Q4 2021 Tradeweb Markets Inc Earnings Call
Care and frontline workers and scientists continue to adapt to the changing environment.
Uncertainty and change create opportunity.
As I highlighted last year at this time, we were given the opportunity to help our clients seamlessly shift their workflows to a virtual street environment and to demonstrate how electronic trading solutions could be mutually beneficial.
<unk> importance is the critical marketplace was evident in March 2020, when we helped our clients trade a record breaking one trillion and average daily volume as volatility skyrocketed.
Fast forward to 'twenty, one it's been an amazing to see us record seven months during which trading activity.
<unk> surpassed March 2020, despite the extraordinary global monetary policy that muted volatility across asset classes.
This is not only a reflection of the acceleration in electronic vacation, but also a testament to the relentless innovation of our business leaders and our 350, plus technologists, who engage with our clients every day.
It is also a reflection of our deliberate strategy crafted over 25 years.
We've dynamically made investments across asset classes clients and protocols to advance market structure and the overall electronic trading ecosystem.
Today, we are not reliant on one asset class client type or geography.
And we continue to build an increasingly diversified business that leverages the investments we've made over time.
This connected dots strategy is still early in its evolution and we believe it will continue to be an important differentiator as we help our clients navigate the trade lifecycle.
Turning to slide four the strategy I. Just described was on display as we reported the strongest fourth quarter in our history, hitting new market share and volume records across a number of products specifically.
Specifically revenues of nearly $277 million during the fourth quarter and 21 were up 18, 8% year on year on a reported basis and 19, 9% on a constant currency basis.
The revenue growth and the resulting scale translated into improved profitability year on year.
Fourth quarter, adjusted EBITDA margin expanded by 144 basis points to 56%.
Turning to slide five this quarter was marked by strong performance across many of our asset classes with rates and credit accounting for 57% and 33% of our revenue growth respectively.
Specifically rates posted another strong quarter, driven by healthy growth across U S treasuries and swaps.
In cash rates.
Revenues were partially helped by a healthy central bank issuance, which continues to fuel government bond trading and the addition of MSI.
Swaps produced another quarterly revenue record with strong market share growth, while mortgage revenues declined slightly.
Credit posted another strong quarter, 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.
Money market performance was fueled by organic growth in institutional repo that overcame continued rate headwinds in the retail sector.
Finally market data saw growth across our API and proprietary data products.
Turning to slide six our strong fourth quarter capped off a record year in 2021.
Record volumes across most asset classes translated into 26% and 19, 3% revenue growth on a reported and constant currency basis, respectively.
As a result, we recorded our 22nd consecutive year of record revenues.
Breaking through the $1 billion revenue milestone for the first time.
The scale generated by our strong top line results drove approximately 192 basis points of adjusted EBITDA margin expansion.
4% earnings growth.
And 31% free cash flow growth.
And as our growth initiatives continue to scale, we maintained our tradition of consistent and focused organic investment.
2021 was a very busy year.
And U S. Treasuries, we closed our acquisition of NASDAQ fixed income.
Continued to onboard new clients and enhance our streaming offering.
And IRS, we expanded our client base in APAC, and our product offering with four new EM currencies and.
In credit we continue to drive innovation as we rolled out multi client net spotting and enhanced our global portfolio trading offering and all trade functionality.
We also expanded our China bonds partnership with <unk>, that's outbound trading.
And money markets, we added new repo collateral types and enhanced our Tri party repo offering.
We believe our investments have not only positioned us well for the future, but also help to make 21, another banner year for trade web.
Moving to slide seven 2021 continued the streak of double digit revenue growth.
That we have worked hard to deliver for multiple years now.
The diversity of our business was also on display.
Today, while the majority of our revenue is still come from rates. The majority of our growth actually comes from our other businesses.
Credit was another highlight accounting for 43% of our revenue growth in 2021.
Regionally, we continue to see strong growth in our international business.
Which has grown revenues at an average of 21% since 2016 with growth accelerating to 25% in 2021.
Our international revenues are currently anchored by our European business.
We believe Asia and more broadly emerging.
Markets will continue to become a bigger component of our international growth story over the next few years.
We believe we have room to grow our network and cross sell our products.
Broadly speaking our <unk> strategy has been centered on playing to our strengths.
We believe we have a strong position in IRS and CBS are.
A foundation that we have leverage to launch and further expand our presence in the mris and Cts.
<unk> volumes were up over 200% in 'twenty one.
And we're seeing early but substantial growth in <unk>. We have also leveraged our leading position in China and portfolio trading to expand into cash.
Cash credit.
We're still early in this journey and we will update you as things progress.
Relentless innovation has been critical to our success.
Throughout our history, we apprised being first which requires constant investment.
In the last six years, we've invested over $400 million in technology to help shape the future of electronic markets growing those investments at an average of 12% since 2016.
And as our investments bear fruit EBITDA margins have expanded nicely.
Yes.
Looking ahead, we expect 'twenty to be another investment year.
While our investments remain heavily concentrated in rates and credit we are optimistic about the durability of our growth across the business.
Given our market share gains pipeline of innovations and collaborative spirit that continues to be the north star for the company.
Moving on to slide eight let me provide a brief update.
On our four main focus areas.
Our interest rate swaps and credit business saw a continuation of their multi year growth story.
