Q2 2022 Marketaxess Holdings Inc Earnings Call
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Yeah.
Welcome to the Q2 2022 market access Holdings incorporated earnings Conference call. My name is Vanessa and I will be your operator for today's call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session to queue up with your question you can press zero then one on your Touchtone phone.
I will now turn the call over to your host Mr. Stephen Davidson you may begin.
Thank you Vanessa good morning, and welcome to the market access second quarter 2022 earnings conference call for.
For the call, Rick Mcvey, Chairman and Chief Executive Officer will provide a strategic update for the company Chris.
Chris Concannon, President and CFO , who will review the progress, we're making on our growth initiatives.
And then Chris <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.
The companys 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.
Let me now turn the call over to Rick.
Good morning, and thank you for joining us to review our second quarter results.
We continued to execute our growth strategy in the second quarter and delivered strong results across our key operating metrics.
Importantly, we have increased our leadership position in the global credit institutional E trading space.
Our primary competitors with strong market share momentum in corporate bonds and emerging markets.
We are now moving back into a much more favorable trading environment and the investments we have made to expand our foundation for growth are paying off.
We achieved record levels of estimated market share across both credit and rates.
Driving a new quarterly record for global credit trading volume.
Specifically, we delivered record quarterly market share in U S credit high yield emerging markets Euro bonds and U S treasuries.
We established a new record for global active clients and traders.
The benefits of open trading are differentiated liquidity pool are coming through with the highest level of transaction cost savings for clients since the pandemic environment in 2020.
Beyond our core business and protocols, we are making excellent strides in new product areas.
We achieved another record quarter with $23 billion in total portfolio trading volume.
Municipal bond trading Adv was a record $371 million with a solid mix of tax exempt and taxable muni activity and a record 342 active client firms.
And U S treasuries achieved record market share this quarter with 160 active clients trading.
We also made several key announcements this quarter designed to enhance our data and ETF trading capabilities with the launch of an ETF on our market access investment grade 400 index.
Our strategic collaboration with MSCI.
And our minority investment in Virtu Financial's, RF Q hub for ETF share and equity derivative trading.
In summary, strong growth in trading volume broad based market share gains and increasing momentum in new product areas, including U S treasuries and municipal bonds are driving significantly improved operating performance.
Slide four provides an update on market conditions.
Just eight months ago, we predicted that an end to accommodative Central Bank policy and quantitative easing would drive a return to wider credit spreads and higher credit spread volatility.
That is exactly what is happening today and we are now in a much more favorable operating environment there.
The median bid ask spread and high grade has moved from two basis points to four basis points in a very short period of time and this has been accompanied by unusually large price movements in the market with high grade high yield bond indices down approximately 15% year to date.
When liquidity is at a premium as it is today more diverse sources of liquidity matter and the price improvement opportunity over open trading becomes a key differentiator in the market.
We believe that this is a key contributor to our broad based market share gains across high grade high yield emerging markets dollar corporates and euro bonds as reflected in our record composite corporate bond estimated market share of 22% which is up.
From a pre pandemic share or 15, 6% in Q1 2020.
One thing we did not anticipate was the rapid change in the slope of the yield curve, which is inverted in just nine months.
Central Bank tightening has led to a substantial increase in short maturity yields and a reduction in average maturity maturities traded which has created a short term headwind for a high grade institutional fee capture.
Over the last 30 years, the yield curve has only been inverted about 5% of the time.
As a result, we expect the yield curve to return to normal when the fed is comfortable the inflation numbers are trending lower.
Sure.
Slide five illustrates our expanding global client network.
The depth and diversity of the liquidity on our global platform is clearly shown by the addition of new active clients and traders globally.
We set new records with 1935 total active client firms with record international active clients increasing to 982 on the platform driven primarily by strong growth in Asia.
Active investor and dealer traders also increased increased to new records with over 11000 active traders on the platform, including a record $5 300 total active international traders.
Our large and growing institutional client network is our biggest asset and provides the foundation for long term growth as we add more products and trading protocols to our global trading platform.
Slide six illustrates the improved macro backdrop and our diverse liquidity is delivering significant cost savings for our clients.
