Q3 2021 Marketaxess Holdings Inc Earnings Call
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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
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Ladies and gentlemen, thank you for standing by.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question simply press Star then the number one on your 10.
Allophone Keybanc.
If you would like to withdraw your question press the pound key at anytime.
As a reminder, this conference call is being recorded on October the 20th 2021.
I would now like to turn the call over to David Cresci Investor Relations manager at market access. Please go ahead Sir.
Good morning, and welcome to the market access third quarter 2021 conference call.
For the call Rick Mcvey, Chairman and Chief Executive Officer will review the highlights for the quarter and international growth.
Chris Concannon, President and CEO will discuss the product expansion and automation.
And then Chris <unk>, Chief Financial Officer will review the financial results.
Before I turn the call over to Rick Let me remind you that today's call may include forward looking statements.
These statements represent the company's belief regarding future events that.
By their nature are uncertain.
The company's actual results and financial condition may.
And materially from what is indicated in those forward looking statements.
For a discussion of some of the risks and factors that could affect the company's future results.
Please see the description of risk factors in our annual report on Form 10-K for the year ended December 31, 2020, I would also direct you to read the form.
Hey differently statement disclaimer in our quarterly earnings release, which was issued earlier. This morning and is now available on our website.
Now, let me turn the call over to Rick.
Good morning, and thank you for joining us to review our third quarter 2021 results Q.
Q3, total revenue was 162 million.
<unk> down 1% year over year.
Operating income was $74 million.
And operating margin was 46%.
EPS of $1 52 was down 15%, reflecting our ongoing investments in new data trading and post trade solution.
Forward looking.
Credit market trading faces headwinds currently with a combination of historically low credit spreads and credit spread volatility. These.
These conditions have persisted over the last three quarters in history suggest they will revert to the mean over time.
Our international.
<unk> is showing strong growth through volume and market share gains in euro bonds and emerging markets post trade services and product expansion.
We are pleased to add Chinese government bonds to our offering through China bond connect and CIB and direct.
Business Slide three provides an update on market conditions.
Market volumes have been negatively impacted by the current low levels of bond yields credit spreads and volatility.
During these periods of price dispersion of bids and offers shrinks temporarily.
Our liquidity and pricing advantage.
Comes through most clearly at times of normal to a high spreads and volatility.
And we believe that there are many factors that could positively impact bond volatility in the periods ahead.
As yields have started to increase from historically low levels average years to maturity traded on our system.
<unk> has come down about 6%.
Average years to maturity is one of the factors that causes fluctuations in our high grade fee capture.
We are watching the emerging news on inflation and supply chain disruptions labor shortages and the China real estate market.
System, mostly.
We believe that it is likely that we will see tapering of central bank bond buying in the periods ahead, which is likely to lead to more normalized yield levels and volatility and bond markets around the world.
Slide four highlights our growth in international markets.
Close.
In spite of the low levels of yields around the world, we are showing strong growth in our emerging market and euro bond product areas.
Eurobond volumes were up 22% year over year against a backdrop of lower market volumes.
Our estimated market share reached new highs in.
Market for bonds during the quarter.
Emerging market volumes were up 19% with estimated market volumes up 1%, reflecting share gains in global EM debt trading.
We are seeing strong growth rates in both hard currency EM bonds denominated in dollars euros it yet.
In Europe, as well as local market trading.
The addition of China increases our local market coverage to 28 local markets across Latin America, EMEA and APAC regions.
This quarter, we set new records in global active trading clients and.
Actual client firms.
This expands our broad client network and creates additional cross selling opportunities.
We are underway with client on boarding for China bond connect and expect an active quarter ahead.
As the second largest government bond market in the World China provides.
Internet meaningful increase in our total market opportunity.
Now, let me turn the call over to Chris to provide an update on product expansion and automation.
Slide five provides an update on open trading and product expansion.
Trading continues to support credit market liquidity by offering.
It's a more participants the chance to engage with the market in the third quarter over 25000 orders and 13 billion in notional value was available daily through our open trading marketplace.
<unk> have also realized the benefits of open trading and are increasingly seeking anonymous all to all liquidity.
During our Q volume grew 20% year over year to $59 billion during the quarter.
The increased diversity of participation continues to drive cost savings opportunities. Despite compressed credit market spreads client saved an estimated $121 million in transaction costs during the quarter.
Quarter due to price improvements delivered by open trading.
The acquisitions of liquidity edge of Muni brokers highlight our investment in new markets and the growing application of open trading across the fixed income landscape.
910 billion of US Treasury trading volume was executed on market access in the quarter.
Deal up 22% from the prior year, we have made several enhancements to our reach trading offering in recent months, including our launch of all to all click to trade functionality and extending <unk> trading capabilities for client to dealer orders. The expansion of open trading for U S treasuries as a critical priority for us.
<unk> and aligns with recent G 30 recommendations for an all to all marketplace in treasuries munis.
Municipal bond trading on market access grew 92% to $5 4 billion in the quarter, an additional $17 4 billion in volume was conducted through Muni brokers are interdealer electronic platform, which we.
We currently do not include in our Muni bond volume totals integration efforts of the Muni broker platform are well underway and we are targeting the fourth quarter for the initial phase of our integration of the platform into our open trading network.
We believe these investments in government bond in municipal bond trading solutions.
We will add approximately 25% to our long term addressable market opportunity.
Slide six highlights the growing momentum of automation in credit trading automated trading on market access reached new records in the quarter growing to $42 billion in volume and over 224000 trades.
115 firms leveraged our automated trading protocols in the quarter up from 86 last year today auto ex represents 19% of total trade count and 7% of our total volume.
Use of dealer algorithms is continuing to grow on the platform with approximately $4 4 million.
Algo responses in the third quarter up 17% from the same period last year the growth of dealer algorithms and our automated automated trading tools are driving a steady increase in the average number of responses on market access in the third quarter. We saw an average of seven responses per inquiry first five.
In the third quarter of 2020 this demonstrates enhancements in our liquidity as a result of the increased engagement from our diverse investor and dealer community.
Slide seven demonstrates the growth from diversifying our business initiatives the acquisition of regulatory reporting hub helped drive total post trade services.
<unk> pointed to $9 4 million in the quarter up 101% year over year. The addition of continental European clients to our suite of regulatory reporting services through this acquisition has further bolstered our unique data solutions through these types of post trade data sources, we have seen sizable benefits.
Revenue in our data solutions like access all composite plus both access all in composite plus helped drive our information services revenue to $9 6 million in the quarter, which is up 13% year over year combined information services and post trade revenue now account for 12% of total revenues up from 8%.
<unk>, two or third quarter of 2020.
Following enhancements to our portfolio trading solution in May we have seen significant traction with our new functionality 54 unique investor firms in 13 dealers were active since may and drove record volume of $8 9 billion in the quarter, We believe our active client group.
Sent in the same group of participants active in the market wide portfolio trading today active.
Activity in our session based protocol mid <unk> reached record volumes in the quarter of $3 4 billion. We plan on expanding mid Aix beyond eurobonds to use credit later this year now let me turn the call over to Chris to provide an update on our.
Thank you Chris Slide eight provides a summary of our quarterly earnings performance third quarter revenue was $162 million down 1% from the prior year the five.
