Q1 2022 Marketaxess Holdings Inc Earnings Call
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Ladies and gentlemen, welcome to the market access first quarter 2022 earnings conference call. 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 as a reminder, this conference call is being recorded on April 20th 2022, I would now like to turn the call over to Steve Davidson head of Investor Relations at market access. Please go ahead Sir.
Good morning, and welcome to the market access first quarter 2022 earnings conference call for the call Rick Mcvey, Chairman and Chief Executive Officer will provide a strategic update for the company, Chris Concannon, President and CEO will review the progress, we're making on our growth initiatives and then.
Christopher <unk>, Chief Financial Officer will walk you through the financial results for the quarter.
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 uncertain.
Company's actual results and financial condition may differ 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 2021.
I would also direct you to read the forward looking statements 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 first quarter results.
In the first quarter, we continued to execute our long term growth strategy and total revenue of $186 million was our second highest quarter ever.
EBITDA for the quarter was $106 million and EBITDA margin was 57%.
Trading volumes rebounded strongly as market conditions improved from prior quarters total average daily trading volume reached a record $38 billion. We achieved the second highest level of average daily volume in total credit and we delivered record U S treasury emerging markets and municipal.
Bond average daily volume.
Total active clients trading on the platform also reached a new all time record for the quarter.
These strong business results are a clear sign that the investments we are making to expand our foundation for growth are paying off.
Importantly, as spreads have widened the benefits of our unique all to all liquidity came through with total open trading estimated transaction cost savings rebounding to over $200 million for the quarter.
Average transaction cost savings per trade through open trading were up approximately 60% from recent quarters.
In our unique live markets order book, we are continuing to gain traction across both rates and credit with a new quarterly record Adv in U S treasuries of $25 billion.
Up 38% year over year and record volumes and active clients in corporate bond live markets.
Beyond our core business and protocols, we are making excellent strides in new product areas.
We registered a record $14 billion in portfolio trading volume <unk>.
<unk> market local market trading reached a new record up 22%.
Municipal bond trading Adv was a record $288 million.
Which benefited from the integration of Muni brokers and.
And we launched our market access 400 index to create a highly tradeable corporate bond index as well as access all prints a real time European fixed income trade tape.
We believe our growing global product footprint record numbers of institutional clients and improving market conditions create a strong foundation for long term growth.
Slide four provides an update on market conditions.
Credit spread and interest rate volatility have both increased over recent months driving record trading activity on the platform.
The first quarter saw high levels of investment investment grade corporate bond issuance, which is likely to slow for the balance of the year.
While we are only three weeks into the new quarter estimated high grade high yield and emerging market market share are all tracking well above Q1 levels.
Combined U S high grade and high yield estimated market share is currently above 20% up from 19, 1% in Q1.
When combined with share trade trends in euro bonds, munis and U S. Treasuries, the breadth of our market share gains has never been better.
Central Bank monetary policy has shifted dramatically with higher rates and the likely reduction of balance sheets to reduce inflationary pressures.
We believe that higher bond yields and less central bank quantitative easing will support higher market volatility in the periods ahead.
Higher bond market volatility is already driving increased demand for open trading liquidity in U S treasuries and credit versus prior quarters.
This is coming through in market share trends active client firms and overall trading volumes.
Slide five illustrates our expanding global client network the.
The increasing network effect on our platform is clearly illustrated by the addition of new clients globally.
During the first quarter, we set new records with 1913 active client firms globally with over 1000 firms integrated from their order management systems.
Our increased investment internationally is paying off with a new record 975 firms trading actively outside of the U S. With notable traction in Asia.
For the first quarter, a record 32% of our global credit trading volume came from clients outside the U S.
Additionally, the number of active institutional investor and dealer traders set a new record at approximately 11200 traders.
92% of our trading volume continues to be with institutional investor clients and the remaining 8% represents dealer to dealer trading volume.
In Europe , we now have nearly 1000 client firms utilizing our post trade regulatory reporting services up from 440 firms at the end of 2020.
Slide six illustrates the tremendous growth opportunity that is driving our approach to investing.
We have included this slide again this quarter because it reflects the enormous opportunity we have in front of us and the expanded foundation, we have established to diversify our business.
Our broader product footprint and growing menu of protocols create multiple options for growth.
We are in very early stages of electrification and most of these markets and we estimate they conservatively represent a $9 billion revenue opportunity for our sector.
We believe it is also likely that all to all trading and trading automation will lead to higher levels of overall bond trading velocity.
We are excited about the many ways, we are pursuing a larger data opportunity.
The launch of our market access 400 index and our real time European fixed income trade tape are both examples of this investment.
Finally, we continued to expand our post trade business with additional clients and post trade services now.
Now, let me turn the call over to Chris to provide more detail on the significant progress we are making with our investments in new initiatives.
Thanks, Rick Slide eight provides an update on open trading and protocol expansion.
Open trading provides our clients with one of the deepest and broadest pools of liquidity for bonds OPE.
Open trading is a unique competitive advantage that we leverage across all of our products and protocols.
In the first quarter over 36000 orders and $20 billion in notional value was available daily through our open trading marketplace. A record 1710 client Counterparties, we're active across our open trading network. This diversity of participation continues to drive cost savings for our clients as credits.
Spreads widened client saved an estimated $201 million in transaction costs during the quarter.
Markets for credit had record trading volume in the first quarter with record trade count already surpassing full year 2021 level and we now have 1200 bonds actively quoted daily across high grade and high yield are.
Our live markets for treasuries reached record volume of one five trillion during the quarter, an increase of 40% from last year and a record 2 million trades up 64%.
