the market.
More turnover and more activity.
That's proven to be the case.
So many markets that have gone electronic as I've kind of study these things over the years.
It's tougher to see it in a short shorter timeframe and I think the question with respect to the swaps market is.
Are there more participants coming into the market.
Or is it stay largely institutional market, we definitely see some more participants theres more activity.
But it is a it's a largely institutional so I expect we will see first and foremost is just the continued acceleration of E.
So the percentage of the market and Thats been proven historically, if we just look backwards just goes more and more E.
The question of turnover and frequency and volumes are a little tougher to gauge in the short run, but I would argue that.
If there's more transparency if there is.
Easy access and if theres more participants youre going to see more more turnover youre going to see more volume.
Alright, but any evidence of that in like whats turned electronic already or is it kind of hard to know.
I think it's hard to pull that out entirely because the.
The volumes still are dictated by the market and market activity more than anything. So if you look at and it's a relatively short time horizon that we've had an active significant E market in swaps alright, so even though we started to do this.
Decade ago it's.
It's really come on full force much more meaningfully in the last several years. So I think it's hard to to jump to that conclusion based on that.
The short history.
Anecdotally when you when you look at comparisons and if you look at Adjacencies and other markets. It's there.
Okay.
Great. Okay. Thanks, so much.
Yes.
Thank you. Our next question comes from Ken Worthington with Jpmorgan. Your line is open hi.
Hi, Good morning wanted to just follow up on the integration of <unk> what are the big milestones in terms of integration and what is the rough timeline just trying to hit those milestones and I thought a big part of the excitement around the deal was getting sort of streaming and a club on the same platform. So.
Assuming it hasnt come already when does that come as well.
Hey, Ken Good morning. Thanks, Thanks for that it's we so yes, so our timelines in terms of integration first let me just say and I said this in the I think I've said in the prepared remarks.
We're very pleased with these first few months we closed in June late June So really good progress out of the gate. We've made some hires that I think will strengthen the offering we've combined it is as you pointed out with what we're doing with streaming we have what we consider.
B.
It is actually the largest platform for trading treasuries across all of the different protocols that we offer. So this is the first time anyone's pulled together all these different ways.
Ways of trading treasuries, which we think over time will be.
Positive for our clients in terms of access and cost and those sorts of things.
So we're pleased with that.
It's been going well.
Say.
It helps us markets kind of pick up velocity. So we're benefiting from that for sure in October.
And we're good out of the gate in terms of.
Timelines, where we're looking to get this whole thing integrated by the end of next year, that's kind of our our timelines that we've put out there in terms of having them on one platform.
Which just makes it easier for.
It's a lower cost way of operating system and it's also as we pointed out for the clients that are out there. It's one point of connection into us with respect to all of these different types of protocols.
Trading right all the way from the RF Q history to streaming to now we have this this order book from and if I'm sure there will be several other evolutions.
That will.
Will be created in the coming years to solve some of the other issues with respect to trading treasuries.
So it sounds like still very very early days.
That accomplishment is really hiring some people in filling in some of the white space that you have is that okay.
I mean, I think thats part of it I would add.
Strong out of the gate right. So we're pleased with the numbers, we're adding we're pleased with the success we've had in these first.
By August September so, it's like three five months or so.
Operation. So yes relatively early days, a few months a quarter or so into it.
It's going well.
Yes.
Thank you very much.
Yes.
Thank you. Our next question comes from Dan Shannon with Jefferies. Your line is open.
Thanks, Good morning.
I guess my question is on.
Expenses and kind of the outlook not so much obviously the guidance hasn't changed as we think about next year in areas of spend and level of investments just curious about what kind of where those areas are and maybe the pace of it is going to be that much different than what we've seen from you.
More recently.
Hi, Sarah Thanks for the question.
As you can imagine we're in our budget process right now so we're not going to provide guidance for next year.
Typically we would update that next quarter, but I cant say theres really no change in philosophy here and we're going to continue to invest for durable long term growth and balance that with margin expansion. So continued investments in the same area and obviously it will be more specific I think next quarter to help you think about it.
Thank you.
Thank you next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks, good morning folks.
Question on volatility.
But both in credit markets and Treasury markets as kind of a two part question, but Billy going back to your <unk>.
For a discussion of portfolio trading versus list trading.
And I think you said.
You expected portfolio trading to still be.
Maybe increasingly and vibrant in a hurry.
Volatility backdrop within credit.
And can you compare that with Lyft trading I guess in terms of what you think the advantages are for portfolio trading versus list trading in a much higher volume.
Utility backdrop in credit and then just just.
Another part of the question is whether you think.
The next round of debt ceiling negotiations as we get into December it will increase volatility.
