Q2 2023 Tradeweb Markets Inc Earnings Call
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Now I'd like to turn the conference over to your speaker today.
Good morning, and welcome to trade webs second quarter 2023 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 F. P N day, and Investor Relations Ashley Serrao. Please go ahead.
Thank you and good morning.
Joining me today for the call are CEO , Billy Hult, who will review the highlights for the quarter and provide a brief business update.
And Tom, Florida, 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 regulation FD.
I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations and as such constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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 presentation and periodic reports filed with the SEC.
In addition on today's call, we will reference certain non-GAAP measures as well as certain market and industry data.
Information regarding these non-GAAP measures, including reconciliations to GAAP measures is in our earnings release and presentation.
Information regarding market and industry data, including sources is that our earnings presentation now, let me turn the call over to Billy.
Thanks, Ashley good morning, everyone and thank you for joining our second quarter earnings call. Despite.
Despite the challenging backdrop, we produced a record second quarter the quarter showcased continued share gains across many of our markets and the scalability of our expense base that allows us to balance investing for growth with margin expansion.
More than 15 years ago. It was hard to know what the time, how would reinvent their relationship between humans and technology, allowing us to not only make phone calls, but also stream movies payer bills or even Airdropped pictures from one phone to another for.
For trade web I am an eternal optimist and I believe we'll see more innovation in our markets over the next five years than we've seen over the last 20 years.
Tronic trading will continue to play an increasingly important role in helping traders navigate both com and turbulent markets. We believe this will be led by technological advances multi asset class trading driving structural changes to financial markets traders leveraging technology to maximize client.
<unk> and data being supercharged by AI and machine learning.
I personally believe the word unprecedented is overused and as the financial markets become more interconnected we should expect that the markets will also become even more dynamic and technology will be used to solve the resulting complexity.
We believe the backdrop I just described it plays really well to our business model one that leads with technological innovation is multi asset class enriching data.
Combine that with cultural and depth of talent at the company and our rich heritage of idea generation, we are in a great position to lead and influence market structure change.
Diving into the second quarter activity rebounded very nicely from a productivity when clients trimmed the risk and move to the sidelines driving a decline in year over year total revenue for the first time in years.
The coast cleared revenues accelerated as the quarter progressed into May and June despite REIT volatility remaining elevated specifically on slide four record second quarter revenues of nearly $311 million were up four 5% year over year on a reported basis and four 4%.
A constant currency basis, and adjusted EBITDA margins expanded by 12 basis points relative to the second quarter of 2022.
We continue to balance revenue growth and margin expansion with revenue growth of 5%. During the first half of 2023 translating to a 43 basis point increase in our adjusted EBITDA margin to 52.4% relative to the first half of 2022.
Turning to slide five rates at money markets led the way accounting for 65% and 27% of our revenue growth respectively, while market data provided 13% of the growth.
Specifically the rates business was driven by continued growth across global government bonds and swaps credit was led by strong U S and European corporate credit, including record market share in electronic U S investment grade during June , but was offset by lower credit derivative industry volumes money.
<unk> revenues also reached record levels fueled by growth in our retail certificate of deposit franchise and continued organic growth in institutional repos.
Equity revenues fell 2% due to lower industry, ETF volumes, which were partially offset by higher market share and strong equity derivatives revenue growth.
Finally market data revenues were driven by proprietary third party data products, which continued to enjoy robust growth and a strong product pipeline.
Turning 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 Tom to dig deeper into U S credit and global interest rate swaps.
Starting with U S treasuries revenues increased by 15% year over year eclipsing industry volume growth of 4%.
This was primarily driven by the attractive rate environment, continuing to propel our retail business where revenues nearly tripled.
Our institutional business also had its best revenue quarter ever led by record average daily volume across our institutional streaming protocol and growing adoption of our RF Q plus offering.
The leading indicators of the institutional business remains strong we gained share versus Bloomberg and client engagement was healthy with institutional average daily trades up over 35% year over year automation continues to be an important theme with institutional U S. Treasury.
<unk> average daily trades, increasing by more than 90% year over year.
Turning to our wholesale business, we produced our second best revenue quarter in our history led by strong volumes across our sessions protocol and strong streaming revenues, which more than offset tough industry conditions across the central limit order book protocols, while our club protocol faced tough market.
Conditions, the team made progress onboarding liquidity providers, and we expect to onboard more during the third quarter step.
Stepping back we remain focused on driving the off the run and the on the run markets away from the phone through innovation in the first half of this year less liquid off the runs represented approximately 40% to 45% of our U S Treasury volumes and our electronic off the run volumes have.
Grown by over 22% per year. Since 2018, we continue to believe we can make further inroads across the U S. Treasury market as we continued to advance automated trading link markets and differentiate with a complete selection of protocols and liquidity pools.
Within equities, our ETF business outperformed the overall market, but faced a tough industry backdrop, given lower equity market volatility and a lack of price dispersion that minimized rebalance activity. However, the diversity of our equity offering was evident this quarter as our other initiatives to expand our equity.
Brand beyond our flagship ETF franchise really bore fruit.
Our institutional equity derivatives revenues were up over 40% year over year, driven by strong double digit growth across options and convertibles.
Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well positioned to capitalize on the long term secular ETF growth story, not just in equities, but across our fixed income business.
Finally, we are pleased to announce that the Australian competition and consumer Commission now provided its approval and indicated that it doesn't intend to conduct any further inquiry into our pending yield broker acquisition.
We look forward to closing the transaction in the coming months.
With that I will turn it over to Tom.
As Billy highlighted in his opening the markets continue to grow more interconnected and this sets the company up well given our global multi asset class and multi client channel focus.
Modernization has traditionally been slow to unfold in fixed income yet we are seeing our clients continue to change their behaviors.
Similarly, we continue to remain nimble as a company across all our asset classes and geographies our product and sales teams are increasingly focused on driving a cohesive strategy across client channels, something we believe will pay dividends as the lines between these channels continues to blur.
Turning to slide seven for a closer look at credit.
The underlying trends were mixed as double digit revenue growth across U S and European credit was offset by softer overall industry trends across munis, China and C. D S.
Specifically across munis, the unattractive yield differentials between munis and U S treasuries.
Led to retail clients favoring U S treasuries, but we believe this should change if muni issuance rebounds moving forward.
Despite this mixed backdrop automation continued to surge with global credit <unk> average daily trades, increasing nearly 70% year over year.
Honing in on U S corporate credit the business grew 10% year over year with revenue growing across all three client channels.
Normalizing for the duration related year over year F. P M headwinds in our institutional business U S credit would've grown by 14% year over year.
We are pleased to hit a new fully electronic market share record in AG and we believe further investments in high yield can lead to a similar outcome in the coming quarters and years.
Electronically credit as a young market with plenty of potential for further innovation and we believe we have a meaningful opportunity to expand our wallet share across our F. Q D. R. A SKU in all to all and grow our leading footprint across portfolio trading and sessions.
Our institutional business was a tale of two cities robust double digit revenue growth in investment grade, but lower high yield revenues, given the 13% year over year pullback in industry average daily volumes.
Looking at the underlying protocols, our primary focus on growing institutional RF Q continues to pay off with volumes growing 17% year over year with strong double digit growth across both <unk> and high yield.
Overall portfolio trading volumes fell 7% year over year due to lower European portfolio trading volumes, given tougher pricing conditions for dealers, while U S portfolio trading volumes grew by 7% year over year.
In the second quarter, we produced the second highest adv ever across the <unk> portfolio trading.
Retail credit revenues were up low single digits year over year, despite advisors focusing their buying in U S treasuries.
All trade produced a strong quarter with nearly $129 billion in volume.
Our all to all volumes grew over 60% year over year aided in part by our growing dealer RFG business, which saw volumes grow over 100% year over year.
The team continues to be focused on broadening out our network and increasing the number of responses on the oil trade platform.
In the second quarter, the number of all to all responders rose by over 10% and responses increased by nearly 100% year over year.
Our sessions Adv grew over 28% year over year. Despite the continued tough match rates across high yield with elevated one way flow.
All in the team continues to focus on increasing our wallet share across protocols with the goal of making further inroads in the block and non block trading markets.
<unk> 23, our fully electronic RG and high yield block share was six 1% and three 3% respectively.
Approximately 20% and 40% of our fully electronic I G and high yield share comes from the block market respectively.
Looking ahead U S credit remains our biggest focus area and we like the way we are positioned across our three client channels as we work to further electronic by the market.
Beyond U S credit our E M expansion efforts continued to progress steadily.
Quarter after completing the first electronic single name RF M. C. D. S trade this quarter, we executed our first Mexican local currency bond trade.
Finally, our soft taxable Muni launch continues and we are focused on the integration of taxable muni liquidity across client channels.
Moving to slide eight as Billy highlighted in his opening the second quarter was mixed and this was particularly evident in our global swaps business that performed well overall, despite a challenging macro environment.
April was quiet after the regional bank crisis in March as our asset manager and hedge fund clients derisk their positions there.
The revenue environment improved in may despite the elevated compression activity and revenues further increased in June coupled with a pickup in our fee per million.
In fact, our June greater than one year institutional swaps revenues rose, 6% month over month, despite adv falling 11% month over month.
Even with the challenging quarter, our global swaps revenues grew low single digits, while market share rose to 16, 3% with record share across dollar denominated swaps.
At trade web we remain focused on providing our clients with a multi asset automation solution that we believe is unrivaled in the market.
In the first six months of the year <unk> average daily trades were up over 45% year over year across the business with <unk>, having the strongest penetration across European Etfs U S treasuries European government bonds and U S credit.
We are now seeing signs of growing adoption across our global swaps business, especially in emerging market swaps.
Systematic funds that were historically more equity focused are now interacting with our platform on a more automated basis.
In the first six months of this year are greater than one year swaps <unk> average daily trades were up 40% year over year.
We continue to expect strong adoption of our <unk> solution across swaps as clients continue to invest in automation.
Finally, we continue to make progress across emerging markets swaps and a rapidly growing RFS protocol we.
We saw record M swap share in the second quarter with revenues, increasing over 140% year over year and we believe there is still a lot of room to grow.