Now have 20 of the 24 primary dealers active on our live markets Treasury platform.
Our mid ex sessions protocol increased 72% in euro bonds and continues to build in U S high grade and high yield after launching in the fourth quarter.
Slide nine highlights the increasing momentum we are seeing with trade automation.
Our trade automation tools powered by our composite plus market data, the delivering workflow efficiencies, reducing our clients' cost of trading and further embedding us in client workflows, while delivering premium execution quality.
With our trade automation tools, a large portion of our clients' order flow can be executed through a low touch or no touch solution with the confidence that they are achieving best execution through a highly efficient trading technology.
Trade automation on market access reached new records in the quarter growing to $49 3 billion in volume and over 280000 trades, reflecting increasing client adoption and higher levels of client penetration today trade automation represents 18% of total trade count on market.
<unk> and 7% of our total volume trade automation has become a critical outsource trading technology solution for some of our largest institutional clients.
Additionally, the use of dealer algorithms, partly supported by our powerful market data is continuing to grow on the platform with approximately $5 3 million algo responses in the first quarter up 12% from the same period last year.
Slide 10 illustrates the powerful diversification of our model across products protocols and revenue types in the first quarter. We continued to see increasing contribution from our new protocols that I just touched on earlier as well as from portfolio trading and our diversity dealer initiative trading volume from these new.
New initiatives represented 12% of our total credit volumes in the first quarter.
The month of March was particularly strong in terms of record client participation and record number of portfolio trades.
Our global platform is now generating market data that enhances and enables many of our global trading protocols. Our unique market position allows us to create proprietary market data solutions, such as our market market access 400 index, our CP plus total markets and our recently launched European fixed income trade case.
Called prints.
Our information services and post trade business have become an important part of our franchise generating combined record revenue this quarter of approximately $20 million as a result of our increased diversification our recurring revenue consisting of fixed.
<unk> distribution fees information services and post trade business hit a record 51 million, representing an increase of 9% year over year.
Slide 11 is a deeper dive into emerging markets, which is one of our largest global opportunities we achieved record revenue and adv in emerging markets. During the first quarter. The record quarter was highlighted by a record trading day on March 31st of over 8 billion almost 1 billion above the previous single day.
Trading work.
As a reminder, emerging markets at market access is a combination of external debt trading in dollars euros and yen and local markets trading across local currencies. We have close to 30 different marketplaces active on our trading system and these local markets are now roughly one third of our EM trading volume.
We see a tremendous growth opportunity many of these local markets and across Latam EMEA and Asia, because they are principally rates markets in very early stages of electronic vacation.
Not only experiencing exceptional growth in EM trading volume, but we are also onboarding new clients with a record 1348 active clients trading E M on the platform.
Clients are increasingly embracing our solution in local markets for larger size trades, which is reflective of the increasing adoption of our request for market protocol, where we saw an increase in trading volume of 48%.
<unk> trades account for approximately 75% of local market volumes. So we think we are well positioned to capture this important segment of the market now let me turn the call over to Chris to provide an update on our financials.
Thank you Chris on Slide 13, we provide a summary of our quarterly financials first quarter revenue of $186 million was down 5%, but represented the second highest level of quarterly revenue.
The 6% decline in commission revenue was mainly due to lower U S high grade fee capture but was partially offset by higher distribution fees and record U S Treasury and municipal Bond Commission revenue.
The combination of higher distribution fees and record information and post trade services revenue increased our recurring revenue in the quarter to a record $51 million.
Total expenses increased 7% driven principally by acquired intangible amortization expense and investments to enhance the trading system and our data product offering as.
As we continue to invest we delivered our third highest level of EBITDA of $106 million and an EBITDA margin of 57%.
The increase in other net was due to two special items first a $1 $6 million gain related to the re measurement of the contingent liability associated with one of our recent acquisitions.
And a $1 $3 million foreign currency transaction gain which when combined provided for net <unk> <unk> per diluted share benefit in the quarter.
For modeling purposes, we expect other net to be a drag of roughly $800000 per quarter absent special items like those that flowed through this quarter.
The effective tax rate was 28, 4% in the first quarter compared to 21% in the prior year.
The higher effective tax rate in the quarter was due to lower excess tax benefits and the impact of a nonrecurring $3 $2 million tax charge or <unk> <unk> per diluted share related to a settlement with New York State tax authorities to resolve the 2010 to 2014 audit cycle.
Collectively the net impact of the tax charge in gains recognized in other net providing for a <unk> <unk> per share negative impact on earnings.
We are reconfirming, our full year 2022 effective tax guidance range of 24% to 26% excluding this tax charge we.
We expect the remaining quarters of 2022 to be around the midpoint of the guidance range.
On slide 14, we provide more detail on our commission revenue in our fees per million.
Total variable transaction revenue was down 9% driven principally by lower fee capture partially offset by higher U S. Treasury municipal bond euro bonds at EAN transaction revenue.
The lower high grade fee capture was driven by a larger percentage of shorter duration hybrid bonds traded on the platform.
Which represented approximately $22 of the $25 year over year decline.
We have not changed our high grade fee plan and we have seen similar volatility in year over year high grade fee capture in the past.
Such as the third quarter of 2021 longer duration drove high grade fees per million up $26 to $200 per million for the quarter.
Based on our high grade fee model and all else being equal we expect less variability in our fee capture even if rates continue to rise from these current levels.
As we entered the second quarter, we are seeing U S high grade fee capture stabilize around the first quarter of 2022 levels.
Other credit commissions decreased 4%, mainly driven by declining average fees per million, which decreased 7%.