Wider spreads having created an environment, where the benefits of open trading are coming through in the form of a significant increase in transaction cost savings for our clients.
Liquidity conditions in fixed income trading it become challenging once again reminding all market participants of the importance of all to all trading liquidity.
The increased activity over our platform is clearly shown in the record levels of total credit and open trading executed trades.
In the quarter, we delivered $238 million and estimated cost savings via open trading with.
Which equates to an annual run rate savings of approximately $1 billion well in excess of the total annual Commission revenue we currently generate.
The combination of transaction cost savings and significant improvements in trading and post trade efficiency creates a strong value proposition for our clients.
We believe our substantial first mover advantage at all to all trading will continue to differentiate market access from our competitors for many years to come.
Slide seven illustrates the strong year over year increases in estimated market share.
The share gains that we achieved in the second quarter exceed the long term average gains for the company.
We believe this is the most compelling quarter, we've ever had for a meaningful and comprehensive market share gains across all products and regions.
And 92% of our volume is conducted with institutional investor clients.
According to the major global banks, we recently surveyed the market access lead an institutional client electronic credit trading has widened and all three geographic regions.
To give you some historical perspective, all but one of our primary products were in the top quartile for year over year quarterly growth in estimated market share over the past 10 years and high grade was in the second quartile.
In the long term market share gains are the strongest contributor to shareholder value in our DCF model.
Slide illustrate slide eight illustrates the tremendous growth opportunity that is driving our approach to investing.
The strong market share gains we delivered this quarter only served to reinforce the sizable opportunity that we have before us in terms of top line growth potential.
All else equal one percentage point increase in market share across all of our products generates approximately $50 million in incremental revenue annually.
And the total revenue opportunity in front of US is substantial with an estimated $9 billion revenue opportunity in the fixed income E trading sector by 2031, assuming historical market growth rates.
If you add some expectation for higher trading velocity in the years ahead as well as a growing data opportunity the revenue revenue opportunity is even larger.
Importantly, with our financial model, we can capture this opportunity at very attractive returns with our current return on equity of approximately 25% and our current EBITDA margins north of 50%.
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 10 provides an update on open trading and our protocol expansion.
In the second quarter over 38000 orders and 21 billion in notional value was available daily through our open trading marketplace, an increase of 32% and 33% respectively.
Record 1700 unique firms were active across our open trading network during the quarter with approximately 1000 firms providing liquidity. This.
This diversity of participation continues to drive significant cost savings for our clients as credit spreads widened with a toll.
Savings delivered through open trading year to date.
<unk> markets rates are innovative all to all solution in U S. Treasuries saw trading volume increased 57% year over year with a strong increase in market share as well, we continue to onboard clients and launch new rates products.
<unk> markets for credit saw total trading volume increased to $3 5 billion in the first half of the year, which is up 76% compared to the second half of 2021 with 71 171 clients active on the platform.
Given the recent liquidity challenges in the rates space, we believe that our all to all model is increasingly being viewed as a potential solution for liquidity challenges across both the credit and rates markets.
Municipal bonds also registered record Adv of $371 million, excluding Muni brokers are organic muni volume grew 84% year over year, we continue to build liquidity on the platform with another major municipal bond firm coming online and beginning to trade in the coming.
Days.
Slide seven highlights the increasing momentum we are seeing with automation in credit trading automated trading on market access reached new records in the quarter growing to $57 6 billion in volume and over 305000 trades, reflecting very strong adoption. Despite the increase in volatility.
Volatility.
Today auto ex represents 19% of total trade count and 8% our credit trading volume. We also are seeing an increase in auto responder trading volume and automated responses.
Adoption in Europe has been particularly strong with auto X volume up 53% and trade count up 50%. Additionally.
Additionally, the use of dealer algorithms continues to grow on the platform with approximately $5 7 million algo responses in the second quarter up 23% from the same period last year.
The impressive three year CAGR as shown on this slide reflect the strong long term growth we are experiencing across our trade automation suite.
Slide 12 illustrates the powerful diversification of our model across products and protocols.
The second quarter was a record for portfolio trading with total PT volume of 23 billion, which represents an increase of 64% from Q1.