Both businesses saw record share in the fourth quarter as our efforts to increase client engagement with innovative solutions continues to pay off.
With respect to credit it is especially encouraging to see our success now spread to high yield.
Longer term, we remain excited by the growth potential for both these businesses as our growth initiatives scale electronic vacation increases in the rate cycle turns.
Billy will provide more color on the quarter and our strategy momentarily.
Turning to U S treasuries.
Another rates product that continues to perform well with volumes up 40, 47% year on year.
Led by both the institutional and wholesale business and aided by our <unk> acquisition.
Market share rose to 18, 7% of the U S Treasury market.
The backdrop of healthy issuance continues to support the institutional channel and the pickup in volatility aided the wholesale channel.
Our share gains have been driven by existing clients doing more business and making further inroads into the <unk> market.
Yes.
Looking ahead, we continue to invest in driving the adoption of early stage institutional streaming protocols like trade web plus.
The wholesale and <unk> integration is going according to plan.
We've made progress on migrating several back and middle office functions related to trade and billing and were currently preparing for the broker dealer consolidation.
Finally within equities institutional Etfs produced a healthy quarter with average daily volumes up 32% 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 32%.
Our other initiatives to expand beyond our flagship ETF franchise are also bearing fruit with momentum continuing in equity derivatives, where revenues were up double digit year on year.
Looking forward, we believe we remain well positioned to benefit from the continued growth in Etfs globally.
And as our growth initiatives scale.
We believe the secular trends powering the growth of electronic trading remain intact.
As we exited 21 and in the first month of this year. We also saw the return of debate and financial markets.
We believe we are in a great position to help our clients as they navigate a higher volatility environment, given our global footprint and our ability to stitch together different asset classes and different liquidity pools.
With that I'll turn it over to Billy.
Thanks, Lee as we build markets trade web we think deeply about all the pieces of the puzzle. Most important piece is how our product leaders and technologists engage and collaborate with clients to create win win solutions relationships have always been important in fixed income and recognizing that has allowed us to lead and have interesting and kandi cant.
<unk> about the evolution of trading from a relationship business to an experienced this empowering our clients with innovative technology to complement their relationships. So to date, so that they can deliver or discover the best prices has been key ultimately the constant challenge of creating a richer trading experience has been tabled.
Stakes to the way we compete.
Our strategy is working and clients have responded to our engagement by pushing credit and swaps volumes to record highs at trade level.
Turning to slide nine for a closer look at credit.
We produced another very strong quarter with both IAG and high yield hitting new records for market share capping off another record year for credit to.
To share gains are a testament to the growing network, we're building and the innovations we continue to bring to the market to solve client pain points.
As Lee mentioned 2021 was no different with the rollout of multi client net spotting and further enhancements to our portfolio trading and all trade offerings.
Looking forward our formula remains the same.
Collaborate and innovate to help our client save time and money.
Turning back to the fourth quarter clients continue to respond to a brand of innovation with healthy adoption across all trade portfolio trading and net spotting.
<unk>, our biggest institutional protocol and revenue contributor produced another healthy quarter with average daily volume up 15% year over year to.
The strong institutional growth was supported by our fast growing wholesale business, which had a record quarter.
While we are pleased with diversity of our growth. We strongly believe we have the potential to do even better as retail conditions start to improve as interest rates increase.
Portfolio trading continues to shine bright.
Reaching a record percentage of industry volume into Denver as volatility increased a testament to the utility that portfolio trading provides the market with <unk>.
Seniors back our focus was primarily on the ETF ecosystem, where large asset managers, where we're doing block size trades with a handful of liquidity providers.
<unk> portfolio trading has become a key factor in improving execution quality and liquidity for the buy side.
One considerable advantage of portfolio trading is the extremely high hit rates client tend to construct portfolios with the aim of trading one piece of risk and as a result hit rates on the platform or around 95% with relatively similar hit rates for illiquid bonds.
Trade web facilitated $78 billion in portfolio trades in the fourth quarter of 2021, an increase of more than 35% year over year.
This capped off a record year, where trade we have helped clients execute over $300 billion portfolio trades.
Clients are also increasingly putting dealers and competition are in comp portfolio trading reached record levels, comprising 89% of portfolio trading volumes up from 54% in the fourth quarter of last year.
The strength in portfolio trading was matched by the rapid growth of our anonymous liquidity solution, all trade, which saw a record $98 billion in volume in the fourth quarter of 2021, an increase of nearly 50% year over year.
We continue to invest in our all to all network by enhancing dealer RQ integrating AI.
And improving responder functionality we.
We will continue to develop our session trading liquidity pool, which has proven to be a great tool for dealers to manage their risks, especially after executing a portfolio trade and our newer rematch protocol, which continues to scale.
Finally, our advanced net spotting offering, which leverages, our deep U S. Treasury liquidity pool saw another solid quarter with over $82 billion in volume the volumes were down 5% year over year.
More importantly, the number of users of users utilizing net spotting was up 34% year over year.
The lower volumes were driven by lower electronically processed activity, which tends to have larger trade sizes, and a flatter yield curve that reduced the need to actively hedge.
Turning to the rest of our credit business, our European credit and institutional Muni revenues each grew over 20% year over year, while our Cvs revenues also saw healthy double digit year over year growth.
