Q3 2022 Tradeweb Markets Inc Earnings Call
Yeah.
Good morning, and welcome to trade webs third quarter 2022 earnings conference call.
As a reminder, today's call is being recorded and will be available for playback to begin I'll turn the call over to head of Treasury S. P N E and Investor Relations Ashley Serrao. Please go ahead.
Thank you and good morning.
Joining me today for the call are chairman and CEO Lee Olesky, who will review the highlights for the quarter and provide a brief business update our CEO elect and precedent Billy Hult, who will dive a little deeper into some growth initiatives and our CFO , Sarah Ferber, who will review our financial results.
We intend to use the website as a means of disclosing material nonpublic information and complying with disclosure obligations under SEC regulation FD.
I'd like to remind you that certain statements in this presentation and Q&A Q&A may relate to future events and expectations.
Such constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
Statements related to among other things our guidance are forward looking statements.
Actual results may differ materially from these forward looking statements information concerning factors that could cause actual results to differ from forward looking statements is contained in our earnings release and periodic reports filed with the SEC.
In addition on today's call, we will reference certain non-GAAP measures information regarding these non-GAAP measures, including reconciliations to GAAP measures are not posted earnings release and presentation.
To recap this morning, we reported GAAP earnings per diluted share of 33 <unk>.
Excluding certain noncash stock based compensation expense.
You shouldn't related transaction costs acquisition related D&A, and certain FX items, and assuming an effective tax rate of 22%. We reported adjusted net income per diluted share of <unk> 45 states.
Please see the honest release and the Form 10-Q to be filed with the SEC for additional information regarding the presentation of our historical results now let me turn the call over to Lee.
Thanks, Ashley good morning, everyone and thank you for joining our third quarter earnings call.
As I take part in my last trade web earnings call I sit back and reflect upon this startup that I co founded over 25 years ago.
With $10 million in capital the core approach with simple.
Listen to our clients and build services products protocols and functionalities that enhance their trading workflows.
Over those 25 years, the talented trade web employees have grown this institutional U S treasury startup into a global multi asset class multi client and multi protocol business.
One of the crowning achievements was the 2019 IPO.
Load by the tremendous growth the team has produced as a public company.
In fact from 2004 through 2021.
We've averaged 12.9% annual revenue growth.
And the first three quarters of 'twenty, two we generated revenues of $896 million up 55% from the first three quarters of 2019 or an average growth of.
16% per year, despite the material FX headwinds were currently facing in 2022.
The Lions share of this growth has been organic as a result of relentless focus on innovation and collaboration that continues to be the north star of our company.
As we help clients trade as efficiently as possible.
This strategy sounds simple yet success requires perseverance.
Our team is dedicated the time and focus going different liquidity pools and markets to deliver holistic global multi asset class solutions.
We call connecting the dots.
This incessant focus on moving markets forward has allowed us to develop a diversified business model that allows the company to drive strong revenue growth, even when facing a challenging macro environment and some of our products and client channels.
I am thrilled to pass the baton to my longtime friend and partner.
Okay.
I'm excited to see him.
Sarah and Rico Bruni.
He was the head of Asia, and Europe , Chris Bruner, who built our institutional U S credit business.
Justin Peterson, our Chief Technology Officer, and the entire trade web team.
They continue to build upon our competitive advantage our people network.
In technology.
I am excited to watch the team capitalized on our long term growth runway ahead, and most of our markets still trading over the phone.
Turning to slide four record third quarter revenues of $287 million were up eight 2% year on year on a reported basis.
The underlying strength in the business was even better stripping out the 490 basis points of FX headwinds that have been the most severe since we went public.
We generated strong revenue growth of 13, 1% on a constant currency basis, and another double digit revenue growth quarter.
The revenue growth and the resulting scale translated into improved profitability relative to full year 2021.
As our year to date adjusted EBITDA margin increased by 83 basis points to 51%.
Adjusted earnings per share saw a healthy growth of 15% year on year.
Turning to slide five the diversity of our growth was on display once again this quarter.
<unk> by double digit constant currency growth across all of our asset classes.
Eights and credit continue to lead the way accounting for 40% and 27% of our revenue growth respectively. While equities provided 22% of the growth our high watermark in terms of growth contribution.
Specifically rates posted its best third quarter revenues ever.
Driven by our continued growth across global government bonds and swaps.
And cash rates U S. Treasury revenues were up nearly 10% year on year, given the acceleration of our retail business due to the higher rate environment.
Swaps produced another strong quarter with positive market share growth, while mortgage revenues declined given the challenging rate backdrop.
Credit posted another strong quarter, driven by strong Muniz U S corporate credit and Cvs trading.
Equities posted its highest third quarter revenues ever driven by institutional Etfs, and our effort to diversify and grow our other equity products.
Money markets set a new record fueled by growth in our retail CD franchise and continued organic growth in institutional repos.
Finally market data revenue growth was equally split across our affinitive contract and our proprietary data products, which continue to enjoy robust growth.
Moving on to slide six I will provide a brief update on two of our main focus areas U S treasuries and Etfs and turn it over to Billy to dig deeper into U S credit and global interest rate swaps.
Starting with U S treasuries, our market share fell slightly to 19, 6% of the U S Treasury market.
The slowdown that we saw in the second quarter within our institutional asset manager and hedge fund clients as they move to the sidelines and trimmed risk as volatility spiked persisted into July .
Activity is starting to improve.
Exiting July with both August and September registering month over month increases.
Leading indicators of the institutional business remains strong.
Gained market share versus Bloomberg and client engagement was good with the number of users increasing by 10% year on year and 3% quarter on quarter.
On the other hand, our wholesale performance was mixed as our legacy streaming offering saw positive revenue growth, while our club underperformed as elevated volatility benefited the incumbent.
Recall, when we acquired <unk> the first phase of our integration plan was focused on expenses.
Consolidating broker dealers and technology platforms at migrating the data center.
