Q4 2023 MarketAxess Holdings Inc Earnings Call
Unknown Executive: Ladies and gentlemen, thank you for standing by. Welcome to the Marketaxess fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen only mode.
Ladies and gentlemen, thank you for standing by and welcome to the market access fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen only mode.
Unknown Executive: Later, we will conduct a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.
Peter We will conduct a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
Unknown Executive: As a reminder, this conference call is being recorded on January 31st, 2024. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at Marketaxess. Please go ahead, sir.
As a reminder, this conference call is being recorded on January 31st 2024.
I would now like to turn the call over to Steve Davidson head of Investor Relations at market access.
Stephen C. Davidson: Go ahead Sir.
Stephen C. Davidson: Good morning, and welcome to the MarketAxess fourth quarter and full year 2023 earnings conference call. During the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the... Rich Schiffman, Global Head of Trading Solutions, will update you on how we executed this quarter, and then I will review the financial results for the quarter. Before I turn the call over to Chris Concannon, let me remind you that today's call may include forward-looking statements. These statements represent the company's beliefs regarding future events, which by their nature are uncertain. The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements.
Stephen C. Davidson: Good morning, and welcome to the market access <unk> fourth quarter and full year 2023 earnings conference call.
Stephen C. Davidson: For the call, Chris Concannon, Chief Executive Officer, who will provide you with a strategic update on the company.
Stephen C. Davidson: Rich Schiffman global head of trading solutions will update you on how we executed this quarter and then I will review the financial results for the quarter before I turn the call over to Chris Concannon, Let me remind you that today's call may include forward looking statements.
Stephen C. Davidson: These statements represent the company's belief regarding future events that by their nature are uncertain.
Stephen C. Davidson: Company's actual results and financial condition may differ materially from what is indicated in those forward looking statements.
Stephen C. Davidson: 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 31st, 2022. I would also direct you to read the forward-looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our website. Now, let me turn the call over to Chris Concannon.
Stephen C. Davidson: 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 2022.
Stephen C. Davidson: I would also direct you to read the forward looking statement disclaimer in our quarterly earnings release, which was issued earlier. This morning and is now available on our website.
Stephen C. Davidson: Now, let me turn the call over to Chris can get.
Chris Concannon: Good morning, and thank you for joining us to review our fourth quarter and full year results. Our underlying revenue growth trends improved during the fourth quarter as we continue to execute our growth strategy. We delivered 11% revenue growth, including the benefit of our Pragma acquisition. Earnings per share was $1.84, an increase of 16%.
Christopher R. Concannon: Good morning, and thank you for joining us to review, our fourth quarter and full year results.
Christopher R. Concannon: Our underlying revenue growth trends improved during the fourth quarter as we continue to execute our growth strategy.
We delivered 11% revenue growth, including the benefit of our pregnant acquisition earnings per share was $1.84 an increase of 16%.
Chris Concannon: U.S. high-grade transaction revenue increased 14%, emerging markets increased 8%, and Eurobonds increased by 7%. With these improved results in the quarter, we delivered our 15th straight year of record annual revenue. Turning to my strategic update on slide three, first, we are delivering innovation with the launch of our new trading platform, XPro, designed to address our U.S. credit market share challenges by retooling the delivery of our trading offering. We're pleased to see our portfolio trading clients increasingly leveraging our unique pre-trade analytics like tradability, which are only available through XPro. 30% of our portfolio trades were executed on XPro in the fourth quarter, up from 18% in the third quarter. Next, we are enhancing our suite of automation tools with the addition of Pragma.
Christopher R. Concannon: High grade transaction revenue increased 14% emerging markets increased 8% and euro bonds increased by 7% with these improved results in the quarter, we delivered our 15th straight year of record annual revenue.
Christopher R. Concannon: Turning to my strategic update on slide three first we are delivering innovation with the launch of our new trading platform X Pro designed to address our U S credit market share challenges by retooling the delivery of our trading offering we are pleased to see our portfolio trading clients increasingly leveraging our unique.
Christopher R. Concannon: <unk> pre trade analytics like trade ability, which are only available through ex prop 30% of our portfolio trades were executed on X pro in the fourth quarter up from 18% in the third quarter.
Christopher R. Concannon: Next we are enhancing our suite of automation tools with the addition of progress we delivered new records across our automation suite of products in the quarter.