<unk>, 5% decline in commissions was offset by the 100% uplift in post trade revenue.
<unk> revenue includes $3 four moving and trade reporting revenue generated from new clients added through the regulatory reporting hub acquisition.
Information services revenue was up 13% year over year due to new data sales and the positive impact of foreign exchange due to the weaker U S dollar.
The annual contract value.
Trade renew recurring data contract sales for the first nine months of 2021 has exceeded all of 2020.
The sequential pick up in other income was due to foreign currency transaction gains excluding.
Excluding E rate activity, such as foreign exchange gains and losses, we anticipate the quarterly.
<unk> for the other income expense line to be about $1 million of expense. The effective tax rate was 22, 2% for the quarter and 21, 6% year to date.
Slide nine provides an overview of commission revenue trading volumes and fees per million.
The 9% decline in.
We run real transaction fees was attributable to lower U S credit trading volume and lower overall fee capture.
The 17% decline in U S high grade fees per million was mainly due to shorter duration driven by the increase in bond yields and a decrease in the average years to maturity of bonds traded on the platform.
Baird.
We also experienced some dealer movement to a fixed fee plan from an all variable fee plan and this explains the increase in U S high grade distribution fees as fixed fee plans provide for higher fixed distribution fees, but lower transaction fees.
Other credit fees per million was lower year over year.
Platform to a higher mix of emerging market in eurobond volume that command lower fees.
Third quarter 2021, other credit distribution fees includes $1 2 million of Muni brokers subscription and license fees.
Slide 10 provides expense detail.
<unk>.
Third quarter expenses were up 16% year over year and include $5 5 million of operating expenses amortization of acquired intangibles and nonrecurring integration costs associated with the regulatory reporting hub and muni brokerage acquisitions.
If we exclude these acquisition.
Acquisition costs expenses were up eight 4% the.
The increase in compensation and benefits reflects higher salary and benefit expense as we continue to add employees to support our product and geographical expansion.
The $4 $9 million increase in depreciation.
Detailed amortization expense includes $2 5 million of acquired intangible amortization expense from acquisitions and higher software development costs as we continue to invest in trading system enhancements.
M&A integration costs and higher recruiting fees contributed to the increase in professional and consulting fees year over year.
<unk> and had a 32% declining clearing costs reflect transaction cost savings from our strategic decision to convert to a self clearing model back in August 2020.
We are updating our full year 2021 expense guidance range to 360 million to $365 million down from.
Here, which are $370 million to $386 million.
The updated expense guidance reflects among other items lower incentive compensation and variable clearing costs.
Slide 11 provides an update on cash flow and capital management.
As of September 30.
From a rate of our cash and investments were $458 million and our trailing 12 month free cash flow was $320 million.
During the quarter, we paid $25 million quarterly dividends to our shareholders and repurchased approximately 9000 shares.
During the third quarter, we did not have any borrowings under.
On the one year $500 million revolving credit facility for the $200 million secured facility and on October 15th we replaced the one year revolving credit facility with a new three year facility.
Based on our third quarter results, our board of directors approved a 66 regular.
Clearly dividend now, let me turn the call back to Rick.
Thanks, Chris.
We are experiencing slower than average growth rates in the short term. We are pleased with the expansion of our business strategy evident in new products, new protocols and new clients.
We are confident market conditions.
Reporting credit will improve once again, highlighting the benefits of our unique open trading liquidity pool.
New opportunities in China U S treasuries munis post trade and data show promise that valuable revenue growth and diversification in the periods ahead.
<unk> now I would be happy to open the line for your questions.
Thank you, ladies and gentlemen, as a reminder to ask a question Press Star then one on your telephone.
To withdraw your question please.
Again, Thats star one to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Dan Fannon with Jefferies. Your line is open.
Thanks, I wanted to talk about just kind of the market backdrop and understanding the context that you gave around spreads and volatility being very low but could you talk about the competitive framework today as you think about your offerings.
Offering versus others and how that is how that dynamic has changed over the last couple of years.
Sure happy to do so Dan I'll take the first cut at that but.
We're starting to pilot market condition conditions index, and I set a year ago on this call that no one should expect that credit.
Credit trading conditions of last year to continue in.
And definitely I will say exactly the same this year from very low levels of volatility that you also shouldnt expect these levels are very low spreads and volatility to continue either.
We certainly as a more developed business are impacted by what is going on in the overall market.
And you probably saw this quarter that fixed income trading revenue for the large banks was down 15% year over year.
So they are seeing the same impact from the current market conditions than we are.
We are.
When I turned to competition I think there are two big stories. This year one is the.
<unk> been transit transition of dealer to dealer trading from voice.
<unk> brokerage to electronic trading.
And we see that as our competitors. We also see that quite clearly here with dealers initiating more orders into our open trading platform. So that's been one of the themes this year as the dealer.
Rapid dealer business has.
It has moved away from some of the traditional voice brokerage firms that is now very actively deployed on the electronic trading networks, including our own.
It's not it has not been historically been one of our big areas of focus but.
Open trading is for.
Dealer to an entry point for <unk> trading the second is the growth of portfolio trading.
We're portfolio trading has grown from something around two and a half or 3% of trace a year ago to around 5% of trace now and the processing benefits for portfolios are significant.
Given the large number.
Adding items electronic processing is critical to the effort.
It does not today include new forms of liquidity it is pure <unk> trading.
And we are happy to see progress with clients and dealers utilizing our own portfolio trading solution and I think those are the two themes this year on the competitive.
A lineup that I would point out.
And beyond that I think market conditions have been part of the story and we're quite confident they will change over time.
Hey, Dan It's Chris I would just.
Also mentioned that we do see differences in in protocols and different environments, particularly protocol.
In front of us.
Derived price protocols on what I mean by that if you have a price forming market they.
They suffer in a low vol.
And tight spread environments, where you're deriving price from the market.
Things like mid mid market sessions.
Yes.
In a low volatility environment Youll see a gravitation to mid market sessions or portfolio trading that are using end of price.
Portfolio trades in a fast market in a volatile market those solutions actually will lose market share. So overall, we've seen in the past both portfolio.
Set in mid mid market sessions get hurt by volatility they are actually feeling the benefits of the lack of volatility right now.
Thanks.
Helpful and then just.
On the expenses and kind of spending and understanding the change in guidance reflects more of kind.
Trading environment, but in terms of the initiatives and the ongoing kind of development that you have internally any change in terms of the rate of spend on those kind of growth areas and as we think about 2022, which I know is still a bit early I.
Just the context of the environment today, and how youre thinking about kind of these new initiatives and the level of spend that's needed.
Can you kind of address those.
Yes, David this is Christie.
Thank you for the question, we're continuing to work through our 2022 budget and we're going to provide specific guidance on where that will be in the fourth quarter call, but yes, as we talked about today and we talked about in great detail.
Two investor day back in December we had a very long list of opportunities ahead of us and we're looking forward to the next 10 to 15 years. So we are committed to invest in those opportunities and focusing on our trading system enhancements to product and protocol expansion, our geographical footprint expansion.
So I don't think the fact that we've reduced our 2021 guidance has nothing to do with levering back on those investments. It's all to do with the variable operating expenses and as we look to next year just as a guide rail I would say that we're going to expect double digit expense growth.