We will be consolidating the broker dealers shortly and plan to migrate data centers during the first half of 2003.
After we migrate the data center, we expected that to be a catalyst for revenue growth as we rebuild the liquidity pool.
On the whole, we believe the U S Treasury business.
Is in a unique position with deep retail wholesale and institutional liquidity pools, giving us the ability to continue to grow and capitalize on any potential market structure change.
Finally within equities institutional Etfs produced strong quarterly revenue growth with average daily volume up 43% year on year, driven by new client wins and strong industry volumes. The client pipeline remains strong as the benefits of our electronic solutions continued.
To resonate.
Structurally we are seeing an increase in cross asset trading.
Whereby ETF RF skus are being placed by both fixed income and equity trading desks.
Our other initiatives to expand beyond our flagship ETF franchise are also bearing fruit with momentum continuing in the equity options convertibles and <unk>.
We look forward to crossing the $100 million annual revenue Mark in the coming quarters, and we believe we remain well positioned to benefit from the secular growth in Etfs and our other growth initiatives scaly.
With that I'll turn it over to Billy.
Thanks, Lee and congratulations on a terrific run at trade web.
As Lee highlighted in his opening we have methodically grown our asset class geographic and client footprint over the last 25 years. One thing that has been constant trade web is our singular focus on collaborating with our clients to drive change in the fixed income markets.
All of the success, we've had to date I believe the best is yet to come and in fact, we just completed an offsite, where we gathered our senior leaders and discuss our growth outlook for the next few years, the energy and optimism around the durability of our growth was remarkable we expect credit and swaps to continue to be the back.
One of our growth but.
We'll also be expanding our E M and muni footprint in a meaningful way as you might expect we are also working on a few more initiatives that we will reveal in due course.
I am truly excited about the team that we've assembled and our ability to deepen our competitive advantage across our people network and technology.
That note I'd like to officially welcome Tom <unk>, who joined as President of <unk> at the beginning of the month and I believe he will be a valuable addition, as we look to grow trade what's footprint over the coming years.
Turning to slide seven for a closer look at credit.
We quite often talk about the diversity of the business across asset classes, but the diversity within each asset class shines in moments like this corporate credit face a mixed the industry volume backdrop, given the elevated volatility continued deep per million pressures across institutional IAG due to a reduction in.
Duration and tougher market share conditions across high yield.
However, the elevated volatility at wider spreads continued to boost our cts business and the higher rates helped drive nearly 90% year over year revenue growth in our muni and retail and middle market credit businesses.
The product of this was a healthy quarter with 12% year over year constant currency revenue growth.
It's amazing to see our growing credit business now annualizing over $300 million in revenues led by U S credit.
We have a differentiated strategy in U S credit and we continue to work on building out that puzzle.
And our client network.
ROE our all to all volumes and develop our integrated strategy across client channels.
Electronically credit as a young market with plenty of potential for further innovation and we believe that our holistic credit approach and strong feedback loop with clients will continue to help us expand our network. We are excited to hit new fully electronic market share records.
And we believe further investments in high yield can lead to a similar outcome in the coming quarters and years.
Our institutional volume growth continues to be underpinned by growth in <unk> and portfolio trading our third quarter RFG average daily volume grew 14% year over year driven by investment grade.
<unk> remains the main protocol in the U S credit market, but we realize that the protocol hadn't evolved very much over the last 15 years, so rather than imitate we re imagined the RFG protocol to create a differentiated client trading experience and we are excited about the initial positive results.
That we have achieved over the past few quarters.
Banding RFG presence across AIG in high yield remains our biggest opportunity and we continue to see great success.
Cross selling the innovations we have brought to the credit market to gain wallet share.
Despite the continued increase in spreads and volatility. We also continue to see strong portfolio trading activity on the platform with average daily volume growing 13% year on year and September being another record month.
The underlying trends remain impressive globally. The number of users were up 15%, while the line items traded were up over 35% year over year.
In the quarter, our largest trade was greater than $2 billion.
Behavior change takes time, but clients are increasingly using our market leading portfolio trading solution to access greater liquidity minimize information leakage.
Improved certainty of execution trade left liquid instruments more efficiently trade credit portfolios at the close and reduce workload in operational risk.
The strength in our Q and portfolio trading was matched by the strong growth of our anonymous liquidity solution, all trade, which saw nearly $100 billion in volume with average daily volume, increasing 12% year over year.
Our all to all liquidity volumes are positive year over year growth across AG, but faced tougher acquiring conditions within high yield while high yield volumes were down year over year. The number of high yield all to all responders increased by 12% year over year and is up 40% since the beginning of 2020.
One, giving us confidence that we can continue to deepen our liquidity pool moving forward.
Session volumes saw double digit volume growth led by AIG, while high yield faced tougher hit rate conditions, given more one way submission flow.
Finally, we remain laser focused on maximizing the value of assessors liquidity uploaded on our platform through newer protocols like rematch.
Which accepted our all to all liquidity.
Our rematch average daily volume was up nearly 80% in the third quarter.
Turning to the non U S credit business revenue grew 17% year over year and continued to perform well in the current market environment.
Our muni business achieved record third quarter revenues as the retail market sprung back to life and the institutional business, which grew more than 150% year over year continues to attract new clients.
We will be leveraging our leading presence in the tax exempt muni space to expand our institutional offering to include taxable Muni soon.
Our recent rollout of our AI price for me and it has gone well and we recently partnered with six financial to redistribute our Muni data.
Another area of focus over the coming years as emerging market credit our currency and portfolio trading offers offering continues to scale and we're methodically expanding our presence across all rates and credit products. We believe our position as a global multi asset class firm give.
As us a unique one stop shop proposition being able to offer <unk> products across swaps GDS credit and China bonds to our clients.
The continued volatility in the market boosted our Cts revenues, which grew 45% year over year with strong growth across regions.