The decrease in other credit fee capture was driven by two deal dealers migrating to a high yield distribution fee plan and a mix shift in product trading volume the.
The increase in EBITDA in local markets trading volume had the effect of reducing fee capture as Ian local market bonds command lower average fees per million given these are rates focused markets.
On slide 15, we provide you with our expense detail further.
First quarter expenses increased $6 million or 7% driven.
Driven by higher acquired intangible amortization expense and investments to enhance the trading system and our data product offering.
If we exclude the impact of acquired intangible amortization expense expenses would have increased 5%.
Compensation and benefits are more or less flat to prior year as we reported higher levels of variable compensation expense during the first quarter of 2021.
Depreciation and amortization expense increased $3 $4 million due to higher software development and acquired intangible amortization expense.
Our technology and communications expense increased $2 2 million on higher software subscription market data and technology licensing fees.
On slide 16, we provide an update on cash flow and capital management.
As of March 31, our cash and investments were $400 million and our trailing 12 month free cash flow was $278 million during.
During the first quarter, we paid out $26 million in quarterly dividends to our shareholders repurchased approximately 102000 shares for a total cost of $39 million and paid out year end bonuses and related taxes of approximately $45 million.
We believe the current stock price level provides an opportunity to utilize excess cash to repurchase shares at a discount to their long term value and.
And based on our financial results our board of directors declared a quarterly cash dividend of <unk> 70 per share now, let me turn the call back to Rick.
Thank you Chris in summary, we continue to execute well against our long term growth strategy. The record volumes. We registered this quarter are a clear sign that the investments we have made to expand our gross cylinders and increase our product diversification are paying off.
New and innovative protocols that we have built are modernizing fixed income market structure and gaining momentum.
Our strong execution combined with the improving market conditions in global fixed income set the stage for a promising period of growth ahead now.
Now I would be happy to open the line for your questions.
Thank you and as a reminder to ask a question you will need to press star one on your telephone and to withdraw your question press. The hash Brown team Youre first question is from rich Repetto with Piper Sandler Your line is open.
Yes, good morning, Rick.
<unk> Chris.
Rich.
So.
You definitely came through with the excitement I guess on.
On the on the improved market conditions.
And I'm just looking.
The what you've experienced in April you said its better.
Markedly improved our.
And better than I thought you said the first quarter average.
Can you give us a little bit more detail and color because if you look at just the first quarter average was pretty close to March and given your sort of.
Your excitement about it.
Could you sort of give us a hint to boat.
A better idea.
The increase in market share do you experience.
Sure sure.
I certainly gave a piece of that rich in the prepared remarks looking at combined high grade and high yield estimated share for April month to date at over 20% compared.
Compared to the first quarter average of 19, 1%, but in addition to that the reason that we're excited is when we look across our new and expanded product suite. We're seeing those share gains come through also in emerging markets Eurobonds treasuries and municipal bonds.
So the momentum that we're seeing in share combined with the market condition improvement is what gets us more excited about growth in the periods ahead.
Got it and I guess, just a follow up.
Two follow ups, but you are.
Pointing more towards overall credit market share the combined.
And is there a reason for that or.
I think.
We've looked at it as two separate buckets that you compete in each.
But is there a reason to sort of look at it on a combined basis and they're both they're both they're both part of the corporate bond market in the U S. So give given that we're just three weeks into the new quarter. We thought we would just give you a combined market share.
Obviously in a week and a half we will have all the details out on both high grade and high yield but high grade is clearly the more important piece given the size of that market relative to high yield. So I think you can interpret that.
The share trends are positive in both.
Got it and just one detailed question is there any difference between the fee rates for the local markets.
Currency.
Credit trading trading.
Yes, each market Doug This is Chris Stewart and so each market has a different rate as I mentioned in the prepared remarks. The EM local markets are more of a rate focused product offerings. So youll see those those fee capture rates trend below $100 per million, which is one of the reasons why you sort of did.
<unk> and the fee capture quarter over quarter.
Got it very helpful.
We actually publish on our website.
Standard fee plans. So if you wanted to get a flavor of each individual category I would refer you to the website of market access.
I think the important takeaway from Q1 riches that point that Chris made earlier that we have made no changes to our fee plans.
So in high grade you had to combine change of higher rates overall, and a flatter yield curve.
And that not surprisingly causes reduced duration when duration goes down in high grade fee capture goes down because institutional investors trade on.
Corporate bond spreads to treasuries and our fee model is on yield not price.
So that is that is the sole reason that the fee capture dropped in Q1.
Probably larger than prior some other prior periods because of the extent of the rate increase and the very rapid flattening of the yield curve, but as Chris mentioned earlier as we look forward. We don't see the same level of volatility in high grade fee capture and none of this has come from any changes whatsoever.
And our fee models.
Okay.
I was just going to ask one quick follow up on that.
Why do you think that there wouldn't.
Suppose we had rate changes going forward.
Are you just assuming that the.
The yield curve doesn't move as much.
The rote duration.
Interest rates don't move as much when you got the fed.
Expected to raise a peak.
Hi, Michelle.
<unk> activity on duration is highest when rates are the lowest which of course they were through the second half of last year. So we've already gone through the most sensitive chain.
Change in duration with the current interest rate increase that's gone through and as you know the curve has completely flattened.
So those two things have already occurred which.
Suggests to us that we're not likely to see the same level of duration change in the periods ahead.
Understood. Thank.
Thank you very much.
Thank you and your next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks, good morning folks.
Maybe.
First question, maybe just to talk about portfolio trading and that's obviously still a.