Consistent with our historical.
<unk> rates.
Great. Thank you.
Thank you.
Our next question comes from the line of Rich Repetto with Piper Sandler Your line is open.
Good morning.
So I guess my first question has.
<unk> brokers.
I guess a follow up on the expenses.
If you did increase head count.
I calculate.
I think five or 6% and.
If I back into the expenses and your <unk>.
Youre going to continue to invest despite the.
Low volatile and slow volume.
Do environment.
But I am getting like 17%, 18% year over year increase.
<unk>.
I guess is it mainly in head count or can you get.
No.
What's behind this.
Guidance, because we can back into what it what it implies for <unk>.
Volume of the year over year do you need to consider the fact that we do have the additional acquisition costs that were not embedded in last year. So I think that apples to apples when you're when you strip out the acquisition related cost you would see a more normalized rate in that.
Double digit.
Yes teens range rich.
And rich the other thing to add into your Formula, which may be complicating things is our conversion to self clearing last year and some of the changes we made globally, particularly in Europe around clearing.
That scale.
Much better into.
Load me too. So when you think about our clearing costs are variable cost of trading on open trading we should start reflecting a much better scale of growth of expenses on that side.
Got it Chris all factored into my Formula next time.
No.
<unk>.
Yes.
Next question, Rick It's really all about.
Environment out there and I don't know what more you can say.
To give us give investors sort of it.
You have a timeframe or what's typical here on the turn but I guess that's one.
Part of the question. The other is this regulatory environment.
It doesn't look like it's so much focused on corporate credit, but yeah.
You've got the FCC talking about.
Our jewelry market review.
And then you get issues in China at least on the on the brokerage side.
Like to hear whether it's added.
And in Europe.
Your efforts there.
In China on the credit side, Okay. Good rich you managed to take a two question limit and make it a five question topic, which is totally fine.
Happy to go through all of those but.
Yes.
The short answer on when the market conditions.
Improved for our business model is we don't know of course, but what we've done is we've looked at the last dozen years or so and we pointed out previously we did have similar conditions in 2014, and 2017 and really two quarters was a long time to sit at those low levels of spreads and low levels.
Credit spread volatility.
So we're already beyond that today with the high grade spread index sitting in a five basis point range. All of 2021, so far so history would say that we.
We will see a change and as I mentioned earlier the ingredients for volatility are.
Clearly increasing.
Certainly from my perspective, what we're seeing.
And wage pressures does not field transitory.
Nor do some of the increases that we're seeing in energy prices. So there certainly are core parts of the inflation story that I think are longer term in nature.
Sure and you still have the central banks, especially in Europe and here in the U S.
Who is buying a lot of the net new issuance of government bonds and even mortgages in the case of the ECB some corporate so.
I would expect that.
Some of.
The excess liquidity that we have in the market will start to reverse relatively soon.
Because you still have a lot of quantitative easing going on and you have certainly above trajectory inflation numbers showing up regularly now in the data.
So that would be one side I think that the market conditions are.
Our improving on the regulatory front.
No.
We see that there is continued talk about greater transparency and fixed income markets, which of course, we wholeheartedly support.
We have no idea why treasury has not moved to increase transparency of the U S treasury market given that it's been.
Right now collects the data.
Just as they do for corporate bonds and high yield. So we would be big proponents of increasing transparency in treasuries were also continually taking steps to increase transparency in European fixed income as Chris mentioned earlier as a byproduct of our growing.
Growing post trade Reg reporting business. So those are very much attached at the hip.
We think we're providing a valuable service back to our clients to provide those tools to them.
Clearly share against <unk> has a very busy agenda in front of him.
See topics like crypto and.
Market payment for order flow a.
Retail equity trading high on the list.
But he does regularly mentioned fixed income transparency and potentially.
Some improvements to the Ats regulatory structure, which we've focused on at film stack.
And then on.
I'm not sure I perfectly understood. The question, but the focus here domestically of course is on making sure that.
Public companies that are registered to trade in the U S are complying with U S accounting and audit rules, which we think makes a lot of sense.
Got it.
Very much Maria.
China. Thank you.
Our next question comes from the line of California.
Your line is open.
Hi, good morning.
Maybe just on the automation slide in your prepared remarks, you noted that the responses per per inquiry.
Continuing to move higher.
I.
Just wondering obviously the environment is pretty benign from that from a credit and credit spread volatility standpoint.
Wondering how much of this kind of increase do you think is secular.
I'm, assuming you think most of it is and I guess.
I'm just wondering if do you think there's kind of a tipping point here where.
Does this go overseas.
Yes, I'm just certain response rate.
All of a sudden customers just feel more comfortable executing.
And executing an automated fashion.
Yes, great question, our automation growth continues its really seen.
Over quarter growth rate, particularly in 2021.
There are times of volatility, where it will grow slower, but it's really based on client adoption and client penetration and what I mean by that were really going after the largest investment fund complexes that need automation to solve multiple tickets.
Trading.
<unk>.
On their desk and so it's really a workflow solution.
<unk> increased penetration is really incur.
Increasing the size that clients are comfortable using a no touch low touch solution for trading credit and we're seeing those increases.
At the client level, so we continue to see growth.
<unk> achieved close to 20% of our trading activity is now through no touch low touch automation solutions.
It has now reached 7% of our total volume we would expect that to.
To continue to grow as clients continue to seek workflow solutions, particularly.
That's a <unk>.
Environment.
There are benefits to open trading as a result of the adoption of things like auto responder, which is one of our key automation tools that we rolled out.
Allowing clients to actually participate in responses to other clients or other.
<unk>.
Requests for price.
It has having an interesting dynamic to.
The overall liquidity pool.
Got it thanks.
Second question is on.
On capital deployment.
The stock's come back in now.
Year to date.
Dealing with the operating environment has been challenging.
Wondering whether you have any appetite to.
To bump up or increase the repurchase program above our stated objective to.
To offset equity dilution or weather.
There's no change there.
Yes. This is christie.
Our capital.
Management strategy the number one priority for us is to invest in the business and the.
The goal of our repurchase program was to offset dilution from employee equity grants and we have satisfied that during the third quarter. So as we look to what's the number one investment opportunity for US we continue.
Immediately thats to deploy our capital and investing in the business and we will revisit our repurchase program in connection with our 2022 budget. So no change in our capital management strategy.
Got it thank you.
Thank you.
<unk>.
As a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line of Michael Cyprus with Morgan Stanley. Your line is open.
Hey, good morning, I, just wanted to circle back to the regulatory landscape I was hoping maybe we could have taken a little bit further on the corporate.
Credit side, and just would be interested in your thoughts there on how you see the landscape evolving on the regulatory side and in particular, there's been some noise around this rule 15.
Two dash 11, just on I think initially it was supposed to apply to equities at least that wasn't thinking and now it seems like it may capture fixed income.
Your requirement that may require dealers since for information about issuers as updated but many issuers are private.
Just curious how much of a challenge do you see that as to fixed income markets. How do you see that playing out and just more broadly any sort of thoughts on the regulatory landscape.
Yes, Thanks, Mike it's a.
Good question, because there's a lot of industry.
The focus going into.