Finally, we are excited about our collaboration with S&P global market intelligence to introduce electronic connectivity between primary and secondary markets across European credit covered sovereign supranational and agency bonds.
In sum it.
It was another solid quarter for credit and we continue to see a lot of opportunity in credit as our institutional and wholesale platform continues to scale and the retail business continues to thrive.
Moving on to swaps the multiyear growth story continues as swaps registered another strong quarter aided by a rebounding industry volumes and market share gains are variables swaps revenue grew 23% year over year, driven by strong growth across tenors and market share climbed.
215, 2%.
Since the beginning of 2019, the swaps industry has fluctuated from high growth to negative growth high rates to zero rates and now back to higher rates and fluctuating volatility.
Over those 15 quarters, our swaps business has produced an average of 30% year over year revenue growth.
Estimate to the resiliency of our market, leading swaps business and the strong growth opportunity that we feel is underappreciated.
Our momentum in major currencies continues with record year to date share and dollar euro pound and M. Denominated swaps, we believe the LIBOR transition is progressing well.
50% of our year to date volumes came from sofa trades up from 14% in the year ago period, with 95% of our dollar swap clients, having executed a sofa base trades since the start of the year.
Inflation and upward pressure on commodity prices have shown little signs of abating.
Central Bank continued to raise interest rates to help counter rising inflation. However.
However, such uncertainty means market participants have had to make longer term decisions about how they hedge their exposure to inflation.
She is executing our first cleared inflation swap transaction in 2017 trade web has carved out a leading position in the electronic execution of inflation swaps. Just another example of us helping our clients improve their execution experience.
Year to date inflation swaps volumes are up 60% year over year.
Beyond the risk free rate transition and inflation swaps, we continue to respond to structural changes in the swaps market, making strong advances and cleared swaps and request for market protocol adoption, we saw record <unk> share in the first nine months of the year with revenue increasing by over.
100% year over year, we believe if we increase our market share by an incremental 10% of the cleared and market that could add up to an additional $15 million in variable revenues, assuming current market average daily volumes. The long term opportunity is even larger since 2000.
17 clarity.
Average daily volumes have increased at an average of 24% per year.
Finally, we also saw a record RFP activity as we continue to onboard dealers and deepen our liquidity pool globally.
Looking ahead, we believe that the long term swaps revenue growth potential is meaningful with the market's still only 30% of electron applied we believe there remains a lot that we can do to help digitize our clients manual workflows, while the global fixed income markets and broader swaps market grow.
And with that let me turn it over to Sarah to discuss our financials in more detail.
Thanks, Billy and good morning.
As I go through the numbers all comparisons will be to the prior year period, unless otherwise noted.
Let me begin with an overview of our volumes on slide nine.
We reported record third quarter average daily volume of nearly $1 one trillion.
Up 14% year over year and up 12% when excluding short tenor swaps.
122 product categories that we include in our monthly activity report 10 of the 22 product areas produced year over year volume growth of more than 20%.
Areas of strong growth include European government bonds global swaps U S investment grade credit.
Credit and global Etfs.
Slide 10 provides a summary of our quarterly earnings performance.
The third quarter volume growth translated into gross revenues, increasing by 13, 1% on a currency.
Currency basis, continuing our track record of double digit revenue growth.
Opex headwinds of 490 basis points led to reported growth of eight 2%.
We derived approximately 36% of our revenue from international customers.
Call that approximately 30% of our revenue base is denominated in currencies other than dollars predominantly in euros.
Our variable revenues increased by 14, 8% and our total trading revenue increased by eight 6%.
Total X revenues related to our four major asset classes were down five 1%, but were flat on a constant currency basis.
Right fixed revenues were down given the migration of certain European government bond clients.
The variable contracts at the end of last year.
And the impact of FX.
Money market revenue growth was driven by <unk>.
Another trading revenues were down 2% as a reminder, this line does fluctuate affected by periodic revenues tied to technology enhancements performance for our retail clients.
Market data increased by three 4%.
And our proprietary data products.
This quarter's adjusted EBITDA margin of 51% increased by 86 basis points on a reported basis and 130 basis points on a constant currency basis relative to the third quarter of 2021.
Similarly, our adjusted EBITDA margin for the first nine months of 2022 increased by 83 basis points on a reported basis and 109 basis points on a constant currency basis from the full year 2021.
We remain committed and on track to deliver annual margin expansion in 2022, and Theres been no change to our philosophy of balancing revenue growth with margin expansion.
All in we reported adjusted net income per diluted share a 45.
On slide 11, we contextualize the impact of FX on our historical results. The key takeaway here is the extreme moves in FX. This year are unprecedented and are masking the strength and consistency of our constant currency revenue growth.
Specifically, the third quarter FX headwinds of nearly 500 basis points were driven by a 14% decline in the euro relative to the U S. Dollar, which is the highest decline we have seen year to date and remain in October .
That said when you compare our constant currency growth rate versus prior years, you can see the continued momentum across our business.
This is a testament to the diversity of our business model across asset classes protocol geographies and client channels.
This diversity allows us to uniquely navigate different macro environment, while the secular story of electrification of vehicles.
As Billy highlighted we're excited about the growth potential that lies in front of us and we believe we have multiple significant initiatives that will help us to continue to grow at double digit revenue growth.
Sure.
On top of our own initiatives as yields increase across fixed income, we expect the interest from clients and investing and trading and fixed income products to continue to increase.
Moving onto fees per million on slide 12, the trends I'm about to describe are driven by a mix of the various products within our four asset classes.
In sum.
Our blended fee per million increased 1% year over year, primarily as a result stronger growth and higher fee per million rates derivatives and cash equities.
Excluding lower fee per million short tenor swaps and futures, our blended fee per million or up 3%.
Let's review the underlying trends by asset class starting with rates.
Average fees per million for rates were up 4%.