In sum our strategy of attacking the entire market is succeeding and we believe that this diversity across product protocol geography, and client type provides us with tremendous room for growth.
As we look ahead.
We are excited by our roadmap to drive innovation across the credit markets.
Moving onto swaps just like credit the multi year growth story continues as swaps registered a record quarter and a record year for <unk>.
Higher volatility environment drove a 20% year over year increase in fourth quarter 'twenty, one industry volumes, though full year volumes were still down 12%.
Our variable swaps revenue grew over 40% in the fourth quarter and the full year, driven primarily by market share climbing to a record 17, 7% with growing adoption of newer protocols.
We believe our brand and swaps continues to get stronger we are focusing on the things we can control and we continue to collaborate with the marketplace to solve for more pieces of the puzzle.
Integration is obviously, a very big thing and we've been a leader around this across all our businesses, we are driving our market share higher by innovating across products protocols and geographies with international swaps growth being a big area of focus.
During the fourth quarter, we saw broad gains across our products and our momentum.
In major currencies continues with record share across all currencies.
I wanted to spend a little time to give you an update on the LIBOR transition with the start of the year LIBOR for the Sterling Swiss franc in Japanese yen markets has been discontinued while the U S. Dollar LIBOR rate will be published until June 2023, no new risk can be added in 2022.
Trade web has played a key role in ensuring this transition occurs seamlessly around the globe by helping clients move their portfolios and access liquidity in the new benchmarks.
Around 85% of our most active clients are now using sofa and just under two thirds of our clients have done a silver based trade.
Beyond the risk free rate transition, we continue to respond to structural changes in the swaps market, making strong, but early advances and cleared swaps RSM protocol adoption and multi asset trading.
During the fourth quarter, we saw record activity and we have more than doubled our quarterly revenue run rate from the beginning of the year.
We also saw record RF and activity as we continue to onboard dealers and deepen our liquidity pool.
Looking ahead, we believe the long term swaps revenue growth potential is meaningful with the market's still only 30% electronic side. We believe we can actively collaborate with our clients to solve more pieces of the digitization puzzle, while the global fixed income markets and broader swap markets grow.
In the near term, we believe the looming rate hike the looming rate hike cycle also presents an attractive backdrop for the business.
Finally, we continue to invest in our leading automated trading capability.
The number of AI ex trades grew by 21% year over year in the fourth quarter. Our most sophisticated clients are increasingly adopting this cable state solution globally across asset classes.
In fact, while trades were up 47% in 2021 average daily volume increased by 70%, which is a sign of the growing client comfort and deploying AI X for larger trade sizes.
2022 marks the 10 year anniversary of our AI X rollout yet we believe we are still early in overall client adoption.
<unk> heard us talk in the past about the move from the phone to the mouse and then eventually from the mouse to more to more automated trading solutions.
As markets get more electronic new participants enter and we are actively seeing that happened in our swaps business with new systematic clients that utilized automated trading strategies. Looking ahead, we will continue to invest to provide more features and functionalities as we strive to give our clients the best possible trading.
Experience.
And with that let me turn it over to Sarah to discuss our financials in more detail.
Thanks Barry.
Go to the numbers.
Very soon it will be to the prior year period.
Let me begin with an overview of our volumes on slide 11.
We reported our highest fourth quarter average daily volume of $1, one trillion up 24% year over year and up 12% when excluding short tenor swaps.
Notable growth include global governance on flat U S corporate credit and institutional ETF.
Slide 12 provides a summary of our quarterly earnings performance.
Fourth quarter volumes translated into revenues, increasing by 18, 8% on a reported and 19, 9% on a constant currency basis.
We are at 37% of our revenues from international customers and recall that approximately 30% of our revenue base.
In currencies other than dollars.
Yes.
Constant currency growth is higher than our point and given the depreciation of the euro below that 2020 average rates.
Our variable revenues increased by 26, 1% and our total trading revenue increased by 23%.
Total fixed revenues related to our four major asset classes continued to grow up nine 7% and 11, 1% on a constant currency basis.
Right fixed revenue growth was primarily driven by the addition of UNFI acquisition credit fixed revenue growth was driven by European credit.
Trading revenues were down 1% as a reminder, this line item does fluctuate and it affected by periodic revenues tied to technology enhancements for our retail clients.
Market data increased by three 8% data growth in API and proprietary data products.
Adjusted EBITDA margin came in at 56% expanded nicely by 144 basis points relative to fourth quarter 'twenty as it continued to benefit from scale.
All in we reported adjusted net income per diluted share a 42.
Moving on to fees per million on slide 13, the trends I'm about to describe are driven by a mix of the various products within our four asset classes.
Our blended fee per million increased 1% year over year, primarily as a result of stronger growth and higher fee per million credit, mostly offset by strong growth in lower fee per million underlying your slot.
Excluding lower fee per million short tenor swaps and futures our blended fees per million were up 12%.
Let's review the underlying trends by asset class starting with rates.
Average fees per million for rates were down 6% for.
Our cash rates products fees per million were up 9%, primarily due to growth in higher fee per million U S. Treasuries.
Long tenor swaps fees per million was fairly flat, primarily due to critical and swaps and RF and that was offset by lower duration.
In other rates derivatives, which includes rates features and short tenor swaps average fees per million decreased 20% due to a reduction in OIS fees per million, which carry a lower fee per million upfront.