Across our RSM protocol, we are seeing a further broadening out of our clients that are utilizing the protocol.
Looking ahead, we believe the long term swaps revenue growth potential is meaningful and we expect revenues to reaccelerate as the environment normalizes.
With the market is still less than 30% electronic side. We believe there remains a lot that we can do to help digitize our client's 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, Tom 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 second quarter average daily volume of nearly $1 three trillion.
Percent year over year and up 11% when excluding short tenor swaps.
Areas of strong growth in European government bonds global swaps U S investment grade credit equity derivatives and repos.
Slide 10 provides a summary of our quarterly earnings performance the second quarter volume growth translated into gross revenues, increasing by four 5% on a reported basis and four 4% on a constant currency basis.
We derived approximately 35% of our revenues from international customers and I'll call that approximately 30% of our revenue base is denominated in currencies other than dollars predominantly in euros.
Our variable and total trading revenue increased by four 2%.
Fixed revenues related to our four major asset classes were up five 2% on both the reported and constant currency basis.
In other trading revenues were down 4% as a reminder, this line fluctuates as it reflects revenue tied to periodic technology enhancements perform for our retail clients.
Year to date adjusted EBITDA margin of 52, 4% increased by 46 basis points on a reported basis and 68 basis points on a constant currency basis from the full year 2022.
Moving on to fees per million on slide 11.
The key trends for the quarter you can see slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter.
Overall, our blended fee per million decreased 7% year over year, primarily due to a mix shift away from credit and a decrease in long tenor swaps fee per million.
Excluding lower fee per million short tenor swaps and futures our blended fee per million was down 7%.
Our cash rates products fees per million were up 8%, primarily due to a positive mix shift towards higher fee per million U S. Treasuries.
U S treasury fees per million were also aided by the continued pickup in our retail channel.
For long tenor swaps fee per million were down 20%, primarily due to an 18% decline in duration year over year and an increase in compression trades.
This was partially offset by growth in <unk> and swaps and our RF and protocol.
Our cash credit average fees per million decreased 2% due to a mix shift away from <unk>, partially offset by strong growth in our fully electronic U S high grade volumes for.
For cash equities average fees per million decreased by 9% due to a mix shift away from higher fee per million European Etfs.
And finally within money markets average fees per million increased 30% driven by a mix shift towards U S Cds and away from global weakness.
Slide 12 details our adjusted expenses at a high level of scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins everything no change in our philosophy here.
Adjusted expenses for the second quarter increased four 7% on a reported basis and four 3% on a constant currency basis.
Compensation costs increased 0.7% due to increases in headcount and salaries, which were mostly offset by lower accruals for performance related variable compensation.
Professional fees increased 11, 3%, mainly due to higher technology consulting expenses.
Technology and communication costs increased primarily due to higher data fees and our previously communicated investments in data strategy and infrastructure.
Adjusted General and administrative costs increased due to the absence of a tax credit that we had in the second quarter of 'twenty, two and a pickup and philanthropy.
Excluding the tax credit in the year ago period, adjusted G&A grew seven 6% year over year.
In addition, unfavorable movements in FX resulted in a 0.1 million dollar loss this quarter versus a $1 million gain in the second quarter of 'twenty two.
Using FX rates as of June 30th FX losses would be approximately one 4 million and $1 million in the third and fourth quarter of 2023, respectively.
Recall in the second half of 2022, adjusted G&A expenses were reduced by $5 million in FX hedging gains.
Slide 13 details capital management, and our guidance, which remains unchanged.
Our cash position and capital return policy. So we ended the second quarter in a strong position with nearly $1 $4 billion in cash and cash equivalents free.
Free cash flow reached approximately $635 million for the trailing 12 months up 18% year over year.
As a reminder, funding our pending youll broker acquisition with cash on hand.
Our net interest income of $15 1 million increase due to a combination of higher cash balances and interest yields. This was primarily driven higher by recent fed hikes and more efficient management of our cash.
Capex and capitalized software development for the quarter was $15 million, a decrease of 1% year over year, primarily due to the timing of our investment spend.
And with this quarter's earnings the board declared a quarterly dividend of nine cents per share.
S a and class B common stock.
Finally, we spent approximately $8 million under our share buyback program, which included opportunistic and planned repurchases to offset dilution from stock based compensation plans, leaving approximately $245 million for future deployment at the end of the quarter.
And now I'll turn it back to Billy for concluding remarks.
Thanks, Sara as I wrote recently change happens at a slow pace until it doesn't trader skills and capabilities. We will continue to evolve as technology takes on more mundane tasks increases efficiency and enables traders to focus on higher value activities, the future will be quants coders and <unk>.
Portfolio managers, all wrapped up inside one trader, we believe technology will create opportunities for current and future generations of traders, allowing them to not only be the alpha generators, but also skilled relationship managers and even marketers. The combination of these themes sets the stage for a peer.
A significant transformation over the next five years, and we look forward to helping our clients drive that change.
With a couple of important month and trading days left in July which tend to be our strongest revenue days overall revenues and volumes were up double digits relative to July 2022.
The diversity of our growth remains a theme as we are seeing strong volume growth across global government bonds global interest rate swaps and corporate credit our IGT shares higher than June levels, while high yield share is relatively in line with June levels.