Cash rates products fees per million were up 14%, primarily due to a positive mix shift towards higher fee per million U S treasuries and the migration of certain European government bond clients kind of fixed to variable contracts at the end of last year.
For long tenor swaps fees per million were down 7%, primarily due to lower duration, while we continue to see growth and flat and RSM.
And other rates derivatives, which includes great features and short tenor swaps average fees per million increased 34% due to a shift towards rates futures, which carries a higher fee per million than the group average and a core increase in OIS fee per million.
Continuing to credit despite the higher fee per million across cash credit credit derivatives and electronically processed U S cash credit average fees per million for credit decreased 17% due to relative product mix with stronger volume growth and lower fee per million credit derivative.
Currently process trade.
Drilling down on cash credit average fees per million increased 4%. Despite the continued U S high grade fee pressures due to stronger growth in U S high grade and munis, which both carry a higher fee per million and overall cash credit.
Notably our fully electronic U S high grade volumes were a record third quarter.
Looking at the credit derivatives and electronically processed U S cash credit category fees per million increased 3% driven by stronger growth in European Index, Etfs, which carries a higher fee per million than the group average.
Continuing with equities average fees per million for equities were up 23% for.
For cash equities average fees per million increased by 20% due to an increase in fees per million within U S. Etfs, which was driven by a decrease in notional per share trade it.
Recall in the U S, we charge per share and not for notional value traded.
Equity derivatives average fees per million increased 1% due to an increase in convertible fee per million.
Finally within money markets fees per million increased 2%.
This was primarily driven by a mix shift towards the U S Cds, which offset a decrease in our U S repo fees per million.
In addition, the higher fee per million retail money market continues to improve given the higher interest rate environment.
Slide 13 details our expenses.
Adjusted expenses for the third quarter increased six 8% and 10, 4% on a constant currency basis.
Call that approximately 15% of our expense base is denominated in currencies other than dollars predominantly in sterling.
The third quarter of 2002, adjusted operating expenses were higher as compared to the third quarter of 21, primarily due to increased employee compensation technology and communication and G&A comp.
Compensation costs increased four 6% due to higher head count.
Adjusted non comp expense increased 11, 1%, primarily due to technology and communications DNA DNA and professional services, but were helped by favorable movements in FX.
Adjusted non comp expense on a constant currency basis increased 16, 1%.
Specifically technology and communication costs increased primarily due to higher clearing and data fees as a result of higher credit all trade volumes and streaming U S Treasury volumes, which continued to grow.
In addition, this quarter also saw the continued impact of our previously communicated investments in data strategy and infrastructure.
Adjusted General and administrative costs increased primarily due to an increase in travel and entertainment as we recover from the pandemic.
Favorable movements in FX resulted in a $2 $2 million gain in the third quarter of <unk> 22 versus a $900000 in the <unk>.
Third quarter of 2011.
Professional fees increased six 4%, mainly due to higher legal costs.
Slide 14 details capital management, and our guidance first on our cash position and capital return policy.
We ended the third quarter in a strong position holding $1 1 billion in cash and cash equivalents and free cash flow reached $555 million for the trailing 12 months.
We have access to a $500 million revolver that remains undrawn as of quarter end.
Capex and capitalized software development for the quarter was $12 3 million, an increase of 23% year over year.
We continue to expect capital expenditures and capitalized software to be in the range of 62 to 68 million for the full year.
With this quarter's earnings the board declared a quarterly dividend of <unk> <unk> per class, a and class b share.
We spent $11 $3 million offsetting equity dilution during the quarter.
Typically we spent $9 million under our regular share buyback program, leaving $9 million for future deployment as of the ended the quarter.
In addition, we withheld $2 3 million in shares to cover payroll tax obligations related to equity compensation.
In October we exhausted, our $150 million share repurchase authorization, which expires at year end.
Given our historical philosophy of using share repurchases to offset the impact of our annual equity grants, we will be discussing with our board renewing our buyback program as well as other typical aspects and strategies within our capital management framework.
Turning to other guidance items for 2022, we are now tightening our adjusted expenses to range from $620 million to $640 million, which incorporates the benefits from FX movements, mainly related to sterling.
For forecasting purposes, we continue to use an assumed non-GAAP tax rate of 22% for the year.
And finally on slide 15, we have updated our quarterly share count sensitivity for the fourth quarter of 'twenty two to help you calibrate your models for fluctuations in our share price now.
Now I will turn it back to Billy and Lee for concluding remarks.
Thanks Tara.
Following the positive third quarter results. We believe we are on track for another great year of trade web and for our 20 <unk> consecutive year of record revenues that level of consistent absolute revenue growth speaks to the resilience of our business model and the team remains laser focused on things in our control.
Maximizing the power of our network to drive further innovation into the marketplace.
Ongoing FX environment Act as a headwind to the core growth and earnings power of the business. We believe our competitive position has never been stronger a testament to the impressive talent and network, we have a trade web.
With a couple of important month and trading days left in October which tend to be our strongest revenue days, we are seeing double digit volume growth across credit equities and money markets relative to October 2021.
The diversity of our growth remains a theme as we continue to see double digit average daily volume growth across U S High grade credit munis, CBS global Etfs equity derivatives repos and retail share certificates of deposits, we are seeing record average daily.
<unk> in our Muni business our share is in line with third quarter levels, while high yield share is stronger than September levels.
I would 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 contributed to the record quarterly revenues and volumes at trade web.
As I sign off for my last earnings call I want to also thank all the investors and sell side analysts.
I've had the great pleasure to meet over the last few years.
With that I'll turn it back to Ashley for your questions.
Thanks, Lee as a reminder, please limit yourself to one question only feel free to hop back into 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 to ask a question you need to press Star one one on your telephone please.
Please Sam violate the Q&A roster.
Our first question comes from the line of Richard Repetto from Piper Sandler Your line is open.
Yeah, Good morning Lee.
Good morning, Lee, Billy and Sarah Firstly, I just want to congratulate you have had a great run you've been resilient and unflappable I think I'd use that word to describe it before but well deserved.