Continuing to credit.
Average fees per million for credit increased 20% drilling down on cash credit average fees per million increased 16% due to stronger growth in the U S high grade and high yield which carries a higher fee per million than overall cash credit.
High yield volumes were a record in the fourth quarter.
Looking at the credit derivatives and electronically processed U S cash credit category fees per million increased 7% driven by growth in Cvs fee per million.
Continuing with equities average fees per million for equities was flat.
The cash equities average fees per million increased by 6% due to an increase in fees per million within the U S and EU ETS.
ETF fee per million was driven by a decrease in volume per share traded.
And in the U S, we charge per share and not for notional value traded.
Equity derivatives average fees per million decreased 17% to the growth in the U S derivatives, which carry a lower fee per million in equity derivatives capex.
Finally within money markets fees per million decreased 1%. This was primarily driven by a reduction in our retail CD fees per million, which more than offset an increase in our euro U S repo fees per million.
Our fee per million retail many markets business remained pressured by the low interest rate environment.
Slide 14 details our expenses at.
At a high level, we continue to invest for growth there's been no change to our philosophy here.
Adjusted expenses for the fourth quarter increased 14, 8% and 16% on a reported and constant currency basis, respectively.
Approximately 15% of our expense base is denominated in currencies other than dollars predominantly in Sterling.
Fourth quarter 2021, adjusted operating expenses were higher as compared to fourth quarter of 2020 due to increased employee compensation.
<unk> technology, and communication and the inclusion of UNFI.
Compensation costs increased 21, 8% due to higher head count to support our growth as well as higher performance related compensation.
Adjusted non comp expense increased 2% on a reported basis as higher G&A and technology and communications were partially offset by lower professional fees and favorable movements in FX.
Adjusted non comp expense on a constant currency basis increased 6%.
Specifically technology and communication costs increased primarily due to higher clearing and data fees as a result of compelling all trade volumes and credit and streaming U S Treasury volume in.
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.
Everybody movements in FX resulted in a $1 3 million realized gain in the fourth quarter 'twenty, one versus an $800000 realized loss in the fourth quarter 'twenty.
Professional fees decreased eight 4% due to lower legal and consulting costs, partially offset by continued investment in data strategy and infrastructure technology.
Slide 15 details capital management and our guidance.
First on our cash position and capital return policy.
We ended fourth quarter in a strong position holding $972 million in cash and cash equivalents and free cash flow reached nearly $527 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 error was $51 million, an increase of 21% year over year in line with our expectations.
With this quarter's earnings the board declared a quarterly dividend of <unk> <unk> per class, a and class b share.
We spent $147 million offsetting equity dilution during 'twenty, one specifically, we spent $76 million under our regular share buyback program, leaving $74 million for future deployment at the end of the quarter.
In addition, we would have $71 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 depletion from ongoing equity compensation.
Turning to guidance for 2022.
So we will continue to invest in 2022 and are expecting adjusted expenses to range from $620 million to $655 million.
The midpoint of this range would represent an approximate 11% increase which is in line with our average expense growth from 2016 of 10%.
We believe we can drive adjusted EBITDA and operating margin expansion compared to 2021 at either end of this range.
As Lee and Billy described we continue to invest for the future with credit and rates being key focus areas with a long runway for growth.
Investing in introducing and driving new protocol adoption launching new products and expanding our geographic reach.
Some of these investments will take some time to scale, but we continue to price innovation and have a technology pipeline that continues to go up.
We expect G&A expenses to ramp in fourth quarter 'twenty, one levels through the course of the year as we increased <unk> and marketing spend to drive client engagement.
We expect technology and communication expenses to grow from fourth quarter 'twenty, one levels driven by additional investments in data strategy and infrastructure.
Additionally, we expect continued growth of credit all trade and our U S treasury streaming platform.
For forecasting purposes, we continue to use an assumed non-GAAP tax rate of 22% for the year.
We expect Capex and capitalized software development to be about 62% to $68 million.
We estimate that approximately 60% will be spent on software development to support our growth initiatives.
95% will be related to growth capex, and 15% will be related to maintenance capex. The midpoint of our capex guidance implies 27% year over year growth, which would be higher than our historical average due to opportunistic infrastructure enhancement exclude.
Excluding this midpoint growth would be 5%.
Acquisition of Infinity transaction related D&A, which we adjust out due to the increase associated with pushed down accounting is expected to be $127 million.
Finally on slide 16, we've updated our quarterly share count sensitivity for our first quarter 2002 to help you calibrate your models for fluctuations in our share price.
Now I'll turn it back to Li for concluding remarks.
Thanks, Sarah nearly two years into this pandemic I would say that we're all getting better at dealing with these curve balls.
I'm, especially proud of the trade web team, who have not only adapted to this new normal but also have excelled in 'twenty.
<unk> 2021 was another record year marked by numerous milestones for the company and our products.
Change creates opportunity and our focus on innovation and collaboration is the ethos of the company.
Clients continue to embrace the potential of electronic solutions and we are excited to invest alongside them.
Part of the change that we have historically excel that is helping our clients navigate regulatory change and capitalizing on regulation as a firm.
The network that we've built over the last 25 years has not only helped us get to where we are now but has also positioned us to be on the front foot regarding market structure changes.