We delivered this strong performance with estimated portfolio trading market volumes in high grade and high yield increasing only 9% sequentially, resulting in very strong estimated market share growth in the second quarter.
Estimated high grade and high yield portfolio trading market volume represented approximately 6% of the total high grade and high yield trace market in Q2 up slightly from the first quarter.
Estimated high grade and high yield portfolio trading market volumes have remained relatively flat as a percent of total trades over the last four quarters.
In the first half of the year.
In the first half of the year, we had a record 96 active clients and we executed a record 534 trades driving record portfolio trading volume of 37 billion through the first half of July we have already registered $67 6 billion in portfolio trading volume and are currently trending to a new month.
<unk> record.
Slide 13 is an update on emerging markets, where we continue to see strong growth in local markets and overall market share.
We achieved 13% growth in Adv and emerging markets during the second quarter with record local markets trading volume driving record estimated market share.
Local markets trading volume up 68 billion represented a record 39% of total <unk> volume.
The strong performance in local markets was driven in part by strength in EM trading volume across our APAC region.
We also continue to onboard new clients with a record 1370 active clients trading E M on the platform.
Slide 14 outlines our data strategy.
The three pillars of our data strategy are as follows first our goal is to create best in class front office trading and real time data solutions that leverage <unk>, plus and our trade automation capabilities.
Next we are creating data solutions that enhance the portfolio construction process like our recently announced collaboration with MSCI, which leverages, our proprietary trade ability data and liquidity scores.
Last we want to continue to develop new trading protocols and tradable products for our active and systematic clients like our recently launched market access 400 liquid bond index.
We are in the early stages of implementing this strategy and the announcements that we made this past quarter will be key catalysts for our success now.
Now, let me turn the call over to Chris to provide an update on our financials.
Thank you Chris on Slide 16, we provide a summary of our quarterly financials.
Quarter revenue was $182 million up 3% from the prior year, including the impact of lower U S high grade fee capture and foreign currency fluctuations.
Strong growth in trading volume and market share gains across credit and rates was partially offset by a 10% decrease in total credit fee capture and lower information services and post trade revenues.
Information services revenue in the quarter were negatively impacted by 600000 from a strengthening U S dollar from a year ago as well as lower data sales due to timing.
Considering the new data contract pipeline in the second half of the year, we expect our full year 2022 information services revenue growth rate to hit our historical levels around 10% on a constant currency basis.
Second quarter post trade revenue included a negative impact of approximately $1 $1 million on the strengthening U S dollar compared to the prior year quarter.
Adjusting for currency fluctuations combined information services and post trade revenue would've increased approximately 3% from the second quarter of 2021.
EBITDA was $105 million and our EBITDA margin was 58%.
The increase in other income was due to $5 $5 million of foreign currency transaction gains, which benefited EPS by <unk> 11 per share in the quarter and a small gain from our investment in our queue up.
Excluding the impact of foreign currency, we expect other income in the remaining quarters of 2022 to net out to zero due to estimated gains from our Q hub and improved investment yields on our cash balances.
The effective tax rate was 25, 3% in the quarter compared to 21, 8% in the prior year.
Due to lower than expected excess tax benefits related to share based compensation. We now expect a full year effective tax rate to be at the upper end of our previously stated guidance range of 24% to 26%.
On slide 17, we provide more detail on our commission revenue in our fees per million.
Total commission revenue increased 5%.
Our growth in other credit and rates Commission revenue was driven by healthy increases in our trading volume and estimated market share, but was partially offset by lower average fee capture across high grade and other credit.
The lower high grade fee capture was driven by a combination of higher bond yields and lower years to maturity, which accounted for approximately 85% of the $31 year over year decline.
The decrease in other credit fee capture was driven principally by product mix shift as a result of the increase in and local markets trading volume, which has a lower average fee capture is these are rates focused markets.
Higher distribution fees across high grade and other credit helped to offset the impact of lower average fee capture across credit.
On slide 18, we provide you with our expense detail.
Second quarter expenses increased 9% driven principally by investments to enhance the trading system and our data product offering.
Specifically employee compensation and benefits increased $5 million, an increase in head count.
Depreciation and amortization expense increased $2 million.
Due to higher software development and acquired intangible amortization expense.