It's a sizable debate in the marketplace.
Sure.
You can refresh us on your ambitions.
For your portfolio trading market share within the within the industry and your view of where you think portfolio trading could comprise.
As a percentage of the total.
Mark yet and maybe just to talk about that versus lift trading in terms of the cost savings I think or so if I'm right. The cost savings can still be better on list trading in a in a more volatile backdrop, maybe if you could just touch on that.
Sure sure happy to Brian and first of all in terms of.
The market environment around portfolio trading a year ago.
Portfolio trading volumes and share we're growing at a fairly steep curve. If you look at the trace tape and.
And what appears to be portfolio trading activity within trace it has stabilized at about 5% secondary market share of trace for high grade and high yield combined over the last 10 months or so.
So it's kind of settled in at about 5% of the market not showing the same levels of growth currently I personally think in conversation with our dealer clients.
One of the key reasons for that is with both rates and credit spread volatility up significantly it's much harder for the dealers to manage the risk in portfolios than it was during much of last year when volatility was very low.
So you are seeing the market levels stabilize as we mentioned we had a record quarter in PT, we continue to print with more clients. We printed with all the dealers that we believe are active in portfolio trading and we continue to strive to be number one in portfolio trading as we are in other protocols in credit trading overall.
So it's an investment area for us it's moving in the right direction still represents a relatively small part of secondary trading and I think if volatility remains high that's likely to remain the case.
Okay. That's good color and then just on the.
Just on the recurring revenue.
You haven't talked about that as much obviously.
Given the strong growth in the <unk>.
Volume part of the business, but if we look at the growth year over year. It looks to me if I had my calculations right here based on the numbers you are quoting at about 9% on a year over year basis. So maybe just a thought of.
Or do you have thoughts on where you think that can grow over a two to three year basis.
Given your the recently announced product innovation on the market data side with the 400 and the euro fixed income data.
So on a recurring revenue.
We obviously have three buckets there are dealer distribution fees are.
Our post trade business, which has grown over the last year and then obviously our data business, which we're pretty excited about particularly given some of the new products that we've launched.
C P plus and access all continues to be the driver of growth within the data.
Piece of the business, but we do have some very attractive exciting new products like.
Our European prints, which is a trade tape for Europe as well as our CPE total markets, which is just CP plus with very broad coverage across.
A broader set of funds globally. So.
And then within CP parks, we have a number of products at the product level. So you obviously have the.
The opportunity to launch a CP plus for treasuries.
We obviously have a growing CP plus for emerging markets, which is obviously a market that needs more transparency.
And is under great demand from our clients. So we continue to see our opportunity in the information services space grow over time, as we add market share, we're actually adding more data to our offering so those records that you're hearing about in the in the first quarter across our volume.
And across our products is growing our data opportunity as well.
Do you think there could be a compounding effect.
That info services and post trade services growth as you grow volume to the extent, where you could even potentially grow that revenue stream faster than obviously volumes are dependent on volumes, but versus your transaction business.
It does compound because as clients add more products or add more.
Differential products theyre, adding to their overall spend on the platform.
But we are careful about how fast we grow it.
Because obviously, we want to see more growth in volume and more dealer participation and so.
So we're being very cautious on how we grow that and.
Just a reminder, there are certain data products that will not be for sale.
For our end users they won't be embedded in our automation solution so products around how to trade a bond when the trade of bond food.
<unk> to trade a bond with those are important products that will drive uniquely drive our trading automation tools and will only be for sale through those tools. So there is some exclusive data that we will keep proprietary and not make available for sale great alright, great. Thanks. Thanks, so much for the color.
Thank you. The next question comes from Kyle Voigt with <unk>. Your line is open.
Hi, good morning.
I think there was an updated rollout of your treasury open trading capabilities or at least the integration of that offering towards the end of the quarter. Just wondering if you could talk about that a bit and the level of demand you're seeing from clients for an open trading solution and cash treasuries.
Yeah, Great Great question, Carl Obviously, we had a record in the first quarter of one six trillion up 37% Ironically the rollout there you're referring to came at the end of the quarter.
So we've recently integrated our live markets for rates.
With clients on that integration it was a key integration so prior to that clients didn't have an easy way to move their orders from their own <unk> into that solution that is now fully integrated at the end of the quarter. We've also introduced.
In our <unk> platform and open trading solution for treasuries. So those two integrations are what clients have been asking for as we've been pitching them on our treasury solution.
I think they are both important because one it's a combined offering of streaming prices.
A true click to trade solution fully integrated with their own <unk> and then a <unk> solution, both disclosed and an open trading solution that right now it doesn't exist in the treasury market Ironically, even though most people think the treasury market is further advanced from a lot.
Tronic vacation the introduction of open trading is something that the fed has called for in their research of the treasury market and obviously.
Regulators are quite focused on our introduction of the open trading solution.
Which is now fully integrated and fully introduced as of.
As of this month, so we're getting a great deal of excitement certainly from some of the larger clients.
<unk>.
From my Vantage point, it's the first time, a client a large institutional client can leave a resting order in an all to all market in treasuries Ironically something that didn't exist. Prior to this introduction. So we're pretty excited about the opportunity in treasuries.
I'm really excited about the feedback we're getting from clients as we roll out the platform to individual clients.
Very helpful. Thanks for that Chris.
And then a follow up on the high grade fee capture.
You just provide some details on where the average years to maturity of the high grade bonds traded on the platform was in the first quarter and also provide some historical context on where that range has been historically and where it's gone down to on the low end and a flatter yield curve environment.
<unk> historically.
Yeah, Kyle so in the first quarter 2020 to the years to maturity.