<unk> hundred 11 in fixed income right now and Youre absolutely right. This is a 50 year old rule that was originally designed to prevent fraud and.
In equity OTC markets with retail investors.
And particularly penny stocks.
So it's been around for a long time, it's never really apply to fixed income in.
There was a change in the pronouncement of registered Federal Register from the FCC.
Recently that said that they viewed fixed income is being included in that.
Docs in that 50 year rule and it did come as a surprise because.
There had not been any staff guidance are really discussion about the rule previously and no review period before the change came about.
I think everybody is trying to sort out exactly what it does mean and the commission did provided.
They have implementation until early next year and I know its under discussion and review with market participants and the commission currently.
There are some antiquated terms in there that nobody quite knows how to define currently like what exactly is a quotation medium.
A delay because it does create restrictions for broker dealers and publishing quotes on quotation mediums.
So that that the.
The challenge starts with what exactly is the definition of a quotation medium.
From our perspective, we have a variety of protocols and the ones that are.
Pushed actively used by our clients today, we do not believe would fall subject to the rule.
It's not to say that all protocols would be exempt, but we believe that the ones that are used here primarily would be exempt.
And the other thing that market participants who have gotten comfortable with is that the majority of corporate bonds.
Probably are not going to create an issue and those are from public companies that are issuing bonds because the fields that broker dealers are required to validate that they have the information for readily available for public companies.
Some of the private securities.
140 forays in Reg as funds are still subject to some interpretation.
And that's where the area of focus is now large market areas like Muni and treasuries have been exempted.
I think when all is said and done we're going to be into a very small sliver of the U S market.
That could be impacted by the rule.
Of course, we're hoping that the.
The SEC will respond to some of the industry concerns about really publishing quotes to promote transparency in some cases electronic trading that should be available for all fixed income securities and especially.
For institutional market participants.
So thats, what we know about where it stands right now.
Great. Thank you so much comprehensive response there maybe.
Maybe just a follow up question coming back we're seeing the sort of war for talent in the marketplace. Today, maybe you could just talk a little bit.
About how you're adapting around that give us maybe a little bit of sense around the retention turnover.
Any sort of expectations for growth in head count over the next couple of years clearly you guys have been growing but maybe you could give us a sense around where you're hiring from and are you guys, a net taker or give her to big tech.
Well I'll.
Obviously, we are if you will.
Look at our head count growth rate out investing in talent and.
And investing in particularly tech talent as we grow out our overall footprint and our technology offering tech talent is by far the hardest.
Star Trac and to hold onto we've had.
Historically very good retention here at market access we are quite excited about the retention levels that we have.
But the new work from home flexibility and added a curve ball the overall offering of employment. So we have increased our floor.
Sure agility around where people work to make sure we attract.
The highest and best Tech talent on the market and that's actually been very helpful. In the candidates that we're seeing in the sophisticated talent that were able to acquire across the board we've seen great success.
Flex their graduate programs. So we are hiring directly from colleges across the country and seen some great success with.
With the new players coming into market over the past few years, so great great retention historically tech talent is quite tight and difficult I would say some of the companies.
With have taken a very hard view on on working from office has actually opened up our opportunity to acquire talent from whether it's wall street firms or the large tech companies.
Great. Thank you.
Thank you.
Our next question comes from the line of Patrick O'shaughnessy with Raymond James Your line is open.
Hey, good morning, a follow up question on the competitive landscape.
What have you guys seen in terms of competition from all the all venues that would serve as an alternative to your open trading.
Great question Patrick.
<unk>.
Honestly.
The activity we Coa is.
Efficiency gains and direct client to dealer trading primarily.
And it does not involve much all to all trading in my opinion so.
When you look at the growth indeed activity away.
It's largely suites in session based trading that.
Is <unk>.
I think the exhaust potentially has opportunities to look for liquidity elsewhere, but certainly what shows up on the trace tape is 100% DDD.
Portfolio trading is <unk> today without really additional.
From us as events in the marketplace. So that is a as CDC protocol.
The newer entrants that is getting some media attention at <unk> it looks to us like.
Again this is based on the trace tape and I. Thank all of you have the opportunity to speak with them directly which of course you should.
Part two.
But based on the analysis of what's available in the trades Ats tape it looks to us like the all to all protocol is flat year over year in all of the growth is coming from dealer direct.
At our dealer direct is in early stages right. It's what do we talk to clients the levels that are streamed or not fully.
Executable.
At those levels. So it almost always involves a negotiation on or off system to.
To get to the point, where there is a trade completed so exceeded the trading with negotiation.
According to market participants some of it processed some of electronics so.
When we really think about that seven years of investment that we've made to focus on all of our protocols in all of our products on open all to all trading.
We believe that our leadership there is significant.
That benefit will come through when we see higher levels of volatility and price.
Dispersion just as it did in 2020.
Got it. Thank you and then I wanted to dig into the Chinese bond market opportunity a little bit more as well how are you guys thinking about the tam of that opportunity in.
What else has to take place for you guys to really start to immediately capture some.
Some of that Tam.
Yes. Good question, if you look at the pure China bond connect Volte.
Volumes currently you see the international activity levels at somewhere around six or $7 billion in turnover per day now on the one hand that makes it all.
A large local market already.
With that volume on the other hand, Thats, a very small spot part is less than 10% of the daily market volume and the Chinese government bond market.
Our view shared by others is that that international ownership will grow.
Because it's highly.
Hi, Lee likely that the Chinese waiting in the government bond indices around the World will continue to go up in the years ahead. So those that are measured by government bond global indices will be increasing.
Their ownership in the Chinese government bond market. So.
It's an attractive.
Condition today and in our opinion it will only grow.
Onboarding and OTC markets is time consuming and complicated as always so.
In spite of the fact that we have lots of clients fully integrated to our platform that are ready to trade Chinese government bonds on market access.
<unk> is a documentation and onboarding process that we will go through so it will probably take US a couple of quarters to get to critical mass where most of our clients can take advantage of that new offering.
Great. Thank you.
Thank you.
Our next question comes from.
Alex.
Your line is open.
Hi. Thank you this is <unk> filling in for Alex.
Hi, good capture rate was down sequentially and I know you cited some reasons like shorter duration rising yields on dealer moving from variable to fixed but can you provide us more color.
On the line as to which of these three factors played a bigger role.
The decline in capture rates and how should we think of the jumping off point.
For <unk>.
Yes. This is Chris GB the high grade fee capture is theres a lot of variable factors that contribute to the month to month.
Year over year variability and as you pointed out.
Years to maturity.
Interest rate environment, the dealer fee plan mix all of those are main contributors in those three items are actually what contributed to the year over year increase in if you had to prioritize the number one.
Or was the rising interest rate environment, you saw the 10 year treasuries spreads gap out which was presented on our slide four market conditions deck.
Rick pointed out there was shorter years to maturity and <unk>.
Referenced in my prepared remarks that we had a number of dealers migrating from.
A fixed fee plan from a variable <unk> to a fixed fee plan and all of that collectively it's probably a 40 30 30 split on the composition of what was contributing to that $35 year over year decline.
Got it yes.
Helpful. Thank you.
Perfect. Thank you.