Great Ron.
My question is what are you going to do now.
Now my question is actually for Billy.
And you as well, but as you go through the transition.
What will be a focus Billy and what things you are you've taken from lead it to us.
Really the mantra to lead trade web going forward.
Greg Great question.
Rich.
Thank you for asking it leaves obviously been great through this transition I.
Im looking forward to working with him as chairman of the board I would probably be a little bit more emotional and flower in terms of what I was saying.
Like every analyst in the community plus all of these people Werent dialed in at this exact moment, so I'll leave that sentiment between.
Kind of closed closed doors.
Groundwork.
Has already obviously begun and we're kind of hitting the ground running.
And I referenced this in my prepared remarks, rich, we had an excellent excellent management offsite.
Meeting at the end of the at the end of the summer.
When you have.
No real engagement you feel it but I think the <unk>.
Jim is obviously very charged up for.
For the opportunities that lie ahead for the company.
My areas of focus I think obviously, you would understand exceptionally well, it's going to be talent development, both myself and Lee have always kind of historically talked about like the power and the importance of the people. So we're going to make sure that talent development stage first and foremost as a priority.
Installing an executive leadership team from.
From my perspective, deepening our network with partnerships and acquisitions. These are like major priorities.
It is obviously from my perspective, a great moment to have Tom flew to onboard there'll be president of the company as of January 1st we both Lee and I have a long history and relationship with Tom He is going to be an excellent addition to the management team, it's always sort of awkward, saying nice things about people, while theyre kind of looking at.
Across from me Sarah has been absolutely strong partner in an amazing.
So I feel personally.
Really good about kind of where we are at this moment in time to your great question about like what I am going to kind of take from Lee as much as I can.
At the end of the day, obviously, we're all kind of different people and different personalities, so I'm going to be myself.
Now as the next CEO of the company in a way that I think will make me proud and the company proud and we're going to move on into this next chapter and succeed and do our best but I. Appreciate your question Rich I think one thing for us to sort of determine is how I'm going to still participate in your infamous kind of President's panel.
Maybe Tom and I can kind of arm wrestle and figure out who is going to be the one that participates in that because I know thats, a big kind of historic ratings hit but we appreciate your question Rick So thank you.
Yes.
I think you can move up a slight build but anyway, great rod and congrats thank you.
Thanks Rich.
I'm, just going to say something really quickly and that is.
I think the the.
Company.
As such good hands.
I think the investors have a lot to look forward to.
This is under Billy's leadership with Tom joining and Sarah being here in the rest of the team.
It is incredibly well positioned.
And aside from the.
It's sort of opportunity of the company. The people who are employees are the same people who have been running this business for decades Tom's new Sarah is relatively new but I think we are so well positioned and I'm excited to watch them.
<unk> and grow the business and grow as leaders.
Thanks for thanks for the kind remarks.
Thank you.
Yes.
One moment for our next question.
Our next question comes from the line of Kyle Voigt from <unk>. Your line is open.
Hi, good morning.
Maybe a question for building there's been a sizable by five markets were to spin any surgery market.
Very vocal about wanting.
<unk> for the market.
Can you just talk about the concept of the all in U S treasuries and how you see the market structure potentially changing over time from what is still a relatively bifurcated market structure today.
Yes sure Great question, Kyle how are you.
First thing is just as like maybe like a quick it's a good question just like a quick kind of point of kind of context to make a strong point in kind of an important one obviously the U S. Treasury market is different is different than the credit market.
It's significantly to start with a significantly more electronic we have the estimates of the government bond market at around 60% versus kind of credit, which is around 45%, but I would say kind of more importantly, 80% of the activity in government bonds kind of happens in like seven of the most actively traded issues versus credit which you.
Well Carl has I think is like something like 13000.
<unk> thousand <unk> right. So there is there's a significant difference between those two businesses that being said I think you kind of nailed it in your question.
First of all the pimco kind of.
The white paper that they wrote I think was like significantly important.
Pimco is a very influential very important customer it was a very thoughtful and very well written white paper on some liquidity challenges in the government bond market and so we're going to be in a way that you would expect like exceptionally responsive. So I think we have a team literally at pimco kind of as we saw.
We're going to engage with them directly get their perspective on things. If we were going to kind of chart out some of.
Our our views on the evolution of it all I think there is absolutely an aspect of all to all trading that makes sense in the sort of deeper areas of the of the off the run marketplace. We could also kind of imagine imagine a world I think pretty easily where more and more of the buys.
Site has access to what we describe as the central limit order book World, which is why it's been very important for us from a strategic perspective to be in that business. So we feel like we are kind of really well set up around this evolution.
And.
There is an interesting kind of back and forth debate on this and I think ultimately at the end of the day as we move forward around this it's important to remember that there's not necessarily at all kind of one trading protocol that fits one marketplaces. So we do feel like there is a role potentially for all to all trading and government bonds.
Just like there is obviously always going to be a significant and sizeable roll around RF few trading request for market trading.
Disclosed stream trading there are a bunch of very important protocols in the government bond market that will make this a continued vibrant an important marketplace, but this isn't this is.
A topic that fits us like a glove and we're going to play a leadership role around it I think in a way that you would expect us to so thanks, thanks very much for that.
Thank you.
One moment for our next question.
Our next question comes from the line of Craig Siegenthaler from Bank of America. Your line is open.
Hey, good morning, everyone and I don't know if you guys, sorry, but its that Craig's talking about from bank of America cut out on me.
Hi, Greg Hey, Greg.
So my question is on portfolio trading what were the major drivers of the sequential decline in international portfolio trading other than FX and also can you just put this in the context of the longer term growth trajectory of portfolio trading adoption outside of the U S.
Yes.
I think portfolio trading is going to fit really well into into that European community in credit.
They tend to be very focused on I think two of the most important kind of principles around portfolio trading which is from our perspective information leakage.