It was just under nine years about eight nine.
And if you look back over the course of the last five years.
Scott and as low as seven five years back into 18, and 19 and at that point in time Thats. When you saw the life cycle of there being a flat yield curve and the fee capture was trading throughout 2018 and range from $154 to $157.
Relatively stable range, and that's more or less where we are today and if you look back in time when the yield curve has started to steepen again, you saw years maturity extend which extended the duration and you saw the high grade fee capture pick up accordingly.
Right, which is essentially what's happening right now, but I guess, if we see a continued flattening I'm just wondering if there is a shift incrementally from what we saw in the first quarter towards the shorter years to maturity.
Is there still that same level of sensitivity that you've given historically, which I think is something like in the range of 10 or $15 per million for every one year change in <unk>.
That years to maturity or is that sensitivity now also lower.
Yes, I know the sensitivity on years to maturity is more in the mid teens for every one year movement.
As I mentioned in my prepared remarks, what we're seeing in April .
As an extension of duration, and which has been driven by a longer duration that we're seeing on our platform.
Understood Okay, great. Thank you very much.
Thank you. Your next question comes from Sean Hogan with Rosenblatt. Your line is open.
Hey, guys. Good morning, Thanks for taking my question.
So I just wanted to see if you could provide an update on open trading as competitive advantage in the current environment.
Given volatility trends I think the first quarter.
Market share trends took some by surprise, so just trying to parse out what competitive dynamics versus other factors.
Yeah happy to take that and Chris might have some things to add as well, but yes.
A lot of flows in and out that impact market share and certainly March was an enormous new issue month in high grade debt.
That all else equal may have very well matched some of the underlying trends positive trends in our high grade market share.
<unk> seem to be reversing here in April but.
There is economic logic when volatility in price dispersion grow.
The cost savings that we delivered to clients also grow and if you look at Q3, and Q4, where we had very little credit spread volatility our quarterly transaction cost savings from open trading delivered to clients, we're around $125 $130 million per quarter, you look at Q1.
It jumped to $200 million, so clients see that trade by trade. They are seeing the price improvement that we're delivering and we are optimistic as it has in the past most notably in 2020 that it does change behavior in it. It's a it's an advantage that we have that is not shared elsewhere in the marketplace.
Just because of the almost 10 year investment we have an all to all trading in credit that's now carrying us into rates. So.
The price improvement is there and certainly early days in the second quarter. The market share trends are are coming back our way as well.
I also think that as dealers have a more difficult time pricing portfolios.
Portfolio trades, given the level of volatility.
At the margin there is a shift back to open trading bid and offer lists.
Where the whole market is able to compete for that order flow and provide transaction cost savings in a market environment like we are in now.
Rick I'll just add.
Open trading market share did increase across our products. So we are seeing it grow as a percent of overall market in high yield that obviously went up to 49% from 48% from the prior year Muni saw the largest jump to 48, 6% of our volume.
Is done in open trading.
Even euro bonds had growth.
Is where you just have to parse through the numbers our EM local markets do not include in open trading offering current currently so that growth in local markets does skew our overall E M.
Open trading, but excluding our local market volume open trading grew in emerging markets as well. So we are seeing that open trading value.
<unk> service in the market the other area, where we talked Rick talked about $200 million savings and open trading cost savings in Q1, where we're seeing even larger savings we're seeing clients come into open trading and responding to other clients are accused so for the first.
They are.
Using either auto responder manually responding to other RF queues, and we're seeing that behavior that introduces sizeable savings beyond just the cost savings of open trading so alternative liquidity providers and that behavior is something that we're working closely with clients to increase in high yield alone we saw client savings.
Reach.
$600 per trade by just responding to other clients RF queues. So those are sizeable savings that clients can achieve and it's really a way for clients to <unk>.
Used limit orders as opposed to crossing the market through a traditional RF Q. So those savings are there, they're obviously you've been growing in Q1, and we're seeing those same levels in April as well.
Great. Thanks for all that color.
First one just on new issuance.
We saw a pickup in March so I'm just curious are you seeing that.
Sort of followed through benefits and market share.
Already in April or would you expect that to be maybe.
Maybe a further tailwind for the balance of the second quarter.
All else equal, it's likely to benefit our share because of the patterns and practices on trading newly issued bonds in the first week.
So March was an outlier in terms of the size of new issuance, especially in high grade.
April has tapered off it looks more like a normal April .
We see things currently but.
The broadly held view is that corporates were front loading more of their issuance. This year because of their expectation that rates were likely to rise throughout the balance of the year.
I do think that the expectation is that the overall levels of new issue activity will be lower in the remaining quarters of this year.
Got it thanks for the answers and congrats on the results.
You.
Thank you. Your next question comes from <unk> <unk> with Credit Suisse. Your line is open.
Good morning, and thank you for taking my question can you. Please expand on many brokers progress why the first mover advantage in the Muni market is important and how the platform is currently positioned relative to competitors pursuing the same opportunity.
Sure.
Happy to help there obviously.
<unk> continue to be excited about our muni opportunity again, we had record volume in the first quarter $7 7 billion.
So we continue to see clients coming to us and using us as a solution. The other interesting fact is we only had 275 active clients as of March.
Is obviously up from just February .
Small portion of our overall almost 2000 clients globally. So we do see growth opportunity just in terms of client penetration and adding clients to our Muni network.
Open trading continues to be a viable tool for the muni market. Both in terms of some of the alternative liquidity providers that provide price.
In that market, but also allowing clients to participate directly in the muni market.