I'm showing no further questions in the queue I would now like to turn the call over to Rick Mcvey for closing remarks.
Thanks, very much for joining us today, and we look forward to an update again next quarter.
Ladies.
That concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Okay.
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Okay.
And Jim.
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Yes.
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Ladies and.
And then thank you for standing by.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key at any time.
Just a reminder, this conference call is being recorded on October the 20th 2021.
I would now like to turn the call over to David Cresci Investor Relations manager at market access. Please go ahead Sir.
Good morning, and welcome to the market access third quarter 2021 conference call.
As for the call, Rick Mcvey, Chairman and Chief Executive Officer.
A review of the highlights for the quarter and international growth.
Christy Shannon President and CEO.
We will discuss the product expansion and automation.
And then Chris drove the Chief Financial Officer.
The financial results.
Before I turn the call over to Rick Let me remind you that today's call may include forward looking statements.
These statements represent the companys belief regarding future events that by their nature are in.
The companys actual results and financial condition may differ materially from what is indicated in those forward looking statements.
For a discussion of.
And factors that could affect the company's future results.
Please see the description of risk factors in our annual report on Form 10-K for the year ended December 31 2020.
I would also direct you to read the forward looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning and is now.
Now available on our website.
Now, let me turn the call over to Rick.
Good morning, and thank you for joining us to review our third quarter 2021 results.
Q3, total revenue was $162 million down 1% year over year operating income was $74 million.
And operating margin was 46%.
EPS of $1 52 was down 15%, reflecting our ongoing investments in new data trading and post trade solutions.
Credit market trading faces headwinds currently with a combination.
Storage really low credit spreads and credit spread volatility these.
These conditions have persisted over the last three quarters in history suggests they will revert to the mean over time.
Our international business is showing strong growth through volume and market share gains in euro bonds and.
One of his markets post trade services and product expansion.
We are pleased to add Chinese government bonds to our offering through China bond connect and CIB and direct.
Slide three provides an update on market conditions.
Market volumes have been neck.
Emerging impacted by the current low levels of bond yields credit spreads and volatility.
During these periods price dispersion of bids and offers shrinks temporarily.
Our liquidity and pricing advantage comes through most clearly at times of normal to high spreads and volatility.
And we believe that there are many factors that could positively impact bond volatility in the periods ahead.
As yields have started to increase from historically low levels average years to maturity traded on our system has come down about 6%.
Average years to maturity is one of the factor.
Or is that causes fluctuations in our high grade fee capture.
We are watching the emerging news on inflation supply chain disruptions labor shortages and the China real estate market closely.
We believe that it is likely that we will see.
Tapering of Central Bank.
Bond buying in the periods ahead, which is likely to lead to more normalized yield levels and volatility and bond markets around the world.
Slide four highlights our growth in international markets.
In spite of the low levels of yields around the world, we are showing strong growth in.
Our emerging market and euro bond product areas.
<unk> volumes were up 22% year over year against a backdrop of lower market volumes.
Our estimated market share reached new highs in euro bonds during the quarter.
Emerging market volumes were up 19% with estimates.
Estimated market volumes up 1%, reflecting share gains in global EM debt trading.
We are seeing strong growth rates in both hard currency EM bonds denominated in dollars euros and yen as well as local market trading.
The addition of China increases.
<unk> local market coverage to 28 local markets across Latin America, Sumeia and APAC regions.
This quarter, we set new records in global active trading clients and international client firms.
This expands our broad client network and creates additional cross.
Cross selling opportunities.
We are underway with client on boarding for China bond connect and expect an active quarter ahead.
As the second largest government bond market in the World China provides a meaningful increase in our total market opportunity.
Now, let me turn the call over to Chris.
<unk> provide an update on product expansion and automation.
Thanks, Rick Slide five provides an update on open trading and product expansion.
Open trading continues to support credit market liquidity by offering all participants a chance to engage with the market in the third quarter over 25000 orders.
And 13 billion in notional value was available daily through our open trading marketplace.
Dealers have also realized the benefits of open trading and are increasingly seeking anonymous all to all liquidity.
Dealer RF Q volume grew 20% year over year to $59 billion during the quarter.
The increase.
Increased diversity of participation continues to drive cost saving opportunities. Despite compressed credit market spreads client saved an estimated $121 million in transaction costs during the quarter due to price improvements delivered by open trading.
The acquisitions of liquidity edge of Muni.
Highlight our investment in new markets and the growing application of open trading across the fixed income landscape.
910 billion of U S. Treasury trading volume was executed on market access in the quarter up 22% from the prior year, we have made several enhancements to our rates trading offering.
Brokers at months, including our launch of all to all click to trade functionality and extending <unk> trading capabilities for client to dealer orders. The expansion of open trading for U S. Treasuries as a critical priority for us and aligns with recent G 30 recommendations for an all to all marketplace in treasuries.
Municipal bond trading on market access grew 92% to $5 4 billion in the quarter, an additional $17 4 billion in volume was conducted through Muni brokers are interdealer electronic platform, which we currently do not include in our Muni bond volume totals integration efforts of the Muni broker platform.
Some are well underway and we are targeting the fourth quarter for the initial phase of our integration of the platform into our open trading network. We believe these investments in government bond in municipal bond trading solutions will add approximately 25% to our long term addressable market opportunity.
Slide six highlights the growing momentum of automation in credit trading automated trading on market access reached new records in the quarter growing to 42 billion in volume and over 224000 trades 115 firms leveraged our automated trading protocols in the quarter up from 86 last year.
Today auto ex represents 19% of total trade count and 7% of our total volume.
The use of dealer algorithms is continuing to grow on the platform with approximately $4 4 million algo responses in the third quarter up 17% from the same period last year the growth of dealer.
Algorithms and our automated automated trading tools are driving a steady increase in the average number of responses on market access in the third quarter. We saw an average of seven responses per inquiry first five eight in the third quarter of 2020. This demonstrates enhancements in our liquidity as a result of the increasing.
<unk> engagement from our diverse investor and dealer community.
Slide seven demonstrates the growth from diversifying our business initiatives the acquisition of regulatory reporting hub helped drive total post trade services revenue to $9 4 million in the quarter up 101% year over year. The addition of continental.
<unk> European clients to our suite of regulatory reporting services through this acquisition has further bolstered our unique data solutions through these types of post trade data sources, we have seen sizable benefits to our data solutions like access all composite plus both access all in composite plus helped drive our information.
Formation services revenue to $9 6 million in the quarter, which is up 13% year over year combined information services and post trade revenue now account for 12% of total revenues up from 8% in the third quarter of 2020.
Following enhancements to our portfolio trading solution in May we have seen significant.
And traction with our new functionality 54 unique investor firms in 13 dealers were active since may and drove record volume of $8 9 billion in the quarter. We believe our active client group is the same group of participants active in the market wide portfolio trading today.
Activity in our session based.
Protocol mid <unk> reached record volumes in the quarter of $3 4 billion, we plan on expanding mid Aix beyond eurobonds to use credit later this year.
Now, let me turn the call over to Chris to provide an update on our financials.
Thank you Chris Slide eight provides a summary of our quarterly earnings performance.
Third quarter revenue was $162 million down 1% from the prior year, the 5% decline in commissions was offset by the 100% uplift in post trade revenue.