At the end of the day, we have all the pieces in place.
The network of clients liquidity providers, the technology suite of protocols and third party connectivity.
This has helped immensely and creating a track record of making positive contributions to evolving regulation Dodd, Frank and the move towards SaaS Mifid, two or most recently the LIBOR transition.
It's still early days, but we see the ongoing discussions in the U S treasury market as yet another potential opportunity.
We released January volumes, this morning, and the secular trends powering electronic occasion, where showcase again as we started 2022 with strong momentum having already facilitated more than one trillion and average daily volumes.
Specifically our January revenues were up double digit versus January 'twenty one.
January volumes increased over 7% year on year with broad growth across our four asset classes and new volume record for European government bonds and U S high yield credit.
And U S credit, we also hit a new market share record in electronic U S high yield of eight 2% and grew our electronic U S high grade share by more than 200 basis points year on year to 12, 3%.
We believe the best is yet to come across all of our businesses and we're excited about the innovation, we can bring to the market over the next few years.
We are extremely focused on capitalizing on the various growth opportunities ahead of us and continuing to strike the right balance between investing for the future and driving margin expansion to create long term value for our shareholders.
I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter and I want to thank my colleagues for their efforts that have contributed to our strongest fourth quarter in history and a record year for trade web.
With that I'll turn it over 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 will end at 10 30, a M. Eastern time, operator, you can now take our first question.
Thank you. Our first question comes from Dan Fannon with Jefferies. Your line is now open.
Thanks, Good morning, Lee I was hoping you could talk about the outlook for the rates franchise as we start this year with the prospects of higher rates and maybe.
Frame the upside opportunity as you think about the business as it sits today and maybe distinguish a bit between the cash markets as well as the swaps markets in that backdrop.
Hey, Dan.
Thank you.
<unk> for the question.
<unk>.
Typical on something like this.
Really be too specific I can make some broad broad comments about it.
And it is.
Fundamental thing when you have.
And I've seen this for years of cycles on unfold. When you have a combination of central bank activity with tapering and speculation about rate hikes that is typically a very good recipe for more volatility and more activity.
Our client base right managing risk expressing views.
These are all real positives for for our business.
Not that we really had a strong.
Right.
Michael recently, but if you go back to the 2016 to 2020 period in our rates business.
We had during that period roughly 11, 5%.
CAGR.
In terms of revenue growth.
So.
We're in the middle of the next change right.
Read about it in the UK today.
<unk> is talking and.
The fed has already begun.
So we do believe that this is going to be a real positive for us across both our cash and derivatives business.
The swaps business for us is.
Has it been a terrific business and we think we will continue to be.
Very very impactful.
You see that even in the Jan 21 levels.
Mortgages are a bit more challenging.
And we've seen that as well, but as the array market.
Changes as rates rise, we expect it will spur volatility.
And we think that will be very good for our business.
When you move past all of these macro things, which we typically don't like to.
Forecasted about.
Because we don't know.
We're going to continue to focus on the things that we can control.
And that's the innovation the.
The connection with our network and all the things that we've been doing for the last couple of decades. So we want to continue to move the markets forward to digitize things and.
Really respond to.
What our clients' needs are.
Thanks, Thanks for the question. Thank you.
Thank you. Our next question comes from Michael Cyprus with Morgan Stanley . Your line is open.
Hey, Lee Billy Sarah Good morning, just wanted to ask about the U S credit business I was just hoping for a little bit more color on the market share gains that you guys are putting up and I ask the question. Here is do you see this is being driven by clients switching from other platforms or is it being driven solely by conversion from voice.
And then also to what extent do you see pricing playing any sort of competitive role here or is it really just about execution and platform capabilities. The key drivers.
Hey, Michael It is its ability. Thanks for the question I think we appreciate the way you are kind of framing that question in a positive way and sort of talking about the market share gains that we're clearly having its been sort of there's really kind of interesting and great journey that we've been on and credit rate to think about the fact that we've gone from basically doing less than 1% market share for years.
Five years ago to now kind of posting these really strong numbers, 12% to 13% market share in an IAG are high yield numbers.
We're off the charts in January so.
It's an interesting and timely question when we think about our credit business in Lea said this.
Very consistently as the first thing we think about is is the team. The team is off the charts good.
Starting with our institutional business and our in our wholesale business, great communication really quality team. There and then we always talk about I think in an interesting way the market's desire to have competition in this space. It's not competition just to have competition right. It's really this sort of competition to spur innovation.
So when we think about innovation as you know very well, we've always talked about sort of portfolio trading and things that are happening around all to all trading and then also obviously are kind of advantages that we spoken about around net spotting and net hedging.
To your question about kind of where the share is coming from it's never like a perfect exact kind of science answer and it's a good question.
We've all spoken about and we listened to sort of other earnings calls and obviously there is in a professional and polite way theres really good kind of competitive back and forth that exist, but I do think that if we were kind of asked the question specifically in credit.
Our biggest competitor is I think theres, a chance that Lee and myself and Sarah we would kind of answer like its still the fall it's still the kind of manual way of.
Doing business and when you look at something for example, like portfolio trading.
Which gets so much benefit from electronic vacation and Digitization, the fact that 50% of that.
The volume and portfolio trading is still getting done kind of the old fashion way gives us a lot of confidence.