Technology and communication expense increased $2 million on higher software subscriptions market data and technology licensing fees.
On slide 19, we provide an update on cash flow and capital management.
As of June 30, our cash and investments were $325 million and our trailing 12 month free cash flow was $274 million.
During the second quarter, we paid out $26 million in quarterly dividends to our shareholders and repurchased approximately 179000 shares for a total cost of $49 million.
We had $100 million of capacity remaining on the existing repurchase program.
Our board of directors declared a regular quarterly cash dividend of <unk> 70.
Based on the financial performance of the company.
Now, let me turn the call back to Rick.
Thank you Chris.
In summary, we continue to execute very well against our growth strategy.
We hit on all cylinders this quarter across most operating metrics within our control and we believe that high grade fee capture is likely to move higher in the future as the yield curve returns to normal.
The record level of market share gains we registered this quarter are a clear indicator that the investments we have made to expand our gross cylinders and increase our product diversification are paying off.
Our strong execution broad based market share gains increasing momentum in new products and expansion of our global footprint are setting a very strong foundation for growth in the periods ahead.
Now I would be happy to open the line for your questions.
Thank you we will now begin our question and answer session. If you have a question. Please press zero then one on your Touchtone phone if you wish to be removed from the queue. Please prestero. Thank you.
Youre using a speakerphone please pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero than one and we have our first question from rich Repetto with Piper Sandler.
Yes, good morning, Rick and Chris and Chris.
I guess the first question is on the on the fee capture.
Rick and I know, it's caught everyone by surprise.
But I guess when the yield curve.
Steepens again, we're not in this.
Is it like a spring loaded effect, where they should be no impact to the market.
Nice market share gains that you've made.
Like lower fees in it.
In any way.
Not in any way impacted market share I guess is my point and wood.
And increasing fee per million not impact.
<unk> market share going forward.
Well.
I think.
<unk> is about a return to normal curve and what that is likely to do for fee capture there are two primary factors that go in and this is that the nature of institutional clients trading in high grade corporate bonds only theres been very little movement in our fee capture for other credit because those are price based <unk>.
<unk>, but within the high grade corporate bond institutional client trading.
Clients traded on a yield spread to treasuries and our transaction fee is also based on a on a yield spread which is wide duration matters in determining that outcome for high grade fee capture. So there are two key things that go into that one is the overall level of yields and the other is the average maturity.
<unk> of bonds traded on the platform.
Of those worked against us in the year over year period, because of course yields are much higher year over year, which drives down duration.
And the curve is inverted so you had very unattractive yields in the short end of the curve one year ago. You have now have the most attractive yields at the short end of the curve because of the yield curve inversion. So both of those have worked against us. So yes, if we get back to the normal shape of the yield curve, which we would.
Expect to over the periods ahead.
You should see that the average maturities also returned to normal which all else equal will help fee capture the other question that is what our overall yield levels in that mix to drive the total fee capture but as you've seen from long periods of time, we're at the lower end of what we've experienced historically in the high grade fee capture.
And that came off of a period when the curve was relatively steep and we'd been at the higher end. So we think over time as all neutralizes and averages out but unfortunately in this particular period, we've had both drivers of fee capture pointing lower.
Even though we've had absolutely no changes in our fee model for high grade trading.
And rich I would just add as we see fee capture picking up is that yield curve, Jos and our clients start trading across the curve.
You don't see that increase in capture impacting our share growth either.
Obviously these fees have been in place for many years and.
Clients arent sensitive to that type of thing.
The change over time as the yield curve starts to change.
I missed that.
Answered my question.
One follow up is it looks like your head count declined quarter over quarter, and just trying to understand that and sort of the picture.
The guidance for the Opex going forward.
And continued investments so.
Head count was sort of surprising I guess any more color on that.
Yes rich.
It's really all about timing when we look at our full year hiring plan, we expect to hit the full year budget by the end of the year and as of today. We've got just over 50 heads identified.
As Q3 hires so.
It's just a timing when you're looking at sequential head count impact, but year over year were up 7%.
We strongly believe we're going to hit our hiring plan. It's just a matter of the timing and the back end of the year and it's a good question on the operating expenses because the story behind this quarter was definitely FX had.