I would like to welcome Kathryn Johnson to our board of Directors Catherine brings more than 25 years of legal compliance and global markets experience to our board.
Finally, I would like to congratulate Jaco green on his appointment as board Chair and Lee Olesky on his retirement from the board I truly appreciated the close collaboration and friendship that I've had with Lee over the last 20 years.
I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter I don't want to thank my colleagues for their efforts that contributed to our best second quarter revenues and volumes at trade web.
With that I will turn it back to Ashley for your questions.
Thanks, Billy 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 we will now conduct the question and answer session as mentioned as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Andrew Bond of Rosenblatt Securities.
Please proceed with your question.
Hey, Thanks, good morning.
So interest in direct streaming of dealer prices cms's, gaining interest once again on the buy side and it seems to be a theme over the past few years is trading desk that focused on multi asset class connectivity and access the data has improved.
Do you view this direct streaming of competitive threat or just another tool for institutions that ultimately improves workflows and brings more trading activity to electronic platforms.
Hey, Andrew it's Billy Thanks, very much for the question and congratulations on taking Mr head of Bataan.
Lead hitter.
On the analyst questions.
And also by the way thanks for not asking a question in like seven different parts.
I know I know Alex from Goldman is definitely giggling, but he is on mute.
Cause of the kind of single dealer component of it. Obviously you know we've competed against single dealer platforms like forever and ever and ever are very strong you know general view is that you know the buy side and the most important by side clients want you know more counterparties.
Not less right and so we feel very strongly that we're on the right side of all of this and this movement into a more automated efficient way of getting getting liquidity in the marketplace is something that we play a very strong role in in this obviously you know very good for our business and so as you ask the question.
One thing that goes through my mind is I think it's a real interesting question and it's certainly have something to do with like a little bit of strategy and also I think ethos and culture and from our perspective, what we've always said here in a very I think specific way is <unk>.
Very understanding of the competitive landscape look at every angle of everything and and absolutely have a strong understanding of how the competitive landscape is evolving.
But live and breathe with your clients always make that the primary focus and so as we think about the position that we have with our clients. We couldn't feel better about how we have provided a very important service to them and so we feel this trend is an absolutely good one for us and and thanks for the question.
This question comes from Patrick Molly Piper Sandler. Please proceed.
Yeah. Good morning, So my questions on credit you know if we look back in the last 18 months or so you've seen continued shared data and high grade high yield it seems to have been a little bit tougher to come by so I was hoping maybe you could talk a little bit more about the competitive landscaping credit specifically.
Maybe what you feel some of the biggest headwinds a deal ones had been there and how you see that plain out over the course of the back half of this year. Thanks.
Think it's a good it's a really good question Patrick It's Billy I think if.
You know if you've got you know trade web senior management and market access senior management into a room and gave US both troops germ, which is an odd visual I I agree.
I know, we would say the exact same thing, which I think is interesting which is the the true competitor is is the phone right and so everything that we do in terms of how we build our protocols is all about how do we get that sort of more stubborn phone based business off of the phone it onto the electronic marketplace onto trade web right and.
So from our perspective, those kinds of trades have always sort of lived and breathed around being large sort of a risk oriented trades and then traded that have some version of complexity. So that is a very strong area of focus for us as we continue to get after that traditional phone based business.
You know we're in really good shape in terms of how this credit businesses operating day in and day out right and as you guys know very well you know the numbers are strong radar off to average daily volume was up 16% year over year are all to all responses doubled we're doing <unk>.
All of these sort of day in and day out things right to be able to compete and take market share and have a very successful platform. I think is the market got into a little bit of a better place with what we describe as a natural cadence of activity the.
Woody is innovations that we have brought to the marketplace. You guys have heard us talk a lot about how important portfolio trading is.
That has resonated again continually with our clients.
So R. For example are are investment grade portfolio trading average daily volume was up over 20% year over year. These are protocols and innovations that have significant presence with our clients and we're making our bed around the continued ability to innovate for our clients and do.
Well and credit and so we feel we feel really good about it.
And thanks for thanks for the question.
Thank you one moment for our next question.
This question comes from Benjamin Branch of Barclays. Please proceed.
Hey, guys. Thanks for taking the question I wanted to ask a high level higher level question around M&A, maybe it sounds like you're making progress with the old brokers. So maybe posted acquisition what sorts of appetite for further M&A, what pardon me Ah what kinds of assets, what you'd be looking at what's kind of be overall strategy, you're taking through you know build versus buy any updates to your thinking there. Thanks, yeah. Good <unk>.
Russian so yeah and I appreciate your mentioning that about your broker and feeling very confident about that acquisition. So thanks for thanks for mentioning that to start with you know we feel really good about our organic or organic businesses right. So tremendous amount of energy that we're putting into continued moving in government bonds credit as in it.
Example, and I'll use. Another example that I think is very important which is E. T. S. So we feel like all of this route room still to go in terms of like in terms of this traditional voice business in our approach to that fuels like it's working really well for a start with that.