We can continue to kind of take market share from.
From the phone from manual ways of doing trades.
So.
What I would say to you is we're really doing well in credit we're kind of taking market share.
The phone the phone is kind of staying still all these innovations and credit kind of keep moving quickly and fastly and in significant ways that advantages to clients.
We are competitive so we're going to continue to obviously as we're moving phone business our way, we feel like on the edges and on the margins. We're also making big strides around kind of traditional electronic volume.
So so it kind of was a little bit of a combo package to be very honest with you and then when we think about pricing.
Just like really consistently we don't lead with pricing. We don't think we need to we feel really confident about where we have our offering priced.
Quite bluntly and but we feel like the marketplace to expect more from us than just pricing, we feel like the marketplace expects.
<unk> service and really delivering great results. So we kind of feel like Thats. Our go to there and we're going to continue down that path.
And thank you for the question.
Great. Thanks, so much.
Thank you our.
Our next question comes from Alex Kramm with UBS. Your line is open.
Hey, good morning, everyone wanted to come back to the interest rate swaps comments, you made earlier and sorry for being so focused on the near term, but Lee you made a comment that January is off to a good start in that business again.
Which quite frankly, we are seeing a little bit differently.
If I compare to where we ended the fourth quarter I think it's down 20% or so January average daily volume I know one month doesn't make a trend, but just trying to understand maybe what happened in the fourth quarter in particular in October November for making such a tough comp or what was going on considering that volatility is up.
So far this year other rate proxies in terms of volume.
Mark It's all looking very good at this one seems to be a little bit of an outlier. So.
Any color and and maybe any offsets that you can talk about would be helpful. Thanks.
Sure Alex Thanks for the question.
First off I would say, it's still early in the quarter.
But having said that both our swaps volumes and revenues in January were up double digit year on year. So that's the reason we feel confident about what's going on there.
Our January institution swaps daily revenue run rate is also running higher than the fourth quarter. So that's another.
Further evidence of.
The strength, we're seeing in you got to also keep in mind. There are seasonal factors that we have in our swaps markets.
The third month of every quarter, that's the roll period that tends to be our strongest month.
<unk> set up for March obviously.
Also have a number of.
Sort of characteristics of the markets.
Dealers actively managing their balance sheets heading into year end.
But I wouldn't look I think that.
You're not supposed to read too much into a particular month, we're very pleased with January we think it was a strong January .
But to focus on a particular month or even quarter is not what we're doing we're really focused on the long term here, we're focused on investing in the business.
Expanding our software offering.
To offer more functionality to pick up more of the processes that occur.
As Billy was saying the phone if you look at the swaps market. This is the case of the phone is still the largest market share 70% of that market. So.
That's where we have to.
Focus on adding clients, adding functionality.
Going after the market and the Digitization wave, which is kind of secular trend that we've been in for years.
That we have a lot of confidence in.
The monthly the quarterly.
Is going to depend a lot on market conditions, which month year and what kind of activity in.
And the best measure in my opinion for how we're doing.
Look how.
How do we do last January and by the way last January was a strong January so the fact that we had another strong January of this year and severity.
We think it's very positive.
Makes sense as I said, one month doesn't make a year just just curious.
Again.
Thank you.
Thank you. Our next question comes from Rich Repetto with Piper Sandler Your line is open.
Yeah, Good morning Lee.
And Billy and Sarah.
Congrats on a great 2021, you guys are really well positioned it looks like you're well positioned going into 2022 as well.
So my question is going to be on portfolio trading Billy you highlighted a bit talking about the high hit rate.
And trying to get.
It has been.
Hi hit hit rates, even in illiquid stock as well so I guess, what's your outlook for portfolio trading market share going forward.
Would be the question.
Hey, rich it's Billy.
Yeah. Thanks for thanks for the question look it like portfolio trading the all of the.
The way that portfolio trading is getting digested in the market and being talked about now has changed so much really quickly from sort of will this work two while this works extremely well for sure. We know this and what we would describe as kind of low volatility markets.
And now the question now is become a little bit as the market changes.
Will it still work the same way and we have I'll say this very clearly we have a lot of confidence that it will we think the premises around around portfolio trading.
Around certainty of execution around all in levels around the way that real risk is being transferred.
And portfolio trading.
Makes it a really strong offering as the market kind of changes.
Other thing I would just mentioned to you just.
Just very bluntly is that the amount of investments that are happening around portfolio trading specifically on the sell side is really strong right. The way theyre integrating their API is around portfolio trading kind of technical staff Fritsche has really started to change so I'm not sure I'm going to give you I'm definitely not going to say anything about light bulbs.
We're kind of shining the light but.
I am not going to necessarily give you like a specific number about where we think portfolio trading will go. It is mainstream now and it's a significant portion in a significant way that the buy side interacts with the market has gone from being sort of an asset manager type of functionality to something thats gotten widely embraced around.
The hedge fund community and these are the signs that you need to understand and to know that that getting sort of stronger and better around portfolio trading is absolutely the right strategy for us and.
For anyone going forward. Thanks.
Thanks for the question.
Got it thanks Kelly.
Yes.
Thank you.
Our next question comes from Alex <unk>.
With Goldman Sachs. Your line is now open.
Hey, good morning, everybody. Thanks for the question as well.