Had an impact on our revenue, but it also had a benefit on our operating expense. Our operating expenses would have been just around $2 $5 million higher if you adjust it on a constant currency basis. So the level of operating expense of $97 5 million in the second quarter when youre thinking about the exit.
<unk> for Q3 Q4 <unk>.
Consistent with last quarter, it should be like a 3% to 4% growth rate on top of Q2 and of course, that's assuming that the currencies are constant.
Got it understood very helpful.
Because I know, Chris Concannon wants to build out his team further.
Okay.
Unlike the banks.
We recognize the investment opportunities. So we're not we're not pulling back on our hiring plans, where we're trying to accelerate that.
Got it thank you.
Thank you. Our next question is from Gautam Sawant with credit Suisse.
Good morning, and thank you for taking my question I wanted to know what technology and protocols. The market. The market access platform has that could increase primary market corporate bond market share in that marketplace, we're seeing technology, becoming increasingly embedded in the new issue processes and I wanted to just have you expand.
And if there is an opportunity for market access to compete in that primary market. The same way <unk> been able to grow in the secondary market.
Yes, there are.
A variety of workflow solutions that are active in the primary process, it's not a space that we are currently in.
Our focus continues to be.
Exclusively around secondary trading and growing out protocols in products and market share there, having said that live markets is focused on the most liquid end of corporate bonds, including newly issued bonds. So we do think we're providing a new solution with live anonymous trade.
<unk> at the liquid and <unk>.
Supported by a number of the leading banks.
To develop that protocol, but we would expect would be very active over time in newly issued bonds.
But the workflow solutions around the new issue process are not currently an investment area for the company.
Got it thank you and just as a follow up question can you share insights of the type of activity that youre seeing within the fixed income ETF market and how quantitative tightening is impacting.
The processes that market participants are taking and just the growth of that fixed income ETF market.
Will that affect the velocity of corporate bond trading and I guess the changes.
Investors holding to maturity versus like trading more.
Yes.
We've stated in the past there has been a real transformation.
Market, making in risk transfer and fixed income and especially in credit over the last three or four years. So you see a variety of new tools that work from.
Portfolio trading to ETF share trading increased algorithmic trading increased trading automation with clients all of which were participating in actively.
ETF shares had a very active quarter for <unk>.
Volume this quarter.
Part of that was outflows in this sector, but a part of it is because the institutional market both dealers and investors are using Etfs is another risk transfer tool.
And my view is all of this is good for velocity much.
Much in the way that S&P futures.
<unk> accelerated the growth in underlying stock trading I think where we're adding is it is a model where there are a variety of different tools, there's more automation with both investors and dealers.
And Youll see more active trading and more active velocity and ETF share trading is a welcome addition to that equation because it's just another tool to help clients and dealers transfer risk.
And Rick I would just add as we see rates rise and fixed income assets become more attractive, particularly for retail investors. We would expect fund flows to be quite positive towards fixed income etfs and rather than manage funds over time obviously.
Etfs provide them more efficient.
Investment strategy, given some of the expense ratios. So we would expect ETF flows.
In the fixed income arena to increase with the more attractive fixed income rate yield set where we will be seeing in the future.
And finally, Chris.
Obviously, our investment in RF Q hub, along with some of the leading market makers as a sign of our.
Expectation to offer ETF share trading through the market access trading platform. So.
We're very pleased to be.
Been able to complete that step in the second quarter.
With the with <unk> and the other market makers, and we will be working toward a strategy to bring those capabilities to our clients on market access.
Got it that's very helpful. Thank you for taking my questions.
Thank you. Our next question is from Alex Blaustein with Goldman Sachs.
Hey, guys its Michael on for Alex.
So last couple of quarters, we've kind of seen on the high yield side, the dealers shifting distribution payment plans.
Just wondering if you could help us kind of understand the potential net revenue impact of those moves and what's been the driver and how much more might still be in the pipeline.
Yes, Michael.
You're right, we've seen migration for two high yield dealers migrating to a fixed fee plan.
Those fixed fee plans are $150000 a month, so it's $4 50 per quarter that youre seeing a pickup.