Certainty of execution and the feeling that we have is that it's going to become more and more of a risk transfer trading tool for those European customers, there's going to be kind of ebbs and flows on a month to month basis around some of these market share numbers general feel.
Obviously as that portfolio trading works better and right now has more what we would describe as sort of straightforward acceptance and.
And high grade than sort of the less liquid areas of the credit market, but this is a fundamentally important protocol in the credit markets globally, and we feel like the European community is is generally very supportive of what we're building and where we are arriving with our portfolio trading.
Thanks, very much for the question Greg.
Greg I'd, just add that obviously you alluded to FX does play a role in terms of that comparison, whether youre looking at the year over year period.
Sorry.
Particularly with the euro.
Perfect.
Thank you.
One moment for next question.
Our next question comes from the line Michael Cyprus from Morgan Stanley . Your line is open.
Great. Thanks, good morning.
Just curious your perspectives on the SEC's recent proposal for the central clearing of treasuries, what sort of potential impact could we see in the marketplace, what sort of opportunity do you see in this for trade web how you might sort of quantify that and what sort of actions might you need to take the best capture the opportunity.
Yes, it's a great question, it's interesting I mentioned.
The pimco White paper and I do think it resonated really strongly within the within the.
Within the community.
Interesting, they're not a proponent really soon.
Central clearing so I mentioned that because you do really get sort of like interesting kind of debate back and forth around the benefits. Our general perspective is it's good for our business.
In a straightforward way it reduces our capital requirements.
And we have learned.
Bunch of lessons around how central clearing was applied to the global swaps market and how that accelerated the electronic vacation of that market from really sort of a a little bit of a negotiated back alley market into this really strong electron applied market that exists today. So we are proponents of it.
We would say is as the first question I got around government bonds was really about the liquidity of the market, we want to be exceptionally thoughtful.
By embracing central clearing we are not affecting the liquidity of the government bond markets, where there can be a perspective that certain players who are important in the market today would find an expense level too high to be as active participants in the market going forward. So we want to be.
Thoughtful about how this winds up getting applied we're going to be kind of third on this issue I think in a way that you would expect us to be heard we have a lot of credibility obviously as the leading.
Leading our electronic venue in government bonds. So we're going to come out with our own I think strong view.
But it's going to take into.
Affect a lot of the nuances that I was kind of mentioning before but.
But general feeling is like it's good for us and we're set up well for it.
I think the debate on this will continue for a little while.
And thanks for the question.
Thank you.
For next question.
Our next question comes from the line of Andrew Bond from Rosenblatt Securities. Your line is open.
Hey, good morning.
Following up on that portfolio trading September was a record month for portfolio trading at trade web. Despite some concerns that higher levels of volatility will limit growth in more volume, which shipped to all protocol.
Do you think portfolio trade continued to grow meaningfully if markets remain highly volatile or is there a limit to some of the growth in this environment.
It's going to keep it's going to keep growing.
Adding more applied for sure into the into the <unk> rolled into the investment grade world than high yield, which still has I think some of the history and some of the behavior habits around the all to all kind of trading style, but I think the one thing that we have I think decided at a pretty strong way.
Is that the all to all environment.
Is not necessarily the most.
<unk> environment for real kind of risk transfer trades and so one of the things I think that makes us really strongly positive on the value of portfolio trading is the way that portfolio trading.
From our perspective become a real risk risk transfer.
<unk> mechanism around that and that's important.
We feel like it behaves really well in volatile markets right now, it's kind of being applied more to IAG than high yield some of that is behavior as you know the behavior change.
Takes time.
And I think some of the behavior around high yields still goes into it all tall environment.
If that makes sense and thanks for the question.
Thank you.
Thank you one moment our next question.
Our next question comes from the line of Alexander <unk> from Goldman Sachs. Your line is open.
Hey, good morning, guys. Thanks for taking the question.
Hey, Bill I wanted to spend a couple of minutes, maybe you on some of the competitive dynamics in credit trading and really just kind of maybe zoning in on some of the convergence we're seeing between different protocols that you and market access is starting to donate them. So on the one hand, you guys have been leading in portfolio trading market access now doing more portfolio trading.
As you guys are pushing more aggressively into <unk> with some of the innovation you mentioned as well as ultra all so.
As these two kind of venn diagram start to converge what are your views on pricing is it reasonable to think we will start to see more pricing.
Pressure in the space or.
Really more competitive dynamics on pricing I guess and then just a reminder.
Do you guys compare to the incumbent in this space in terms of apples to apples kind of.
A comparison on pricing, whether or not you guys will be able willing to kind of lean into that a little bit more.
It's a great question Alex.
Thanks, very much I kind of made this point before pretty strongly.
That as we have entered into the credit space and shown our ability to really compete in the credit space at a very high level, we've never kind of lead with price.
I think thats, an important thing, we've led with innovation and creating efficiencies for our clients and we feel at a very in a very strong way that the market is really supportive and wants kind of this competition in a way that you just described because they've benefited from it.
And I've always been I think you know in a very straightforward way like a complimentary of of market access from the perspective of having gotten a lot of things right. I think there were a little bit late around portfolio trading and have done a very good job recently of understanding how important that protocol is and doing better and it.
One of the things for sure that we found is as we've delivered innovations into our customers specifically speaking around portfolio trading or around net spotting and net hedging we're able to get more of their kind of traditional RF <unk> business as a consequence, so when the exact way.
That you described I do think Theres, some convergence of where we're all competing.
That being said again high level and a really important way the market really does want to support and have this kind of competition in the space as you know exceptionally well we grew up competing in a lot of the markets that we're in Alex with Bloomberg from essentially day, one so that competitive dynamic has kind of.
<unk> for us always and I think it makes both firms better and I think the clients wind up winning as we continue to innovate I don't know sorry. If you have do you want to add any comment around kind of pricing.