Our exempt Muni business grew to $1 5 billion, which is up 84% from Q1 'twenty. One so we're seeing growth both in the taxable side as well as the tax exempt side and we're seeing growth out of our dealer, our Q offering which leverages open trading.
Well.
Grew close to 80% since Q1 'twenty one the Muni brokers acquisition, certainly adds close to 4% market share to our overall muni footprint.
We see that both in terms of trading opportunities, but also in terms of the data opportunity that Muni presents.
There is really not a great real time muni seed in that market and we see an opportunity to introduce better pricing better transparency across the muni market and we're slowly integrating community brokers platform onto our open trading network as well to further integrate that acquisition, but.
Pretty happy with.
<unk> generally and thus far early days with the Muni brokers acquisition, but pretty happy with the overall footprint of what we touched on in the Muni market.
Got it thank you and Mark and <unk> currently have about $1 billion $30 billion Tam in local currency what is the level of electronic location in E. M. Local specifically and I guess can you expand on some of the capabilities that the platform has that what's kind of driving the.
They're in the competitive advantage.
Yes, I'm happy.
The local markets are at the earliest stages of electronic vacation.
I think what we've successfully built as a global network of clients and dealers to build it.
A unique workflow and liquidity solution in the local markets.
And it's driven today, primarily by global investors, but our success in the regions that were mentioned in the prepared remarks is reflecting more adoption by local market participants within country.
And that's where the big opportunity is still still exists. So we're we're in low single digits, we think of the market opportunity in local and they have 30 markets available in one place with the workflow solution that we do is we think is a huge advantage to both dealers and investors active in those markets.
So it's another example of where we think Theres a tremendous amount of runway ahead in a market that we've been investing in for quite some time and all of this.
To add the EM local markets.
<unk> is a heavily brokered market really to achieve anonymity.
And we're obviously exploring expanding our open trading solution across local markets, we see an opportunity to provide.
Anonymity into that market and further electronic fire as Rick mentioned, it's a phone based market.
Somewhat chat based as well but.
Really electron implication of that market is as early days and we see an exciting opportunity for open trading to introduce the anonymity that's really achieved through the phone and the brokers today, so exciting large market and a great opportunity for us.
Got it thank you for taking my questions.
Thank you. Your next question comes from Patrick O'shaughnessy with Raymond James Your line is open.
Hi, good morning to what extent do you think your traction with newer trading protocols like portfolio trading live markets amid X are incremental volume for market access versus cannibalizing RF cube volume.
Yes.
I think there is.
Okay.
There is.
Our growing menu of suite and suite of solutions available to clients here than there has been in the past, but we were super excited about live markets. Obviously much further along already in treasuries, but I think order books have a real role to play in the future liquidity.
The structure of fixed income and we are certainly in a great place to be the leader and provider of live markets.
It's really interesting to see that a year ago, we only had one dedicated market maker in corporate bond live markets. We're at five now and we expect two or three more during this quarter. So you are seeing dealers get excited about order books being really.
So an important source of not only making markets for them, but also.
Finding their own liquidity and if we can build that base in the most liquid end of the corporate bond market. It will have positive implications for the entire rest of the less liquid corporate bond market and its directly tied into what we're trying to do with the market actions 400 index is those most liquid bonds that we had.
Now have available in our order book are also part of that index. So IC live markets is really a catalyst for greater velocity.
In the periods ahead.
It's tough to say with portfolio trading.
<unk>.
Some of it.
It is potentially an alternative way.
For clients to transfer risk and part of it is probably new opportunities that have been made available.
Live markets is where I would say Patrick we have the biggest opportunity to make a real difference in both credit and rates in terms of offering a new and live liquidity solutions.
And Patrick I'll, just add what we've heard from clients, particularly oil, particularly the hedge fund clients the opportunity to.
Placed orders on a live order book, not just request price or respond to RF queues in a more automated way using things like our automation tools those are exciting clients to actually trade credit like they have never traded before theyre seeing uptrade opportune.
<unk> that.
It didn't exist before so.
Really think there is higher velocity embedded in these new trading protocols that we're delivering whether it's automation.
Our live markets. It is giving a certain subset of the client population trading strategies that they just haven't deployed in the credit market before so higher opportunity.
Lower costs of trading.
Introduces trades that they otherwise wouldn't make in the past.
That's helpful. Thank you.
And then your presentation today speaks to deal of renewals at higher fee levels with regards to your distribution fees are you guys starting to take pricing with your distribution fees.
Say that again, Patrick I'm not sure I followed that.
One of the slides that Chris spoke to had some commentary.
Slide 14 increase in distribution fees due to.
Higher unused monthly minimum commitment fees and dealer renewals at higher fee levels. So I'm curious does the dealer renewals at higher fee levels commentary suggest that you guys are exhibiting a little bit of pricing power with your distribution fees.
Yes, there was.
We made.
No changes to the fees, but there were certain dealers that were online and to your point I guess, we do have some.
Some pricing.
Advantages with the attraction of trading on the distribution fee plan as the scale of them doing more business.
So that pickup we wanted to make the point that that increase in distribution fees didn't have anything to really deal with the migration because that wasn't impacting our fee capture was all about the ratios, but we're getting people to more standardized levels as we move forward.
And we've used the distribution fee with dealers for a number of years and it's very attractive to certain dealers given their overall volumes.
And as we attract more clients onto the platform, which is obviously happening with our record active client numbers.
More dealers or opt into those.
Standardized distribution fees to participate in that client flow so it.
It's really reflective of the growth of the overall client base that we're adding that just that dealers are opting into that more attractive dealer fee.
Got it thank you.