And it's a good sign for us because it means that those dealers anticipate that they're going to do more on the platform.
Phil charging a transaction fee for it is fixed fee plans, but they're not they are paying a lower transaction fee as compared to the monthly minimum commitment fee planning around previously.
As of today, we haven't identified any additional dealers. So the group of dealers that you are seeing hitting the credit fixed fee distribution is expected to remain the same for the foreseeable future.
Great. Thank you.
Yeah.
Thank you. Our next question is from Dan Fannon with Jefferies.
Thanks, I wanted to talk about the market backdrop, a bit some more obviously spreads have widened.
Continuing to talk about automation, but I guess are you surprised that the overall trace volumes are higher given the backdrop of what some of those factors have created or presenting.
I'm not terribly surprised one of the factors Dan as you saw in <unk>.
And all of the bank and major dealer second quarter earnings, including your own.
New issue calendar is way much lower than it had been previously.
And that clearly is an important catalyst for overall trace volumes.
Yes.
Factor is certainly in the the trade volume numbers that you see from the second quarter.
We've had a pretty big shock to the market with a 15% drop in prices. So the overall dollar value at work and corporates is lower than it was at the beginning of the year as well so I'm not terribly surprised.
As you know we continue to believe that we see lots of reasons for optimism on velocity with the increase in market participation, including lots of new and interesting clients continuing to come online in credit trading and 40% compound growth rates, we're seeing in trading automation with both dealers and investors.
New liquidity tools that we just talked about so we were optimistic long term, but were not surprised with some of the short term headwinds around overall market volumes.
And Dan I would just add.
We're hearing from our clients about some of the liquidity challenges and those liquidity challenges aren't just in treasuries were also seeing liquidity challenges in credit.
So many times given challenges around liquidity.
It could impact overall volumes.
But that's why our Ot or open trading alternative liquidity solution did actually see some positive yield in the second quarter and gains across many of the different products in terms of overall volumes, but also penetration within those products.
Understood. Thank you and then as a follow up on the non transactional revenue as they heard the info services outlook of 10%.
To make sure that's for the whole year or the second half of the year and then within post trade I know there was some anticipated runoff from some clients just want to understand the run rate for that portion of the business and thinking about growth maybe not this year or prospectively, how we should think about that thank.
Thank you.
Sure I'm happy to tackle both so for info services, obviously, we have a very strong pipeline and we saw a number of contracts.
Slip from Q2 into Q3, so it's really just a timing.
Issue and also.
Q1 last year saw some one time revenue items as well that we didn't see this this quarter.
We feel very strong about it.
<unk> services and the product offerings that we have we continue to see progress.
Our CP plus product as well as our newly announced access all prints, which is part of the axis all.
<unk> suite of products.
We're confident about achieving those double digit annual growth rates and that has an annual growth rate number that was referenced earlier with regard to post trade.
We were obviously impacted by some of the year over year currency changes.
But the post trade business.
We also saw somewhat expected attrition as you mentioned clients from.
The recent acquisition of Reg reporting hub as we migrated that platform. We had some targeted attrition we were really pushing too.
Transfer clients that were highly profitable. So we saw some some expected.
Attrition of clients on that on that business that business also has a very strong pipeline of clients obviously.
Much more subscription based business so as those that pipeline builds we start to see revenue really show up in in the prior quarters.
For those products some of the new products on post trade that we're excited about we continue to see progress in our repo match service seeing year over year gains in a number of key clients joining that matching service and then a new product called sonar, which is part of our post trade offering for existing clients.
A wonderful surveillance tool that allow clients to review their own activity.
And that's a product that's newly launched and we would expect to see revenue showing up at the end of the year or early next year.
Thank you.
Thank you. Our next question is from Kyle Voigt with K B W.
Hi, Good morning, maybe a related question to the prior question on industry volumes.
So regarding the idea that entire market velocity training will increase.
Complication moves higher I guess, given that we've seen high grade electronic trading moved from 20% to nearly 45% to 40% over the past several years.
Are you surprised we really haven't seen turnover rates move higher over that time period.
And what do you think that tipping point is that and following that philosophy with trade.
Yes.
I think the.
We're still in the midst of.
The transformation.