I would say look we are in you are entering into the credit space generally heartbeat apples to apples with generally apples to apples I think our pricing and a little bit lower.
But as Billy said I think the more important point is we compete through innovation.
And we compete differently, our our business mix in terms of different client channels is also a differentiator between retail institutional and wholesale.
Thanks for the question Alex Good to hear your voice.
Thank you one moment for your next question.
Our next question comes from the line of Daniel Fannon from Jefferies. Your line is open.
Hi, Thanks, good morning.
Had a question on high yield and just kind of the market share dynamics more recently.
Is this can we ascribe it more to that some of the volatility just trying to think about the longer term trajectory of as you think about market share or is there something structurally different about this market and your ability to kind of grow share over time versus say high grade and talk a little bit more specifically about some of the near term dynamics.
I think I think it's a combination really of sort of volatility in the market. That's a good question I think it was a combination of sort of volatility in the market at a moment in time, plus the reality that high yield tends to be.
Ultimately less liquid that tends to have strong behavior in that marketplace around all to all trading and our network has come a long way from when we were first answering these questions from you guys thoughtful questions from you guys back in March of 2020.
Around our high yield responder network.
But at the end of the day market access still has the sort of default liquidity in that high yield network and as that market kind of stays all to all a little bit they wind up winning that being said we had an excellent.
Month, so far.
And our market share around.
Portfolio trading specifically speaking in high yield. So these things kind of have their own light form and Ken can kind of turn pretty quickly were really strong on selling the benefits of portfolio trading to our clients.
Around maintaining their relationship with the market makers the benefits around cost the.
The benefits around information leakage minimizing information leakage and the.
The benefit around.
Execute all trading.
On one level. So we feel really good that that message continues to resonate and at the end of the day, that's kind of what we care about so I think we're well positioned there.
Thank you one moment for our next question.
Our next question comes from the line of what terms. So on from Credit Suisse. Your line is open.
Hey, good morning, and thank you for taking my question can you. Please share your perspective on the impact of the rise of fixed income Etfs as having an industry market structure and fixed income turnover velocity and also can you touch upon your future growth initiatives within the ETF marketplace and how the trade web platform is positioned.
Relative to competitors.
I mean, I think I think the most straightforward way right.
Have a exceptionally strong.
<unk> business.
In the U S and Europe . So we have this great global ETF business that has had exceptional success throughout this year and specifically speaking over the last quarter.
One of the things I think that's really important is that the traditional ETF market makers are playing a larger and larger role around market, making in credit.
We do feel like that has given us a little bit of an advantage as we've continued to kind of March forward and our credit offering as the significant kind of ETF players also become standalone.
Important market makers in credit so that kind of helps kind of round out or kind of put the pieces of the puzzle together for us around Etfs and credit.
Our perspective is this ETF business is going to continue to grow. It's obviously benefited in a very strong way from the volatility in the equity markets and we have a really strong team globally around our ETF business. So feel really good about how we're positioned.
TFS and also feel really good about how that has given us an edge in terms of how we built out.
Our credit our credit business as well.
And thank you for thanks, a lot for the question.
One moment for our next question.
Our next question comes from the line of Alex Kramm from UBS. Your line is open.
Yeah, Hey, good morning, everyone.
Not to be too overly focus on the monthly minoshe, but when you gave your update for October I know a couple of days left the one business that was noticeably absent which is the biggest business as interest rate swaps. So just trying to get a feel of whats happening. There I mean, if you look at some of the data that we track in 12 months it looks like that.
This is actually down year over year. Some of this may be FX, but after seeing a nice trend.
Trajectory during the third quarter, we were kind of hoping <unk> could kind of reaccelerate here.
Just wondering if anything is weighing on this and what needs to change for that business to connect celebrate to historical growth rates again.
Hey, Alex it's Billy.
You are allowed to get into the minutiae in any way that you want so we really appreciate the question like the European swap story for US has been like a significant significant success right. It's been really kind of the lead horse for us in our entire rates complex to your exact and specific question, it's taking the Europeans.
This market is taking a little breather.
These few weeks in October so the volumes are down a little bit I think it's been through obviously a significant amount of volatility.
Some of the players who have been actively involved throughout this year or.
A little bit of a half a step back.
Big picture, we feel exceptionally strong about how were positioned in that business. We have built out really important protocols around request for market, which have landed squarely with our most important.
Hedge fund clients in Europe , there's going to be a continued sort of onboarding of clients into the Mifid world in Europe , and so we feel really strongly that we're positioned very well around our European.
Swaps business going forward, so you're correctly identifying something but I wouldn't read too much into it Alex but completely appreciate your question and your attention to detail.
Thank you.
Yes.
Sir would you be taking more questions at this time.
Yes.
Yes.
Yes.
We will take to market.
Yeah.
One moment.
<unk>.
Our next question comes from the line of Ken Worthington from Jpmorgan. Your line is open.
Hi, Thanks for squeezing me in.
We've talked a lot about innovation.
And I think Lee kicked off with listen to your clients build products connect the dots.
What happens to innovation at trade web and more challenging or more extreme environments like we've seen in recent months and quarters do you get more external ideas more opportunity to execute.
This really the time when innovation takes off or is it the opposite and things start to stall because you're too busy.
And then you highlighted swaps and credit as the backbone for <unk>.
Rose.
<unk> and Muni is having a lot of opportunities where does new innovation really need to be for you to deliver on these growth opportunities.
So good question Ken.
<unk> it a very sort of reasonable way in a way that you are describing you have to be sort of aware of the environment. So I am going to say that in a very clear way you have to have kind of good quarter awareness when to.
To make it obvious point.
When the long bond is up a point or two points you have to be a little bit careful around your 330 meeting that is scheduled we thrive on these kind of.
One on one meetings and the sort of like approach around the white paper unless idea generate and let's solve things. So you have to be aware to your question around the moment in time in the marketplace and I think we're really good at that we're really good at understanding what our clients are going through and what their lives, but their business lives are like.