Thank you. Your next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks, I wanted to follow up again on our market share and I think too Rick in your prepared comments you said the breadth of market share gains has never been better and so I was hoping within high grade you could talk about what gives you confidence I guess sustainability of either market share gains.
Obviously, the macro has changed but we've seen some of that shifts to earlier in the year and market share it didn't come with it so maybe what's different.
April and maybe as you think about going forward that.
Again gives you confidence around additional share gains.
Yes.
What gives me confidence is 20 years of history, Dan is that.
We've gained a lot of share over that time, and we had an outsized market share gain year in 2020, and a little flatter year end 'twenty one when we had no volatility in our markets, but volatility is back and Thats, where the liquidity advantage that we've worked so hard to create versus our competitors.
As in.
Most strongly with our clients and it does drive their behavior. So in April we're starting to see spread levels move out.
As people contemplate a higher probability of recession risk down the road youre going to see more volatility in spreads I think you are clearly going to see sustained volatility in rates and when that price dispersion grows every period in history.
The open trading transaction fee advantages that we have drive our market share higher and I'm just looking at this grid, saying I have never seen seven product areas moving high high higher in share at one time the way that we're seeing it right now so it's beyond just our core business and we're seeing it in treasuries.
Muni is coming through very clearly as well so a lot of work to create this broader footprint, but it does increase our addressable market.
And we've got a long history of growing market share, we don't think that theres any interruption in that long term story and the early results. As we start Q2 are gratifying in terms of seeing that the open trading price differential is really coming through for our clients and their trading a larger percentage of their business here.
Understood. Thank you.
The final thing is.
It's really hard to build and many people have tried before unsuccessfully but.
I do think that the.
The work that we're putting in and the success that we're seeing in order books is a big deal.
I really think this could be a very attractive way to trade, both treasuries and the liquid end of the credit market and slowly, but surely we're seeing client adoption and get to a really interesting place around the live markets order books, which obviously could be another catalyst for share gains.
And Dan I would just add if you look at the records that we're setting across not just our products, but also automation, which is largely driven by high grade and high yield activity.
A record of 49 billion in the first quarter, which is up 36% from a year ago.
It's now just in high grade alone our automation is 25% of trades.
Is done through automation on the platform, that's very sticky business and we're not fully penetrated across the client base that is using it.
Not we don't have all the largest clients set up for automation.
I see that opportunity is growing here dramatically overtime auto responder hit a record.
This quarter as well and Thats still lightly used by most of our largest clients and thats an opportunity to save sizable dollars using open trading through automation.
When you look at the full automation of the bond market in the future.
Still in early innings of what really has to happen. When you. When you look at if you compare the bond market to other asset classes and how automated they are trading activity is across the same client base that we're working with.
We have a long way to go and really it will leverage not only our automation tools, but the liquidity that we deliver through our growing open trading solution across high grade high yield munis treasuries all of the products that we offer here automation cuts across every one of those products and continues to.
To grow and continue to be in high demand from our largest clients.
Thank you.
Thank you and your next question comes from Michael Cyprus with Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question maybe just following up Chris on your point there on trading automation.
You had mentioned around 25 ish percent of actual trades, but 7% or so of volume so a little bit lower on the volume side I guess, if this is successful over time, where do you see that getting to in terms of.
Share of volume in the overall share of ticket and maybe you could talk a little bit about the profile of the customers that have more fully engaged or adopted.
These automated protocols and how are you looking to expand that usage with the other clients, but it just <unk>.
Coming from the dealers or how are you seeing that in terms of dealer uptake versus institutional clients.
Great question, it's really.
In high demand from our largest institutional clients, so think very large.
Managers around the planet that have lots of train tickets.
And they'd like to do that fully electronically fully automated either in what we call low touch fashion or a no touch fashion no touch just means they deliver it through an API to a set of pre instructed commands for the automation to to execute what's interesting about our automation right now it's.
<unk> and Otto RF Cuso solution. So we're really just mirroring the activity of either Emmanuel electronics, or if Q or a phone based <unk> Q.
Our automation really starts to deliver sizable savings is through things like auto responder behaviors or trading at mid <unk>.
<unk> that Leverages, our live markets order book those are all things that we have in our plans over time and that's really exciting.
For what we can do with automation because of the savings that delivers not only is it a savings for clients to kind of reduce their cost of trading.
And simplify their trade desk, but it's also a savings and execution quality.
In some of our large clients that rely on automation tools, we see close to 50% of their activity coming through automation. So that those are sizable.
Reductions in workflow for those clients and that's those are the clients that are most focused on automating their trading and theyre trading tickets in the bond market.
So we do we do see an opportunity amongst some of the dealers that are not auto quoting that could rely on some of our auto quoting solutions, but right now the primary client automation here on market access as some of the largest money managers on the planet.
Great. Thanks, so much.
Thank you and your next question comes from Chris Allen with Compass point. Your line is open.
Good morning, guys. Thanks for taking the questions Rick.
Rick I wanted to ask you just.
And you've noted noted obviously volatilities improved credit spreads are widening.
We've seen ETF activity in credit accelerating materially this past quarter I think many would have expected industry activity to be even better than it has been so I'm wondering if you have any thoughts just in terms of maybe what's holding industry to be back as some of the large market participants sitting on cash right now.
Thoughts on that would be helpful.
Yes.
I think Etfs are an important part of the new liquidity model in fixed income overall.
I view it as similar to the connection between S&P futures and underlying stock trading they're complementary.
To each other and ultimately lead to growth in both sets over time and I think thats. The way the story will play out with the growth in ETF activity as well the fund flows were fairly benign during the first quarter. So.