The trading and risk transfer model in global credit.
So not terribly surprised that we haven't seen the increase in velocity, but as.
As I mentioned earlier, Kyle I still see lots of reasons to be optimistic longer term.
And Rick I would just add during that time period, we saw the overall.
Fixed income market grow dramatically as a result of the massive new issuance that we've seen over the last two years. So you have a.
Very very large growth in the overall fixed income asset class Ken.
A short term impact.
Turnover rate of that asset class more importantly, if.
If you think about electronic trading in.
Fixed income.
Largely driven by our Q timed RF queues so the.
Even though the electronic <unk>.
<unk> is more efficient.
More trades can get done.
It doesn't have that dramatic impact on velocity as you would expect from pure electronic trading.
A close attention to some of our products like automation, which really streamlines execution and can actually increase velocity dramatically in our automation numbers are up.
Sizable grew 39%.
Last year, and we're seeing record volumes across.
Both trades and overall volume notional traded.
So I would pay close attention to that automation suite of products, because that really pushes the accelerant on.
Velocity of trading.
Great. Thank you and then maybe just a follow up regarding revenue capture.
Wondering if you can provide the average the average years to maturity for high grade in the quarter and remind us the historical range that you've seen for that for that high grade Butler.
Yeah for the second quarter.
Just over nine for the years to maturity.
It's been hovering around high <unk> low <unk> for the last couple of quarters. It peaked out at 10 tile back in Q1 of 'twenty one.
But going back longer term in 2019, it did hit the mid sevens, but we have seen stabilization so far in <unk>.
In July of 2022.
Understood. So it sounds like most of that move.
And then I guess sequentially and that can be captured but its mostly related to the yield curve shortening duration rather than mixing the nearest maturity. That's correct. Yeah. That's right I mean, if youre looking at sequentially, we actually had.
$2 pick up on used to maturity, but we were hit with the bond yield movement.
Understood. Thank you very much.
Thank you. Our next question is from Patrick O'shaughnessy with Raymond James.
Good morning to follow up on the last question there on your prior quarterly earnings call. You guys had indicated the high grade fee capture had stabilized in April relative to first quarter levels, and then obviously it was down $12 quarter over quarter for the entirety of the second quarter does that imply that fee capture in May and June was then.
Probably in the one <unk> and if so is that what we should be thinking as we enter the third quarter.
Yeah, Patrick because we go back to last quarter. When we were talking about stabilizing it was more in the context of the exit rate for Q1.
When you go back to December or the fourth quarter. Our average fee capture was in the mid 100, <unk>, we averaged at $1 55 for the first quarter. So each quarter sequentially during that first quarter. We saw a decline in fee capture that brought us to that at $1 50, and then the same thing.
It goes for April May and June , but we're seeing more stabilization in the last three months relative to where we were in April but the one item that's difficult to predict as years to maturity as Rick mentioned, we've really taken that.
On bond yields, but it's difficult to predict have a trading behavior is going to push longer short dated bonds on the platform.
Got it that makes sense. Thank you.
And then sticking with the topic of fee per million.
As you guys keep growing market share in emerging markets is it your assumption that you will probably grow faster in local currency rather than hard currency and if so should we think about.
M fee per million coming down over time.
It's been the case here recently, which we're super excited about Patrick because the global local market opportunity is larger in the aggregate than the hard currency opportunities. So this is a great sign of the.
Lucian of our global <unk> franchise, which opens up <unk>.
<unk> new revenue opportunity.
Yes longer term, we would expect it.
Local currency trading will outstrip hard currency trading and we'll think more about it but.
To provide some granular information there as we go but all of this is new revenue through the growth in E M local trading which.
To us is really good news for shareholders, because we are starting to penetrate a very large and important part of the market.
Great. Thank you.
Thank you. Our next question is from Michael Cyprus with Morgan Stanley .
Hey, good morning, Thanks for taking the question I wanted to circle back to portfolio trading I think you mentioned it was coming in about 6% of industry trace levels overall seems to be holding up better perhaps than feared in a tough market backdrop. So just would be curious to hear your thoughts around that how do you see that volume value proposition evolving in a tougher.