The increase in post trade revenue includes $3 4 million of trade reporting revenue generated from new clients added through the regulatory reporting.
<unk> hub acquisition.
Information services revenue was up 13% year over year due to new data sales and the positive impact of foreign exchange due to the weaker U S dollar.
The annual contract value for new recurring data contract sales for the first nine months of 2021 has exceeded all of.
2020.
The sequential pick up in other income was due to foreign currency transaction gains.
Excluding E rate activity, such as foreign exchange gains and losses, we anticipate the quarterly run rate for the other income expense line to be about $1 million of expense.
The effective tax rate was 22.
2% for the quarter and 21, 6% year to date.
Slide nine provides an overview of commission revenue trading volumes and fees per million.
The 9% decline in variable transaction fees was attributable to lower U S credit trading volume and lower overall fee cap.
To.
The 17% decline in U S high grade fees per million was mainly due to shorter duration driven by the increase in bond yields and a decrease in the average years to maturity of bonds traded on the platform.
We also experienced some dealer movement to a fixed fee plan from an all variable fee plan.
Capture and this explains the increase in U S high grade distribution fees as fixed fee plans provide for higher fixed distribution fees, but lower transaction fees.
Other credit fees per million was lower year over year due to a higher mix of emerging market and euro bond volume that command lower fees.
The.
Quarter 2021, other credit distribution fees includes one $1 2 million of Muni brokers subscription and license fees.
Slide 10 provides expense detail.
Third quarter expenses were up 16% year over year and include five.
The $30 million of operating expenses amortization of acquired intangibles and nonrecurring integration costs associated with the regulatory reporting hub and muni brokerage acquisitions.
If we exclude these acquisition costs expenses were up eight 4%.
The increase in compensation and benefits.
$5 reflects higher salary and benefit expense as we continue to add employees to support our product and geographical expansion.
The $4 $9 million increase in depreciation and amortization expense includes $2 5 million of acquired intangible amortization expense from acquisition.
Benefits and higher software development costs as we continue to invest in trading system enhancements.
M&A integration costs and higher recruiting fees contributed to the increase in professional and consulting fees year over year.
The 32% declining clearing costs reflect transaction cost savings.
From our strategic decision to convert to a self clearing model back in August 2020.
We are updating our full year 2021 expense guidance range to 360 million to $365 million down from a range of $370 million of $386 million.
The updated expense guidance.
Guidance reflects among other items lower incentive compensation and variable clearing costs.
Slide 11 provides an update on cash flow and capital management.
As of September 30, our cash and investments were $458 million and our trailing 12 month free.
Free cash flow was $320 million.
During the quarter, we paid $25 million quarterly dividends to our shareholders and repurchased approximately 9000 shares.
During the third quarter, we did not have any borrowings under one year $500 million revolving credit facility for the $200 million.
Secured facility and on October 15, we replaced the one year revolving credit facility with a new three year facility.
<unk> on our third quarter results, our board of directors approved a 66%.
Our regular quarterly dividend now, let me turn the call back to Rick.
Thanks, Chris.
Chris while we are experiencing slower than average growth rates in the short term. We are pleased with the expansion of our business strategy evident in new products, new protocols and new clients.
We are confident market conditions and credit will improve once again, highlighting the benefits of our unique open trading.
Before.
New opportunities in China U S treasuries munis post trade and data show promise that valuable revenue growth and diversification in the periods ahead.
Now I would be happy to open the line for your questions.
Thank you.
Liquidity, ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.
To withdraw your question press the pound Keith again, Thats Star one to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Dan Fannon with Jefferies. Your line is open.
Thanks, I wanted to talk about just kind of the market backdrop.
We're standing the context that you gave around spreads and volatility being very low but could you talk about the competitive framework today as you think about your offering versus others and how that is how that kind of dynamic has changed over the last couple of years.
Sure happy to do so Dan I'll take the first cut at that.
We're starting to pilot.
<unk> conditional conditions index, and I said, a year ago on this call that no one should expect the credit trading conditions of last year to continue.
Indefinitely, I will say exactly.
This year from very low levels of volatility that you also shouldnt expect these levels are very low spreads and volatility to continue either and.
And we certainly as a more developed business are impacted by what is going on in the overall market and you probably saw this quarter that fixed income trading revenue for the large banks was down 15.
<unk> percent year over year.
So they are seeing the same impact from the current market conditions than we are.
That we are.
When I turned to competition I think there are two big stories. This year. One is the rapid transit transition of dealer to dealer trading from voice.
Based brokerage to electronic trading.
And we see that as our competitors, we also see that quite clearly here.
With dealers initiating more orders into our open trading platform. So that's been one of the themes. This year as the dealer to dealer business has.
<unk> has moved away from some of the traditional voice.
Which firms it is now very actively deployed.
On the electronic trading networks, including our own.
It's not it has not been.
Storage really been one of our big areas of focus but open trading is providing an entry point for <unk> trading. The second is the growth of portfolio trading.
We're portfolio trading has grown from something around two and a half or 3% of trace a year ago to around 5% of trace now and the processing benefits for portfolios are significant.
So given the large number of line items electronic processing is critical to the effort it does not today.
They include new forms of liquidity it is pure <unk> trading.
And we are happy to see progress with clients and dealers utilizing our own portfolio trading solution and I think those are the two themes. This year on the competitive front that I would point out.
And beyond that I think market conditions have been part.
And we're quite confident they will change over time.
Hey, Dan It's Chris I would just.
Also mentioned that we do see differences in in protocols in different environments, particularly protocols that involve.
Derived price protocols and what I mean by that if you have a price.
The storming market there.
They suffer in a low vol.
And tight spread environments, where you're deriving price from the market.
Things like mid mid market sessions.
In a low volatility environment Youll see a gravitation to mid market.
<unk> or portfolio trading that are using and have price.
Portfolio trades in a fast market in a volatile market those solutions actually will lose market share. So overall, we've seen in the past both portfolio trading in mid mid market sessions get hurt by volatility there.
Actually feeling the benefits of the lack of volatility right now.
Thanks, that's helpful. And then just on the expenses and kind of spending and understanding the change in guidance reflects more of kind of the current environment, but in terms of the initiatives and the <unk>.
Ongoing kind of development that you have internally.
Session any change in terms of the rate of spend on those kind of growth areas and as we think about 2022, which I know is still a bit early.
Just the context of the environment today, and how youre thinking about kind of these new initiatives and the level of spend that's needed to kind of address those.
Yeah, Dan This is Christie.
Thank you for the question.
We're continuing to work through our 2022 budget and we're going to provide specific guidance on where that will be in the fourth quarter call, but yes, as we talked about today and we talked about in great detail on Investor day back in December we have a very long list of opportunities.
<unk> ahead of us and we're looking forward to the next 10 to 15 years. So we are committed to invest in those opportunities and focusing on our trading system enhancements to product and protocol expansion our geographical footprint expansion. So I don't think the fact that we've reduced our 2021 guidance has nothing.
Opportunity with levering back on those investments, it's all to do with the variable operating expenses and as we look to next year just as a guide rail I would say that we're going to expect double digit expense growth consistent with our historical growth rates.
Great. Thank you.
Thank you.