Substantially in the Treasury market.
In a in a volatile marketplace.
When markets get Super busy the client base is really going to care about things like certainty of execution first and foremost that's like a big deal right and then the other thing I'd mention is this concept of minimizing information week. It sounds like a high class problem, but the reality is particularly when the markets get busy it's fundamentally important.
To the flow of it also feel comfortable around that so those are two really big things that make us feel like this really strong innovation around portfolio trading is going to have really strong legs, if we'd get into and when we get into a different kind of market.
The market cycle. The other thing I would just say is we don't feel at all again, specifically around around credit I'm going to possibly lateral the debt ceiling question to Lee.
We don't feel like one trades off of the other quite honestly, we don't feel like we have to win in portfolio trading and when we went in portfolio trading that comes out of our RFP volume.
We feel like they both lived together really well.
So as we look into a different market environment I think what we're going to what we feel confidently about is yes.
Tenants at the fundamentals around portfolio trading is going to be there but.
Our RF business, our all to all trading all of those other important aspects of the credit market because it is a diverse complicated complex market structure are also going to kick into.
So I want to make sure that I explained that the right way because we don't feel like <unk> off of the other we feel like they both work together really really well and we've seen a lot of evidence today, where we get portfolio trading correct for clients and we get there our acute business as a component of getting that functionality right for them.
Okay.
That's fair and then Leon the debt ceiling.
Okay.
Yes.
But I would say it.
Just went out.
We have had a brown.
So yes, I mean look this is there's so much happening right now that's obviously impacting volatility with respect to the rates markets.
What's happening in Washington, what's happening with central banks, what's happening with respect to taxes.
And this is it kind of depends on how it goes I don't feel like we have a crystal ball in terms of.
Sort of predicting this one.
But it does feel like there's more volatility in it.
Pressing itself in October in the markets right now.
Pending an hour a number of these factors go it will either increase volatility or slow down my suspicion is we're going to have more volatility.
Just feels like Thats the environment were in right now and I don't think it is just the debt ceiling I think it is a number of other issues and we see that happening really kind of around the world.
It's a fair question, but I'm afraid I don't have.
The precise answer on that one.
That's great color and I appreciate it thank you.
Thank you I have a follow up from rich Repetto with Piper Sandler Your line is open.
Yes, thanks for taking the follow up one last question on the portfolio trading and if you look on.
Slide seven.
It looks like international grew.
Drew seven X.
In the U S.
Probably doubled.
Actually look quarter over quarter in the U S.
Pull back a little bit in portfolio trading and.
And there was.
The increase in international So I guess the question is.
International a little bit.
Getting a little bit later Billy.
And.
And also can you highlight any of the benefits like I think everybody gets the efficiencies.
But is there other things like we're here that you can get.
People put in smaller traded to get.
Because it is such a basket, it's helping them get executed on.
Small illiquid bonds, as well and sort of forcing the dealers to handle that.
Liquidity of that stuff, yes, rich there is some of that for sure. Let me say that Youre right on your analysis that kind of Europe came a little bit later to the party and Thats, Okay, and Thats whats happening there around those.
Those graphs that you described the momentum generally speaking continues to build for sure in both regions and now I think I can say this very bluntly now there's more competition.
Owned portfolio trading because it's become so mainstream so that's the reality of it.
Youre, highlighting I think a very interesting point and I think one of the benefits in let's say this very clearly is.
There is a very strong role that the dealer community plays around portfolio trading so as the markets move electronic for sure. This is there kind of desired way that the market moves electronics versus this kind of all to all of that that we've talked about a lot right. So we've always felt very strongly that creating a balance around the trade.
The environment is really important and I think in a certain way it resonates really really strongly with the buy side community and you highlighted why that is in another way I think there is more support around portfolio trading in the electronic world because it keeps the dealer community as a counterparty to the buy side and I.
That's an important principle I think the dealers still remain a very vibrant part of the electronic credit trading community and we think we feel strongly about that.
Got it thank you and thank you for the question rich.
Thank you.
Im showing no further questions I'd like to hand, the conference back over to Mr. Lee Olesky for closing comments.
Okay.
So thanks.
Basically I just wanted to say thank you all for.
Joining us today.
Obviously, we're pretty pleased with the with our performance. So far we believe that this year is turning into a.
A record year for US we are proud of our team the innovation the diverse growth profile, we've had from from all of our asset classes and as we look ahead, we feel good about our ability to continue to capitalize on all of these secular trends that underpin our business and the upside potential. Obviously, if you have any questions feel free to reach.
Out to Ashley Billy anyone on the team.
Thanks again for joining us on an average race day.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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