Wanted to zone in a little bit more on the non U S opportunity with respect to rate swap specifically.
It looks like you guys have about 18% market share when it comes to the swaps market broadly can you help us dissect the U S business versus non U S and if the non U S is likely to catch up to the U S piece are there any meaningful implications for the capture rate, how the revenue and profitability from that business.
This could evolve.
Hey, Alex Thank you thanks for the questions Lee.
Yes.
That's a good question so.
This is typical of what we've seen over the years that the regions tend to be slightly out of sync.
Uncertain things in something like <unk>.
Swaps, which was so driven by Dodd, Frank and the regulatory change in the U S, which occurred before the changes in the UK and Europe more broadly.
Came in so they're kind of a little out of sync with Europe being a bit behind on the Digitization front, so that whole kind of market share of what's electronic just.
Kicked in later.
I think the.
The opportunities, though when you kind of take a big step back are very very similar.
You see acceleration in Europe interest rate swap electronic application occurring over the last couple of years as the methods stuff kicked in.
Gone through the different categories.
Customers that were required to trade.
Through regulation on.
Entities like trade web. So this is a bit of what I would say catch up to an overall.
The cycles are the same in both when you take a big step back right. You have got a lot of room for Elektron application in both the us and Europe Europe's behind the U S.
Pricing is always slightly different depending on.
Obviously the product.
The marketplace the offering.
So I think we have.
We have a good setup for that for more ultimately revenue growth in Europe . The team has been very actively particularly in Europe , adding clients I was just over in London.
Lastly.
And <unk> spent a lot of time with our sales leadership and they've made great progress.
Expanding the network picking up clients that it takes time to show up in the numbers, but we are really positive.
About that.
Broadly, though those two teams are very coordinated in each of the regions. There is a lot of overlap in our customer base as you would imagine there are different.
Different units and different teams within those customers, depending on whether it's Europe and the U S. But both currencies trade both locations, we get a lot of dollar business out of <unk>.
Europe so.
Yes, I think I do think though when you look at those two markets you will ultimately see something thats, a little bit closer in terms of the electronic vacation.
Time goes by.
The fundamental thing.
Difference between Europe swaps in U S swaps.
My mind is really been.
Regulatory changes.
<unk> prices we added.
<unk>.
Which took kind of a number of years to show up in the markets Interestingly, we actually started.
When I was living in London.
Quite a while ago and so that was the first market.
<unk> kicked off in.
A few months maybe six months.
So it actually started first but then the changes occurred on the regulatory side that really accelerating things in the U S and Europe is now kind of a bit behind in terms of electrons location, but catching up.
Super helpful. Thanks.
Yes.
Thank you as a reminder, ladies and gentlemen that star one to ask your question.
Our next question comes from Brian Bedell with Deutsche Bank. Your line is now open.
Great. Thanks, so much good morning, guys.
To come back.
We're currently trading maybe a two part of it a little different.
One on the slide nine.
Of.
Portfolio trading revenue in.
In the fourth quarter versus the third quarter it looks like it shifted a lot more.
About 9% growth in the U S linked quarter and then.
70% drop on the Internet, but maybe just what's going on there and U S.
Non U S trading and then secondly, I appreciate all your time ability on on.
The dynamic.
I guess as you think about.
2022.
Your share gains in credit.
'twenty one was obviously a good story on the portfolio trading side I know a lot of other things contributed.
Do you see other factors driving that growth share gains and credit U S credit that is in 'twenty two.
Morris portfolio trading in 'twenty one.
I'm going to answer the second part for first Brian in for a second I wouldn't say that we see.
Sort of anything obviously sort of like driving it more than portfolio trading we see we see sort of presenting value to our clients is getting a bunch of these different protocols.
Eight.
And so we absolutely think that the.
All to all market and the RFG functionality around how the all to all market is fundamentally important to the market and so we are putting as much time and energy and investment into all of that as we are in two portfolio trading or quite frankly anything else.
Around credit.
And then we kind of look to sort of present this sort of like all in offering to our clients and then they kind of wind up deciding and a certain kind of interesting way.
So we feel like if we can kind of get that offering right to clients then get that mixed to clients right. We're going to be we're going to be in great shape with them.
I would come back to this very kind of interesting concept around our confidence and portfolio trading working in a bunch of different sort of market environments.
Being specifically important.
So I would I would definitely highlight that to you. The very first part of what you said was a little staticky. So maybe just for a quick second repeat that.
Yes, yes.
U S versus international and I think slide nine it looks like to you.
U S grew linked quarter in international.
This quarter Im wondering what was going on the international side for portfolio trading Adv.
The only thing I would say, it's real quick it resonates equally in Europe , and the U S. I will I will fundamentally say that in a very strong way not to not to get myself in trouble with rich that light bulb goes off in both the U S and Europe in the same way the value of portfolio trading.
Is equally sort of.
Appreciated in both regions.
Europe tends to get very quiet in the fourth quarter, yes. The other thing I would just add is that there is slightly from a timing perspective, we started in the portfolio three years ago in the U S. Europe as of later ads. So it's not surprising to me to see a little bit more consistency month to month.
Be even quarter to quarter, because its a lot earlier and its trajectory and growth cycle I think the news is actually incredible that.
Something that was designed and I think this is one of the great strengths of our platform something that was designed sort of created.