Our next question comes from the line of Rich Repetto with Piper Sandler Your line is open.
Good morning, guys.
I guess my first question has to do with.
I guess a follow up on the expenses.
You did increase.
I calculate by I think five or 6%.
<unk>.
If I back into the expenses and you said that youre going to continue to invest despite the.
Low volatility slow volume environment.
But I am getting like 17%, 18% year over year increase.
<unk> had in <unk> I guess is it mainly in head count or can you get.
What's behind this.
Guidance, because we can back into what it what it implies for <unk>.
Yes, so year over year, you would need to consider the fact that we do have the additional acquisition.
Costs that were not embedded in last year, So I think that apples to apples when you're when you strip out the acquisition related cost.
You'd see a more normalized rate in that.
Double digit low teens range rich.
And rich the other thing to add.
Formula, which maybe complicating things is our conversion to self clearing last year and some of the changes we made globally, particularly in Europe around clearing that scales.
Much better into 'twenty two so when you think about our clearing costs are variable cost of trading on open.
And do you think we should start reflecting a much better scale.
Growth of expenses on that side.
Got it.
This all factored into my Formula next time.
No.
Next question Rick.
Really all about.
Trade out there and I don't know what more you can say.
To give us give investors sort of it.
Either timeframe or whats typical here on the turn but I guess, that's one part of the question. The other is this regulatory environment.
It doesn't look like it's.
So much focused on corporate credit but.
You've got the FCC talking about.
Our jewelry market review.
And then you've got issues in China at least on the on the brokerage side.
Like to hear whether that impacts.
Sure.
Your efforts there.
In China on the credit side.
Okay. Good rich you managed to take a two question limit and make it a five question topic, which is totally fine, but happy to go through all of those but.
The short answer on when the market conditions improve for our business model is we don't know of course, but what we've done is we've looked at the last dozen years.
So we pointed out previously we did have similar conditions in 2014, and 2017 and really two quarters was a long time to sit at those low levels of spreads and low levels of credit spread volatility.
So we're already beyond that today with the high grade.
<unk> read index sitting in a five basis point range all of 2021, so far so history would say that we will see a change and as I mentioned earlier the ingredients for volatility are clearly increasing.
Certainly from my perspective, what we're seeing.
And wage pressures does not feel transitory nor.
Nor do some of the increases that we're seeing in energy prices. So there are certainly are core parts of the inflation story that I think are longer term in nature and you still have the central banks, especially in Europe and here in the U S buying a lot of the net new issue.
So government bonds and even mortgages in the case of the ECB some corporate so.
I would expect that some of the excess liquidity that we have in the market will start to reverse relatively soon.
As you still have a lot of quantitative easing going on and you have certainly above trajectory.
Issuing inflation numbers showing up regularly now in the data.
That would be one side I think that the market conditions are improving on the regulatory front.
We see that as there is continued talked about greater transparency and fixed income markets, which of course, we wholeheartedly.
Lease support.
We have no idea why treasury has not moved to increase transparency of the U S. Treasury market given that it's been right now collects the data.
As they do for our corporate bonds and high yield so we would be big proponents of increasing transparency in treasuries were also.
Also continually taking steps to increase transparency in European fixed income as Chris mentioned earlier as a byproduct of our growing post trade Reg reporting business. So those are very much attached at the hip and we think we're providing a valuable service back to our clients to provide those tools to them.
Clearly share against or it has a very busy agenda in front of him.
We see topics like crypto and equity market payment for order flow.
Retail equity trading high on the list, but he does regularly mentioned fixed income transparency and.
Potentially some improvements to the Ats regulatory structure, which we've focused on at firm stack.
And then on China, I'm not sure I perfectly understood. The question, but the focus here domestically of course is on making sure that.
Public companies that are registered to trade in the U S are complying with U S accounting and audit.
Input rules, which we think makes a lot of sense.
Got it.
You heard much more right.
Thank you.
Our next question comes from the line of California, with K B W. Your line is open.
Hi, good morning.
Audio on the automation slide in your prepared remarks, you noted that the responses per per inquiry.
Continuing to move higher.
I guess I'm just just wondering obviously the environment is pretty benign from that from a credit and credit spread volatility standpoint.
I'm just wondering how much of this kind of increase do you think is the.
Thank you Sir.
I'm, assuming you think most of it is and I guess.
I'm just wondering if do you think there's kind of a tipping point here.
Does this get over a certain response rate.
All of a sudden customers just feel more comfortable executing.
And executing an automated fashion.
Yes, great.
Second our automation growth continues its really seen a quarter over quarter growth rate, particularly in 2021, there are times of volatility where it will.
Grow slower, but it's really based on client adoption and client penetration and what I mean by that were really.
Question is after the largest investment fund complexes that need automation to solve multiple tickets.
Trading that they have on their desk and so it's really a workflow solution. The increased penetration is really.
Increasing the size that clients are comfortable.
Going a no touch low touch solution for trading credit and we're seeing those increases at.
At the client level, so we continue to see growth.
Why it's achieved.
20% of our trading activity is now through no touch low touch automation solutions.
It's now reached <unk>.
7% of our total volume, we would expect that to.
To continue to grow as clients continue to seek workflow solutions, particularly in a <unk> environment.
There are benefits to open trading as a result of the adoption of things like auto responder, which is one.
Use the automation tools that we rolled out its allowing clients to actually participate in responses to other clients or other dealers requests.
Requests for price, so that's having an interesting dynamic to.
The overall liquidity pool.
Got it thanks.
Second question is.
On capital deployment.
The stock's come back in now.
Year to date.
The operating environment and challenging.
Just wondering whether you have any appetite to bump up or increase the repurchase program above the stated objective to to offer.
But any dilution or weather.
There's no change there.
Yes. This is christie.
Our capital management strategy the number one priority for us is to invest in the business and the.
The goal of our repurchase program was to offset dilution from employee.
<unk> equity grants and we have satisfied that during the third quarter. So as we look to what's the number one investment opportunity for US we continue to believe that's to deploy our capital and investing in the business.
And we will revisit our repurchase program in connection with our 2022 budget.
Equity so no no change in our capital management strategy.
Got it thank you.
Thank you.
As a reminder, ladies and gentlemen, Thats star one to ask the question.
Our next question comes from the line of Michael Cyprus with Morgan Stanley. Your line is open.
Alright, good morning, I, just wanted to circle back to the regulatory landscape I was hoping maybe we could take it a little bit further on the corporate credit side and just would be interested in your thoughts there and how you see the landscape evolving on the regulatory side in particular, there's been some noise around this rule 15 two.
Two dash 11 to Stan I think initially it was supposed to fly to equities at least that wasn't thinking and now it seems like it may capture fixed income requirement that may require dealers to ensure information about issuers as updated but many issuers are private so I just just curious how much of a challenge do you see that as to fixed income markets. How do you see that playing.
And just more broadly any sort of thoughts on the regulatory landscape.
Yes, Thanks, Mike it's a good.
Good question, because there's a lot of industry focus going into <unk>.
<unk> hundred 11 fixed income right now and Youre absolutely right. This is a 50 year old rule that was originally designed to prevent.
Fraud and.
<unk> equity OTC markets with retail investors.