As we as we kind of get through this year I will say this in a very specific way, we're feeling like we can get on the margins as we continue to produce really well, we're gonna continue to be thoughtful and maybe I'll use the word aggressive around our M&A approach, we have a great real.
Nation ship with our partners and he'll say they've been very supportive of us as we've sort of I think fine tuned you know that lens and so you know with M&A, where we always looked to augment our revenue growth for from our perspective, it's about expanding our technology network and proud of.
[noise] footprint kind of period, we will be disciplined absolutely and the way that you expect us to and if you were asking me, which you did sort of an area of the marketplace. At this point, where we feel is is sort of significantly interesting to us I would just say without getting into over specifics.
I would say you know the macro market to us is continuing very very interesting and that's our kind of home court and a lot of ways and we do think that there are potentially some opportunities there where we can continue to get stronger and fine tune our strategy.
And thanks very much it's a good question thanks for asking.
Thank you one moment for our next question.
This is from Kris Allen.
The city. Please proceed.
Yeah morning, everyone. There was a recent article about citadel, making a bigger moved credit trading. So I'm. Just wondering if you could provide some thoughts and how do you expect the impact alternative market makers to play a longer term in terms of mortgage structure pricing and customer and pet and also just help that will interface with blog training as well.
I'll take that one hey, Chris It's it's Tom how are you yeah. So as you as you mentioned Citadel Securities announced their entry into hygiene credit as a market maker a couple of weeks ago, they've always been a great client of ours and partner with us over the years, but I think the way we need to think about this.
Move is that it's not a one off but it's more indicative of the continuation of a trend that we've seen.
It's a more systematic market, making an credit where the quoting process is automated and very fast.
We're seeing a new market makers coming in like Citadel, but there's also others and we're also seeing more systematic market, making coming from the big bank dealers who've been in creditors.
Credit training from the beginning.
In addition to the voice traders they'll also have algo desk that responds algorithmic algorithm algorithmically to prices.
You know this is definitely a very exciting development for credit markets and it's unambiguous sweep positive portrayed web.
Technology, and automation are becoming increasingly important and market meeting market, making which is very positive for the growth of electronic trading overtime and getting people off the phone is Billy says and I I think it's also running in parallel to the trend that we've been seeing in the growth of automated execution that we talk about all the time.
I'm in an ability was mentioning earlier, so I think I think this is all good for US you asked about the impact on customers I think it.
It creates a more positive experience for them as they're receiving more responses to their inquiry and they're getting those responses more quickly so that will draw overtime more volume into electronic trading in my view is is more market makers come into credit I think that this increase competition will lead to larger size trades being quoted elect.
Chronically overtime. So we're quite happy with this move and these trends and think it's all very good for us.
Answered that question like flat out correctly, there was a time and it wasn't that long ago, when a new entrant a new dealer got into the marketplaces that trade web lives and breathes and they would get into that marketplace first and foremost by hiring you know a lot of salespeople right. Those days are over and you can imagine.
<unk> not as the citadel's and the virtues and those types of institutions with very sophisticated lenses into into our marketplaces, they're going to be leading with technology and that's an important comment and that's something I think obviously that speaks to the development of the market places that.
We are in and where they are at at this moment.
And thanks, guys. Thank you for the question.
Thank you one moment next question.
And the question is can Daniel Hannan at Jefferies L. L. C. Please proceed.
Thanks. Good morning, maybe another question for you Tom on the fee per million and swaps can you discuss kind of the trends and kind of a mixed shifts you're seeing in the quarter. It made me more perspective, as we think about what's gone on in July and maybe longer term, how we should think about the fee for a million <unk> for these products.
Sure Hey, Dan at that I start and take a little bit of the first part of that question and then maybe turn it over to one.
More of the long term impact.
Nice to hear Ya I think in terms of swaps, let me start okay fine flops greater than when you're just given that the bulk of our revenues are and certainly E per million it fluctuate and a second order, particularly if you look at the month and the order and a lot of that is related to compression activity, which we talk about.
Break it down a little bit it'll be easier to follow.
For the quarter of asking for a million dollars to 75 and he nearly died.
In April it was actually 303 and May it went down at 244 and in June It rebounded that you're 90 C. C that kind of volatility that I was just talking about that really and was paired with compression activity. So the drop in may with paired with a 60 per cent decline month over a month.
Oh, sorry, I 60 per cent increase my temperament and compression activity, which obviously depresses me for a million dollars on the flip side in June and that decrease in compression about 14 per cent helped G. N P per million rebound. So I think that helps you get a little bit of clarity to two terms that correlation.
And importantly, you know away from compression activity one of the big factors for pay per million and flopped, Israeli duration, which we talk about a lot and that's a key driver we're dealing with an inverted yield curves an accident rate higher than they were last year and both of which are encouraging trading activity on that short are and which.
Also you know like the depression or P for a million dollars.
At the positive trend before I, even get to like the macro away from China.
Trying to think of July we're seeing that fee per million Tech, we're seeing an increasing duration and a decrease in compression. So really positive trend overall in July and maybe I'll turn it over Tom T and you could talk a little bit more of a macro trends, yeah, Hi, Dan I'll, just add a couple of points towards Sarah mentioned first of all second <unk>.