Market backdrop here and then more broadly when you look at your portfolio trading offering and others across the industry I, just what sort of enhancements can be made to that offering across the industry in that market access to drive more usage and uptick in MPT broadly.
Well I'll start and I'm sure Rick will have a few thoughts on portfolio trading obviously, we had a record quarter and.
We were able to execute a 330 trades over that quarter end.
So our market share of electronic PTC grow.
We do think that while portfolio trading plays a role in transferring of risk.
In the marketplace, it's a very expensive trade to perform both in terms of time.
While managing the trade, but also in terms of spread that is ultimately paid.
We've seen our clients.
Look and perfect the right portfolios to trade.
With dealers and also we've seen dealers become much better at trading portfolio ports.
Portfolios with their clients.
The key I think.
Two.
What we've seen and again this is all estimated market share of trace trying to retrace and understand what was the portfolio trade.
We do see it has flattened out as a percent of overall trace volumes. So we're not seeing any growth even at times when it was less volatile than the second quarter, but despite the volatility.
In the second quarter, we saw clients still make use of portfolio trading tools and also use our platform for portfolio trading key differentiator is really what we're hearing from our clients are the need for analytics around.
Portfolio trading better data around the liquidity around individual names.
Estimated what the overall price of a portfolio trade could be whether or not it would be preferred to trade. It has a list instead of a full portfolio trade. So analytics that help clients decide whether or not to put on a portfolio trade.
And also what parts of their overall this should be treated as a list or a portfolio. That's really we're seeing a lot of demand for both real time pricing of the portfolio, but also analytics on how to perform the portfolio trade.
Yes, I would just add bipolar.
The path from zero to 5% share of trace was pretty steep.
So a year ago.
A lot of expectations out that.
It was going to continue along that steep path and as Chris mentioned earlier, it's been pretty flat for four quarters in a row at five 5% or so of trace so thats a change from where we were a year ago.
In our conversations with dealers and clients.
Much more difficult to manage the risk in a large portfolio trade today than it was eight or nine months ago and thats reflected in the in the pricing that's coming through on portfolio trades. So the level of enthusiasm to promote portfolio trading is down in the <unk> community.
My opinion, and it's reflected in pricing thats not quite as tight as it might have been when we were in the very low volatility environment last fall, but in terms of enhancements.
There are lots of different client practices around <unk> and we're knocking out a lot of enhancements that are important to them every month.
Very focused on the things that they would like to see added they're also super excited about what we've done to integrate CP plus at our analytics. So it makes them it makes it easier for them to do.
Track pricing as Theyre working up a portfolio.
And we are benefiting from the large credit trading footprint that we've had for many years around the world that trades bid and offer list with US all day long.
So all of those are working in our favor and pleased to say that our goals for this year around portfolio trading.
<unk> are very much on track.
Great. Thanks for that and just a quick clean up question on the capture rate can you just remind us what the impact would be to the high grade capture and if interest rates I guess at the backend of the curve 10 year Treasury goes up by 100 basis points and how to think about the impact to capture if we see a one year move in years to maturity from here.
Yes, Michael where we are in the curve right. Now every 100 basis points is four to $5 and every one year to maturities around 15.
Great. Thank you.
Thank you.
We have a follow up question from Gautam Sawant with credit Suisse.
Hi, Thank you for taking my follow up can you help us maybe contextualize how July market share is trending so far and then if the type of trading activity youre seeing in the marketplace, if thats more fundamentally driven or if it's more due to the overall like pickup and credit spread volatility and its the macroeconomic drivers.
The share trends in July are very similar to what we saw broadly in Q2.
The second half of July market volumes are almost always higher than the first half because of the trading days around the fourth of July holiday. So we have eight full days of trading that represent a significant part of monthly volumes still in front of us.
On your other question.
I think that there is anything I can say about the first two weeks of trading in terms of any significant differences in client patterns versus the second quarter results. We went through.
Got it thank you.
Thank you we have no further questions in queue.
I'll now turn the call over to our presenters for closing remarks.
Thank you for joining us this morning enjoy the rest of this summer and we look forward to talking to you again next quarter.
Thank you ladies and gentlemen, this concludes our conference. We thank you for participating you may now disconnect.
Okay.
Yes.
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