So I don't think you had a catalyst for money managers to transact created by fund flows and you did it did see modest.
Declines in year over year activity around 5% or so in high grade or high yield, but I continue to be excited by what we see is the new risk transfer tools that are available in the market.
The growth at all to all trading and the great growth in automation that Chris has been talking about and to me that all leads to the prospects of higher velocity in the years ahead.
Long term trends.
Didn't come through as clearly as you might have expected in the first quarter, but I still believe that thats the direction of travel with the new law.
Liquidity model, but it is developing for fixed income.
And on the on.
The velocity.
You guys, probably able to measure it much more dynamically than we are but when we kind of look at it it's been declining.
I'm just wondering how.
Do you guys perceive velocity trends in recent periods have you seen any impact of automation in Europe platform are continuing electronic location in terms of you taking share other electronic platforms taking share.
Been any improvement in velocity from how you guys have seen in recent years.
Well if you look at.
The two or three years prior to 'twenty, one, yes, and then you had an unusually benign market environment for both rates and credits credit almost all of last year.
So you did see a modest decline in velocity last year, the big the big change Chris happened actually on the back of Bank regulatory reform in 2012 in 2013 and for obvious reasons Bank turnover went way down.
And I think what Youre seeing now is the establishment of a brand new fixed income trading infrastructure that.
Dealers are embracing and clients are embracing as well too to create new ways to transfer risk that don't require as much balance sheet and we think we certainly feel like we are at the center of that with the automation and the alcohol trading protocols that we're developing consistently in the market is embracing.
And that's what leads to my optimism that we will see higher velocity in the periods ahead, let's not forget too that all to all trading has brought a lot of new participants into the credit markets and there are more coming.
Talking to lots of hedge funds in particular that are building up systematic credit trading strategies and I do think it's because of the ability to participate in all to all markets. So.
So we saw that already on the market, making side with some significant new participants competing for order flow.
On the on the dealer side, and I think theres more to come on the hedge fund and investor side as well. So all of that feeds into my view that you will see a long term improvement in trading velocity.
Thanks, guys.
Thank you and as a reminder, if you have a question simply press star one on your telephone next.
Next question is from Alex <unk> with Goldman Sachs. Your line is open.
Hey, good morning, guys. Thanks for squeezing me in with a question here.
I wanted to zone in a little bit on the high yield market and the dynamics there and.
It feels like the environment broadly has improved you mentioned that a number of times on the call today and you published I guess, a couple of things talking about March being a pretty robust volatility quarter for credit markets.
I guess, taking a step back it just feels like market access participation in that higher volatility environment has been more muted recently in high yield than we've seen in the past.
I was wondering why you think that is and if that just two short term and it's just been a couple of months and you expect generally to see much more uplift.
Yes.
It's the latter Alex.
We're confident in our high yield solution.
We know from recent history in 2020 that when high yield volatility picks up and people start to get more concerned about default risk in high yield that all to all liquidity is incredibly valuable.
Almost 50% of our trades that have price improvement.
Versus traditional methods of execution.
So we remain highly confident that we have an important role to play in the high yield markets and that we are super excited about this being the very beginning of what we expect to be a three or four year period of higher volatility after a long period.
Significant quantitative easing.
Suppressed yields and volatility in the past.
That is our view now.
And Alex I'll just add.
The high yield market volumes were down in Q1.
Yet we are seeing higher penetration of our open trading in high yield. So people are finding that cost savings value.
In our open trading solution in high yield and certainly benefiting from those savings. So we are seeing that that growth of our high yield through open trading.
But high yield as I look at it as just one part.
A sizable story here of market access and.
If you really look at this quarter more broadly.
You see records.
We mentioned many of these but record total trading volume record Treasury volume record emerging market volume record Muni volume record PT volume record automation volume record number of active clients record mid X volume a record diversity dealer volume record on life.
Markets and I have to add a record green bond trading in the quarter $16 billion in green bonds and a record we planted a record number of trees.
82000 trees in the quarter, so high yields important, but we have lots of products here at market access that are hitting records in that quarter, which which again high yield and high grade volumes market volumes were down in the quarter.
Totally in overtime look obviously it'll be important to diversify the business away from high yield by G, which are obviously filled the majority of the revenue base.
My second question is around the.
The dealer migration dynamic you guys highlighted data in the press release and on the call as well.
It sounds like a handful move to a fixed distribution plan within all the credit.
Can you give us a sense of how much of that impacted the fee per million in the other bucket and just taking a step back.
Industry volumes and volatility and credit picks up should we expect more of that migration and how do you think that will impact the fee per million in the other credit bucket, albeit again a lot of it is can be mix dependent, but I guess, maybe holding mix steady.
Yes, so the dealer migration impact on the other credit is probably roughly about $3 per dealer to move in.
Saw a nice pickup of the increase in the distribution fees and to my point earlier.
A win win for us because it's a sign that these high yields dealers are going to trade more on the platform. They recognize on the economies of scale and being on that fixed distribution fee plan.
And it increases our recurring revenue as we look forward with other credit we would expect the mix shift in the products was impacted by an increased level of local market trading in the first quarter.
As high yield volume picks up they command a much higher fee capture so we'd expect that to balance out as we look forward in the other credit fee capture.
Super very helpful. Thanks, very much.
Thank you and this concludes our Q&A session for today I will turn the call back to Rick Mcvey for his final remarks.
Thank you for joining us this morning, and we look forward to catching up with you again next quarter.
And with that we end our call for today. Thank you, ladies and gentlemen for joining you may now disconnect.
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