Quarter was quite noisy because remember U S. Dollar LIBOR was retired on June 30th So what we saw was a lot of clients and dealers.
Moving those LIBOR portfolios off their books compressing and that that led to a lot of noise month to month and and cause that to flow through to the fee per million.
LIBOR is now gone it's all so first so that I think it'll be a little bit smoother and clearer what the trends are now that that the flowers out of the way, but I guess a couple of points that I will point to as to why we've seen a much more activity on the on the short end of the curve you know the the most obvious one is what the feds had been doing right we've been.
Through or we're in the midst of a tightening cycle, where they have hiked 525 basis points in less than 18 months, it's driven a lot of volatility on the short end more need for for market participants to hedge.
Short on rates more speculative money, taking views on the path of the sad so lots of activity in the short and and the second factor as Sarah touched on the steep and version of the yield curve. That's persisted for so long in this cycle has driven more rates investing activity into the short end of the curve.
These are the you know the highest short rates that we've seen in 22 years. So I think.
As the fed reaches the end of its tightening cycle, where should be getting close something we're done something that's another hiker too, but we should see both of these factors dissipate somewhat and Ah steepening yield curve should certainly begin to lengthen out the duration of of of I R. S. Trades, so we'll be watching that that path in the month.
In the months ahead.
Thanks, Dan.
Thank you one moment for our next question.
This comes from Alexanderplatz scheme with Goldman Sachs. Please proceed.
Hi, everybody. Good morning. Thanks for the question, let's see can we hit on pricing. So so Tom I think in your comments and public comments in the last six months or so you made a couple of references that there is a massive classes, where you feel like you guys are below market and I understand.
The fee permanently dynamic could be super lumpy as we've discussed obviously with the mix and ultimately you never want to you know jam price to to create disincentives for people that are trying to get all of that but when you think about areas, where you guys could increased price realistically because you are well below market relative to the to the liquidity and the benefits you providing to the marketplace.
Where would that be what kind of impact and how realistic is it for you guys to actually make pricing adjustment.
Yeah. So it's a great question. Alex. So you know you know you've heard me say this before which is like specifically speaking and credit you know I've made the comment that you know in the early stages, we didn't want to lead with pricing right. We wanted to lead with you know the value that we were creating for our clients and then we felt very specifically.
<unk> that the pricing would follow as we added value and I think one of the nice things from my perspective, Alex about Tom's arrival into trade web was with like a fresh set of eyes. He was really able to kind of roll up his sleeves and take a look at the pricing and then then begin to have you know with the credit <unk>.
<unk>.
And the rage team, which are both excellent like the real conversations that kind of move the ball forward on taking advantage and the taking advantage of the leverage that we feel like we have in our pricing model. So I'll I'll hand, it to Utah just to give Alex some of that color and the way that he was asking yes, Alex I think what I would add is.
We have actually selectively raise prices this year across rates and since you and I last spoke in credit as well recently.
And the U S and you know I think I I, absolutely agree with what Billy said, we want to make sure first and foremost providing value for our clients and the products and services that we're providing and you know we are investing.
Large amounts of money in the technology and the protocols and as long as we continue to provide value in what we're building for clients then they're receptive for us charging appropriately for those products.
Thanks for the question.
Okay. Thank you one moment for our next question.
This question comes from <unk> K E. W. Please proceed.
Hi, Good morning, maybe a a multi part question for Sarah I think the expense guidance implies a bit of a ramp and expenses in the back half of the year and just given that in combination with how the environment played out.
On the top line in the first half and give them what you're seeing July . This far I was just wondering if you could reaffirm whether you still expect to drive operating margin expansion year on year for the full year in 2023, and I know a bit early to look ahead to 2024, but maybe if you could just comment high level as to how you think about incremental margins.
And whether you would still have some that seem flexible view on expenses that will allow for margins to expand again and 24.
Great. Thanks, I appreciate the multipart flashing I'm going to have to make sure I get them remind me I forgot something but I think it is a great question I think given him. The first half of 23 I think we've shown and you can see that we have the ability to deliver margin expansion in different types of revenue environment, including a more meat.
Revenue environment.
While continuing to invest and grow head count. So really importantly, we always talk about balancing the need to invest for a longterm guerrilla with delivering margin expansion.
It is Arab business scale actually contained prohibition natural scale into that.
Specifically, if you think about this hearing twenty-three as a reminder, or expense space not only you know.
Scales, given the size of the platform and diversity, but then if you think about it at the next level of specificity.
50 per cent of our expense is either variable or discretionary so think about 30% as variable that really acquainted fluctuate in line with revenue. So it's area about compensation their things like exchange fees that obviously correlate up and down with onions.
And then that 20% remain there are things that are more discretionary nature now I'm not taking back down at all but those are things that you can make decisions on managing them smartly and thoughtfully those are things like marketing were tiny and so.
Is to really big things to think about that business model scales as an investment in technology platform and then there's a lot of ability has area behind discretionary expenses and be matched thoughtfully and that's really you know from our feet one of the the important characteristics that we focus on and so for 23, we're still comfortable we are talking.
Delivering margin expansion on either end of that expense guidance range, you know right now or tracking that lower half at the expense guidance, but you know given July which Billy commented on in the call being quite strong.