In the U S market has now spread to the international markets to different asset classes, a lot of different applications. So what we're doing with portfolio trading and so Europe was a.
Later adopter by a bit I don't remember exactly the timing.
So it's not surprising a year about a year. So a year later. So this is there a little earlier in there.
Lifecycle of growth.
Okay.
That's great that's great color. Thanks, Scott.
Thank you I have a follow up with mix with pedal from Sandler Piper Sandler Your line is open.
Yes, hi, guys.
One more follow up for Billy.
But two years ago close to that Youre pretty bluntly refracting bump that you said.
During the market volatility of the pin debit when it started that you're all to all trades network wasn't quite as built out.
His peers.
Now looking at the market share gains that you've made over the two years.
I guess the question is what would happen now.
If you have the same volatility in it.
<unk>.
Assuming your institutional penetration is deeper what would happen to know if there was an illiquid.
High volatility event in the marketplace, Yes, I appreciate that I was I was blunt about that and I'll be sort of equally bought now we will be.
Much more competitive.
Cause of the resources and the.
Investments that we've made around our all to all trade functionality. So we feel extremely confident that if the markets get into any kind of zone that reflected sort of March 2020 rich.
Anything is possible, we all know that.
Our share gains are going to hold.
And we feel confident about that so Thats me speaking bluntly again back to <unk>.
Not to have another pandemic.
Yeah.
Well like you said Lee we don't know.
It's been a curve ball for a while.
Anyway, yes.
Thanks for the question helpful. Thank.
Thank you.
Thank you. Our next question comes from Kyle Voigt with <unk>. Your line is open.
Yes, just to just a quick question on regulation.
The SEC proposal could bring treasury platforms under Reg Ats and compliance with Reg Sci just wondering if you could kind of just expand upon any potential impacts from that proposal from an operational standpoint or cost or compliance standpoint as well.
Sure. Thanks Kyle.
Yes, no we've been we've been obviously following that.
We're very engaged in that overall I would just start off by saying.
We've been a proponent of thoughtful regulation.
That focuses on more efficiency and transparency for decades.
And we will continue to take that approach.
When it comes to.
Kind of the proposals with respect Reg Ats.
I should say.
Our original.
Ats in two instances, we are a broker dealer in another instance, so from a practical kind of operating standpoint for us we have we have.
Some stuff to do but it's not like.
Significant thing, we're all sort of set up for that so from a cost basis, we don't see it as a.
Is a big challenge there are some things about it that we would like to see.
Thought through a little bit more carefully.
Okay.
It's a pretty broad proposal.
And it's.
Something that impacts a lot of folks so we.
We want to make sure that thats.
All taken.
Very carefully in terms of how.
It's ultimately implemented.
But we just don't see it for trade web and how we are regulated as that significant of a.
Change.
Great.
And then if I could just ask a follow up quickly on market data.
You continue to take market share really across all of your China I'm, just wondering how you view the ability to kind of monetize.
Increasing data set that you are.
We are continuing to gather on our platform.
And any type of trends in terms of demand for that underlying data would be really helpful. In framing out that the growth for 2022. Thank you.
Sure. Thanks, well I think that this is Sarah I think we remain positive on our market data line overall, we think that that has the opportunity.
Single digit growth.
Two components of that definitive as well as what you were alluding to which is the proprietary data benchmarks that we have including our EPA product.
We've seen a lot of positive trends in that line, certainly, adding new clients in 'twenty, one and you saw that in that growth.
Also there is some addition from NFC market data, but looking ahead, we expect to see that line continue to grow new clients, new products and unit pricing coming in we have API for TCA Tso.
Outlook is quite positive.
Thank you.
No problem.
Thank you and I have a follow up from Alex Kramm with UBS. Your line is open.
Yeah, Hey, Hello, again also wanted to quickly on the portfolio trading side seems like an active debate on there I also think there is an active debate around how you define the market and how many trades actually happening so not sure. If you addressed this already sorry, if I missed it but can you just talk about how many trades.
Generally do how big these traits are on the portfolio trading side and how this has maybe changed over over time and then also when you look at the marketplace and you kind of talk to your clients, what's going on over the phone and maybe on other platforms et cetera, how many portfolio like trade. It's actually happening every day. So we can get a better sense for the <unk>.
Civil market, what extent, yes, sure Thats about basketball is of course, yes. So the nature of portfolio trades, it's never going to actually have like to trade ticket amount of like all to all trades or other types of sort of higher transaction kind of business.
Business that we do so.
So I would say, we do somewhere between 20 to 25 portfolio trades.
I think that the trend to be very conscious of is around kind of what we would describe as block trade block size trades that are now getting done through portfolio trade. So I think so.
I can get this number exactly correct. If we did $2 billion 2 billion portfolio trade.
That's significant that's a real indication from our perspective that real risks trades are getting done and transacted through this style of protocol.
So it's.
You can tell by the amount of questions. We're getting on portfolio trading. It is it is mainstream it is becoming a real risk transfer tool.
Clients from asset managers to hedge funds are adopting it as a real protocol and our general feeling on this and it's a great question a general feeling on this is like being early and being the early adopter around this protocol and partnering with the marketplace. The right way has given us a pretty significant advantage.
Okay. Thanks again.
Yeah.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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