And particularly penny stocks so.
It's been around for a long time, it's never really apply to fixed income in.
There was a change in the pronouncement and registered.
Federal Register from the FCC.
Recently that said that they viewed fixed income is being included in that.
That 50 year rule and it did come as a surprise because their.
There had not been any staff guidance are really discussion about the rule previously and no review period before.
The change came about.
And I think everybody is trying to sort out exactly what it does mean and the commission did provide a delay of implementation until early next year and I know its under discussion and review with market participants and the commission currently.
Sure.
There are some antiquated terms in there that nobody quite knows how to define currently like what exactly is a quotation medium.
Because it does create restrictions for broker dealers and publishing quotes on quotation mediums.
So that the.
The challenge starts with what.
Secondly is the definition of a quotation medium.
From our perspective, we have a variety of protocols and the ones that are most actively used by our clients today, we do not believe would fall subject to the rule.
It's not to say that all protocols would be exempt, but we believe that the ones that are used here primarily.
That would be exempt.
And the other thing that market participants who have gotten comfortable with is that the majority of corporate bonds.
Probably are not going to create an issue and those are from public companies that are issuing bonds because the fields that broker dealers are required to validate.
But they have the information for readily available for public companies.
Some of the private securities.
<unk> hundred 40 forays in Reg as funds are still subject to some interpretation.
That's where the area of focus is now large market areas.
<unk> and treasuries have been exempted.
I think when all is said and done we're going to be into a very small sliver of the U S market that could be impacted by the rule.
Of course, we're hoping that the.
The SEC will respond to some of the industry concerns about really publishing.
Like notes to promote transparency in some cases electronic trading that should be available for all fixed income securities and especially for institutional market participants.
So that's what we know about where it stands right now.
Great. Thank you so much comprehensive response there.
Sure.
Maybe just a follow up question coming back we're seeing the sort of war for talent in the marketplace. Today, maybe you could just talk a little bit about how you're adapting around that give us maybe a little bit of sense around the retention turnover.
Sort of expectations for growth in head count over the next couple of years clearly you guys have been growing.
But maybe you could give us a sense around where you are hiring from and are you guys, a net taker or give her to big Tech.
Well I'll start.
Obviously, we are if you look at our head count growth rate.
Investing in talent and.
And investing in particularly tech talent.
As we grow out our overall footprint and our technology offering.
Talent is by far the hardest.
To attract and to hold onto we've had.
Historically very good retention here at market access we are quite excited about the retention levels that we have.
But.
Growing work from home flexibility is an added curve balls. The overall offering of employment. So we have increased our flexibility around where people work to make sure we attract.
The highest and best Tech talent on the market and Thats actually been very helpful.
And the candidates that we're seeing in the sophisticated talent that were able to acquire across the board. We've seen great success with our graduate programs. So we are hiring directly from colleges across the country and seen some great success with the new players coming into market over the.
The new the past two years, so great great retention historically tech talent is quite tight and difficult I would say some of the companies that have taken a very hard view on working from office has actually opened up our opportunity to acquire talent from whether it's wall street firms or.
The large tech companies.
Great. Thank you.
Thank you.
Our next question comes from the line of Patrick O'shaughnessy with Raymond James Your line is open.
Hey, good morning, a follow up question on the competitive landscape, what do you guys.
<unk> seen in terms of competition from all the all venues that would serve as an alternative to your open trading.
Great question Patrick.
Quite honestly.
The activity we Coa is.
Efficiency gains and direct client to dealer trading primarily.
It does not involve much all to all trading in my opinion so.
When you look at the growth in DVD activity away from us, it's largely sweeps and session based trading that.
Is pure DDD.
Think the exhaust potentially has opportunities to look for liquidity elsewhere, but certainly.
And at what shows up on the trace tape is 100% <unk>.
Portfolio trading is <unk> today without really additional participants in the marketplace. So that is a C.
<unk> protocol.
Yes.
The newer entrants that.
Getting some media attention of treatments.
Certainly.
It looks to us like.
And again this was based on the trace tape and I. Thank all of you have the opportunity to speak with them directly which of course you should do.
But based on the analysis of what's available in the trace Ats tape it looks to us like the all to all protocol is flat year over year in all of the growth is coming from dealer.
<unk>.
At our dealer direct is in early stages right. It's what do we talk to clients the levels that are streamed or not fully executable.
At those levels. So it almost always involves the negotiation on or off system.
To get to the point, where there is a trade completed.
<unk> trading with negotiation.
According to market participants some of it processed some of electronics so.
When we really think about that seven years of investment that we've made to focus on all of our protocols in all of our products on open all to all trading.
So I believe that our leadership there is significant.
And that benefit will come through when we see higher levels of volatility and price dispersion just as it did in 2020.
Got it thank you and then.
Wanted to dig into the Chinese bond market opportunity a little bit more.
Well how are you guys thinking about the Tam of that opportunity and what else has to take place for you guys to really start to immediately capture some of that Tam.
Yes. Good question, if you look at the pure China bond connect.
Volumes currently you see the.
National activity levels at somewhere around six or $7 billion in turnover per day now on the one hand that makes it a large local market already.
That volume on the other hand, Thats, a very small part of less than 10% the daily market volume and the Chinese government bond.
<unk> market.
Our view shared by others is that that.
<unk> International ownership will grow.
Because it is highly likely that the Chinese waiting in the government bond indices around the world will continue to go up in the years ahead. So those that are measured by.
By government bond global indices will be increasing.
Their ownership in the Chinese government bond market. So it's an attractive addition today and.
Our opinion it will only grow.
Onboarding and OTC markets is time consuming and complicated as always.
So in.
In spite of the fact that we have lots of clients fully integrated to our platform that are ready to trade Chinese government bonds on market access there is a documentation and onboarding process that we will go through so it will probably take US a couple of quarters to get to critical mass where most of our clients can take advantage.
Of that new offering.
Great. Thank you.
Thank you.
Our next question comes from the line of Alex <unk> with Goldman Sachs. Your line is open.
Hi. Thank you this is <unk> filling in for Alex.
Hi, good capture rate was down sequentially.
And I know you cited some reasons like shorter duration rising yields on dealer moving from Radian.
Fixed but can you provide us more color as to which of these three factors played a bigger role.
For the decline in capture rates and how should we think of the jumping off point.
For <unk>.
Yes. This is Chris G. The the high grade fee capture is theres a lot of variable factors that contribute to the month to month or.
Year over year variability and as you pointed out.
Years to maturity.
Interest rate environment, the dealer fee plan mix all of those.
Contributors in those three items are actually what contributed to the year over year increase in if you had to prioritize.
The number one factor was the rising interest rate environment, you saw the 10 year treasuries spreads gap out which was presented on our slide four the market condition stack rigs.
<unk> pointed out.
Or miss shorter years to maturity and.
Referenced in my prepared remarks that we had a number of dealers migrating from a fixed fee plan from a variable <unk> to a fixed fee plan.
And all of that collectively.
Probably a 40 30 30 split on the competition.
The erosion of what was contributing to that $35 year over year decline.
Got it yeah. That's helpful. Thank you.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call over to Rick Mcvey for closing remarks.
Competition much for joining us today, and we look forward to an update again next quarter.
Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.