Particularly strong double double digit second half is a little bit harder to predict and we have an acquisition that you know we're on track, but I was in the coming months it will fine tune some of that expense.
But we're still comfortable.
Margin expansion I think they've already delivered that in the first half of the year.
If I now take I think which was the third part of your question 2024, and sort of a little bit longer term outlook I would say a lot of what I said hell holes right. So first priority, obviously investing for revenue growth and we have some longterm multiyear growth initiatives that we've talked about right.
So hopefully that gives you some sense of how we're thinking about it and thank you and let me know if I missed one of the sections of that question.
Great. Thank God.
Thank you one moment for our next question.
This question comes from Alex <unk>.
With you B S. Please P C. Yeah.
Yeah, Hey, Hello, everyone, just maybe coming back to the July commentary you made at the end of the call. The ability I know you guys. Some some color already but but maybe you can flush out with a little bit more what's working what's not working it looks like the interest rate swaps are up a lot by the data we track credit a little bit less so but.
You you talked about sure here are gaining so yeah, maybe maybe something else with you.
Do you think you should point out for us before we see the the numbers next week.
No I think well one month and it's not totally done like I said kinda calibrated, but overall fan volume and revenue perspective necessarily mentioned, we're seeing mid double digit growth in so that involved with the breath of our plan a number of things going well I talked a little bit about swapping compression activity.
And duration increase.
I think Billy and Tom both talked about credit in terms of continued market share performance.
And government bonds and you can see some of that in and fixed Ah revenues as well so its strength across the platform I don't know that I would call out it as highlighted by one particular asset maybe I'll turn it over.
Mm scibelli that that.
Rupture in the market that occurred in that second week of March was significant you guys know this better than we do or as well as we do April was really a risk off moment in the marketplace. We knew we would thrive when we got back into what we describe as that natural cadence of of of trading.
And that that's what we've seen happen.
In the month of July so.
Very straightforward and the exact way. That's her described you know we're talking about mid teens and we're talking about from our perspective really you know across the board solid performance.
It's an environment that I think plays very well to us in terms of the breath of are offering and we're excited to continue to perform in the market because we feel like it's lining up well for us.
And thanks for the question.
Thank you one moment for our next question.
Our next question comes from Ken Worthington with J P. Morgan. Please proceed.
Hi, Good morning, Thanks for taking the question Uhm for Billy can you talk about the trends you're seeing around trading velocity and what you see as the main drivers of velocity as we look forward.
Absolutely. It's an interesting question you know Ken specifically in credit.
That sort of velocity question has become always sort of a little bit of of the big of the big words like when does real trading velocity kind of become a part of the credit markets. You know I would draw draw you know a very strong line too you know the citadels of the world.
Entering into the credit market place as market makers as a statement around a view of where the velocity of credit trading is going to go you know they are in the during the velocity business in a certain way and they're making a statement that they feel like the marketplace is Lee.
Leaning in that direction. So the question almost becomes are they going to be picking up.
Only market share or are they actually going to be increasing the electronic market share within credit. Our view is a very good chance it might be the second you know because when you think about you know where the credit market needs to go it's about sort of reliability of data and that's why we placed a ton of emphasis and.
Resource around how we do you know mid pricing within trade, where we have a great team that does that it's really about again around velocity. It's around his continued sort of from our perspective like protocol adoption that continues to happen and then it's about you know new entrants coming into the market, which is my point about sit at.
<unk>, who are bringing in a leading technology lens first right. These are pretty strong.
Kind of contributing factors to this concept of velocity. So you know I think as we think about the credit market. Our bet is that the velocity of how these businesses continued to trade is going to increase and we like how we continue to kind of men the fort with the different steps that we take in the.
Partners that we bring into the marketplace to be on the right side of this philosophy change.
And thanks for the question again.
Okay. Thank you.
On line for our next question.
This is from Michael Cypress Morgan Stanley . Please proceed.
What's the probability of them getting past what impact might we see in the marketplace in terms of volumes and the opportunity that you see for you for your business.
Free trade and posed trade faster reporting times entrees all of these are very supportive for our business.
You know I'll I'll get into the to a specific topics that you asked.
So on the on the on the proposal to reduce the reporting window on certain fixed income assets, there's definitely been some developments in the last couple of weeks.
While there's been some moving pieces. It seems now that the potential F. C. C rule proposals that may come should impact corporate to Muni. So FINRA voted to submit a rule filing with the F. C. C to reduce the reporting time from 15 minutes to one and we expect the M. S. R. B to do the same thing shortly from.
<unk> what would happen then is the SEC would potentially publish a rule proposal within a couple of months and put it out for public comment. So I think there is a chance that by the end of this year or maybe early 24, we would have a ruling on shorting that trade reporting window. So what does this mean for the market and what does this mean for us well if it happens it would clear.
B a positive for a business because in order to <unk> to to comply with reporting trades within one minute.
Much more business would have to be electric electronically executed. So now that obviously be debate and some opposition to the rule I understand there has been some arguments to phase in the requirement for manual trades, where maybe the reporting window goes from 15 to 10 to five over time, but this would definitely be a positive trend and the.