That being said in a really interesting way to your question I think the stakes get really high around the innovations right. So a tweak here or a tweet there around how portfolio trading works.
Or a tweak around the response time around request for markets that I talked about around European swaps can you just have like real.
Real market in real life consequences at a point in time, where the markets are extremely volatile and challenging. So I think the stakes get higher I think our credibility of kind of having been that partner around innovation I think matters more when the markets get more challenging.
Our pipeline is as strong as ever the idea generation kind of continues but you are right you have to be kind of aware that there are moments where.
Friday morning, as free and then all of a sudden it's not free so you have to pick and choose your spots when you're when you're when you're dealing with and talking with high level market professionals. The team is really good at that and really good at understanding that so that's how I would.
Kind of understand.
How I would describe that that point to you.
Hi.
Thanks.
A complement to that mindset with it we have a really strong track record.
And you're going to make investments in all market conditions, and so you mentioned.
And I think it's not a need to invest.
Our core philosophy.
And so we've been able to do that this year is a really good example, we've been able to invest in these new areas.
In our technology, and our data and infrastructure.
Also delivering margin improvement and so part of the.
The operating model is that strategy of content constantly being close to your client.
In the near term volatility in the long term around having a fundamental growth driver.
We had a really good strong track record on.
Thank you thanks for the question.
One moment for next question.
Next question comes from the line of Chris Allen from Citi. Your line is open.
Good morning, everyone and thanks for taking my question, maybe just following up on Sarah's comments around delivering margin improvement can you maybe talk about your ability to manage expenses and provide some detail on some of the puts and takes would FX travel entertainment inflation and variable comp moving forward.
Sure. Thanks, that's a great question.
At the highest level.
I think a really helpful way to think about it as sort of a rule of thumb about 50% of our overall expense base is either variable or discretionary, but the highest level. We have the amount of flexibility in terms of how we manage our expenses through various market conditions.
Are you able to still deliver margin expansion, obviously, we've talked about it very consistent philosophy of <unk>.
Only thing that margin expansion with driving and investing in long term revenue growth.
Yeah, specifically, which is like a more near term question around footprint.
Thanks.
And where we're managing inflation I think this year is a really good.
Sample set.
And for US really comes down to people caught the vast majority of our expense base with people and we feel like we've done a really effective job managing those trends, while still investing in hiring and being able to compete really effectively for talent, while still delivering on the margin and we expect to continue to do that.
The last piece of that back which is obviously not completely in our control.
FX has been a headwind this quarter is somewhat unprecedented and we put in the earnings.
Page 11.
To break it out a little bit in terms of how FX moves on the revenue line.
On the expense line roughly the rule of thumb. There is about 15% of that expense base are correlated to Sterling Sterling. If you looked at this quarter is down 14% versus the dollar so that has a positive impact on the quarter overall in that same time period.
It's much more of a correlation on revenues at a 30% correlation has also been a drag and so net net FX is dilutive to our EBITDA margin, we do have a hedging strategy.
Impact.
And that volatility quite a bit on the cash flow, but FX, certainly has offset and sort of dampening expenses.
Ported basis.
But overall I would leave you with I think the comment that we've made we like our flexibility we like our ability to make.
And continuous beckman.
Overall make sure that we're making smart decisions that helps support that double digit revenue growth opportunity over the long term it won't be linear, but I think that consistent philosophy has really served us well.
Thank you.
Moment for last question.
Our last question comes from the line of Brian Bedell from Deutsche Bank.
Your line is open.
Thanks, So much for squeezing me in I appreciate it.
A question for Billy maybe talk about the interest rates swap market.
And credit obviously, you've identified as the two biggest growth areas, but you did say the interest rate swap market for trade web is an underappreciated growth story, so maybe just.
The credit business, obviously, it gets all the hype given we can see your direct competitor there.
Maybe talk about what you see between those two businesses is sort of the better say five year growth opportunity for trade web in particular and why that.
Why that would be the case for any yes.
There is an interesting story around interest rate swaps and it's a great question, but the interest rate swap market historically was sort of the most resistant towards the electronic vacation of.
Markets of kind of any of the markets that we ever got into and not to bring lead down memory Lane is the calls ending but he remembers that the vast.
So part of our success there came with a lot of hard work around behavior change. The other part of our success. There came really around playing a leadership role around regulation is that market, obviously when electronic around Dodd Frank in the U S. And then and then kind of Mifid in Europe I would argue the combination of the dollar swap market in the euro.
Rypien swap market are two of the most important markets in the world in terms of everything that's been happening.
The rates complex over the past over the past six months.
We feel exceptionally good around how we're positioned competitively in that space and we also feel exceptionally good around the kind of wallet, that's historically been attached to that space.
And we love the fact that our clients are getting more sophisticated using our products like <unk> more frequently and we kind of click I think really really well in that marketplace. Obviously, considering we've had this leadership role and global government bonds TBA mortgages for a long time, so it fits.
US like a glove our general feeling is this marketplace is going to continue to be exceptionally important going forward and we're going to have that leadership role and thats. Some of the kind of foundation about why we feel very confident there.
And thanks, Thanks, a lot for the question Brian .
Now I'll turn the call over to Lee Olesky for any closing remarks.
Okay, yes. Thank you.
Let me just say quickly I really wanted to thank all of the investors.
Investors and analysts anyone who is still on the line.
For all the support.
Over the years, our interactions have always been.
Great.
I am so proud of.
The team I think you can hear it in the remarks today.
I feel like I'm going out, leaving you in the best possible hands.
And Sarah and the rest of the team here and Tom Who's Who's in the room, we're going to let him talk maybe next time.
And have a great day, obviously, if you have any questions don't hesitate to reach out to Ashley.
Or anyone on the team Sameer.
And thanks, a lot for joining thank you.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Okay.
Yes.
Okay.
Yeah.