Amount of electronic vacation in the market.
On the central clearing topics just to refresh for everybody.
Currently we have just 13%.
Of the U S treasury market being centrally cleared and that's mostly bank dealers trading with each other their proposal that's out there from the SEC and this is.
Very close to the top of their agenda and I do think it's gonna go through the proposal as it's as it's listed would expand this to include P. T fs and hedge funds, essentially which would increase the amount of essentially cleared volume to over 50 per cent of the market. So that's adopted this would also be directionally positive for our business.
With a much greater amount of trees being centrally cleared without settlement risk or credit checks you trading should continue to increase as as electronic trading workflows make it easier to submit trades the clearinghouse.
As far as potential timing the rule proposals been out for awhile. We finished the public comment period, a lot of debate back and forth, but we expect that the SEC could actually come out with a final rule before the end of this year and then they'd set an implementation timeline you know maybe it's something like one year. So I think.
I don't think that either of these rules would affect the overall market volumes would definitely Ah directionally should help support an increase in the share of electronic trading in these markets.
Thanks for the question Michael.
Thank you one moment for our next question.
This is from Craig <unk> from Bank of America. Please proceed crank.
Hi, Thanks for the question, it's Ely Abboud from Craig's team I was wondering if you could elaborate on some of the headwinds you're seeing in European portfolio trading are there any structural differences between Europe and the U S.
Perhaps makes your up a little bit less amenable to <unk> to P. T.
Good question I wouldn't say, there's there's there's like structural headwinds.
I would say.
You know very well European credit market, you know trades on price versus yield in the U S or versus spread in the U S.
There has historically been the perception that there is I think better liquidity around electronic trading and credit in Europe , and so as portfolio trading got adopted it makes sense because there has been this very strong search for counterparties in the U S.
That it would occur first in the U S. So I would agree with you in terms of the frame of your question that there's a little bit of a lag in Europe .
It's still is an area of focus for US there. We have we have produced strong results around our portfolio trading there. We think it's an advantage for us.
These things take time, and there's a process and there's a sales I think process around this sort of comfort.
And the ease of use around all of this that comes with the territory of from our perspective, bringing real innovation into the marketplace and without question for Us and Europe , It's an area of focus and we intend on doing better and improving our results. There. It's a good question and thanks for asking it.
Thank you.
Our last question will come from.
One moment please.
<unk> <unk> Deutsche Bank. Please proceed.
Great. Thanks, Thanks, very much for squeeze me in here if I can also sweetened or just a two parter. The first one being <unk> you. What what is your view <unk> <unk> announced under the partnership with D. T C for cross margining of futures and and fix clear treasuries and <unk>.
It does is supposed to takes startup essentially the beginning of next year did you see any changing client behavior or any impact your business on that and then just on the <unk> negotiations.
If you have any updates on how that is progressing timing and.
Any optimism and getting increased data revenue from them.
Alright, it's time I think I'll take the first one and Sarah can take the preventative one so yes last week, the CME and D. T. C. C announced that will increase cross margining opportunities for Treasury market participants in January of next year for those of trade both cash treasuries an interest rate futures.
It's definitely splashy headline, but I'm looking into the details.
First thing to note. It's it's an expansion of an existing program to include other things like so for futures in a color or a couple of other U S. Treasury futures contracts. The weren't included before so while this could potentially create greater capital efficiencies for some market participants we don't expect expect us to have a significant impact.
Market volumes in treasuries too.
To <unk> to reap the benefits of this market participants would need to be clearing members of both CME and Dtc's you to get the benefit and it's important to note that those two members cannot pass that benefit down to their respective clients. So this would leave most ctf's for example out of scope as they are not F. I C C.
Remember so you know I think that Directionally, it's positive, but we think probably somewhat limited positive at this point.
Okay maybe.
Maybe I'll take the Refinitiv piece.
We've made significant progress even since the last time, we spoke Ah last quarter I'd say, it's still a little bit early for us to release any specifics, but we do feel like the conversations are going really well and you know we're on track later to put something out before the end of the year and Big picture, we have a great partnership.
Actually focus on making that contract simpler more flexible in the great nieces were identifying mortgage.
A positive or.
Then L fag and.
And the other reality is a franchise in our data has come a long way since 2018, which is the last time you know the contract with it.
<unk> and we think they need yellow.
In a collaborative way for both companies and you know while we're on just on data I would remind everyone. It's a great part of our business and we also have a proprietary I price data business, which in the second quarter. It went up 30% year over year. So in aggregate that line for US you know the value of our data consumption of it and obviously.
The ability we can deliver clients in terms of trading execution value all of that is a huge positive far business.
Okay.
Thank you I'm showing no further questions at this time and would now like to turn the conference accidentally called for closing remarks.
Great questions today, everyone. So we really appreciate your attention very specific and very accurate questions, which makes it easier for us to answer it and the way that we do so we really appreciate your attention.
If.
If you have follow up questions. Obviously, please feel free to reach out to actually in Samir and the team who are great and if I could conclude doing it in nine different parts I would but since I can't I will say you have a great day to everyone and enjoy enjoy the day and thanks for the time. Thank you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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