Chris Concannon: We delivered new records across our automation suite of products in the quarter. Our automation products crossed a record $300 billion in volume for the full year in the fourth quarter. Adaptive Auto X, our new client algo solution, moved out of the pilot phase during the quarter with a total of 13 clients, including six of the largest.
Our automation products crossed a record 300 billion in volume for the full year in the fourth quarter adaptive Auto X, our new client Algo solution moved out of the pilot phase during the quarter with a total of 13 clients, including six of the largest.
Chris Concannon: Early results show promising transaction cost savings in U.S. high-grade. And last, in terms of execution, our client franchise has never been stronger with a record 2,100 active firms. We delivered strong growth in our international businesses, portfolio trading, and municipal. We also generated record revenue in both our market data and post-trade businesses as our investments to broaden our geographic and product footprint continued to pay off. Slide four summarizes how powerful data and content on our platform is helping traders achieve better trading outcomes. We want to capture the full spectrum of order flow in the market by helping traders manage their portfolio composition, protocol selection, and counterparty optimization. Our data is at the core of these new initiatives we are delivering through XPROM.
Early results show promising transaction cost savings in U S high grade and last in terms of execution. Our client franchise has never been stronger with a record 2100 active firms we delivered strong growth in our international businesses portfolio trading and municipals.
Christopher R. Concannon: We also generated record revenue in both our market data and post trade businesses as our investments to broaden our geographic and product footprint continued to pay off.
Christopher R. Concannon: Slide four summarizes how powerful data and content on our platform is helping traders achieved better trading outcomes.
Christopher R. Concannon: We want to capture the full spectrum of order flow and the market by helping traders manage their portfolio composition protocol selection and counter party optimization. Our data is at the core of these new initiatives, we are delivering through extra from growing portfolio trading market share to increasing our share.
Chris Concannon: From growing portfolio trading market share to increasing our share of larger-sized trades, our proprietary data is what differentiates us from other market solutions. In 2023, we had a record 390 million price responses from liquidity providers across our platform, which is growing at a three-year CAGR of 11%. This unique data set and the magnitude of this price information is what powers our proprietary data and insights that we generate for clients on X. Slide five highlights our action plan for stronger market share growth in corporate bonds in 2024. Using US High Grade as a case study, we've done a very good job of electronifying small-sized tickets, which has been the key value proposition of Marketaxess since our founding.
Christopher R. Concannon: Of larger size trades are proprietary data is what differentiates us from other market solutions.
Christopher R. Concannon: In 2023, we had a record 390 million price responses from liquidity providers across our platform, which is growing at a three year CAGR of 11%.
Christopher R. Concannon: <unk> unique dataset and the magnitude of this price information is what powers, our proprietary data and insights that we generate for clients on extra.
Christopher R. Concannon: Slide five highlights our action plan for stronger market share growth in corporate bonds in 2024.
Christopher R. Concannon: Using U S high grade as a case study we've done a very good job of electronic flying small sized tickets, which has been the key value proposition of market access since our founding.
Chris Concannon: While the history of electronification would indicate that the largest, most complicated block trades would be the last to adopt electronic solutions, our market has jumped right to the largest and most complicated trades, the portfolio trades. What is left in the middle are trade sizes of $5 million or greater, which is the target market for the rollout of XPRO. We've heard from our clients that they need better data and workflow solutions to manage this part of the market. In this environment, hiring more traders is not the answer.
Christopher R. Concannon: While the history of electrification would indicate that the largest most complicated block trades would be the last to adopt electronic solutions. Our market has jumped right to the largest and most complicated trades the portfolio trade.
Christopher R. Concannon: What is left in the middle is trade size is $5 million or greater which is the target market for the rollout of EXPAREL.
Christopher R. Concannon: We have heard from our clients that they need better data and workflow solutions to manage this part of the market. In this environment are hiring more traders is not the answer to help our clients manage protocol counterparty selection for larger size trades, we have launched trade ability and AI dealers select <unk>.
Chris Concannon: To help our clients manage protocol and counterparty selection for larger-sized trades, we've launched Tradeability and AI Dealer Select. Tradeability helps determine the depth of the market, while AI Dealer Select helps clients determine the right dealers to engage. With Adaptive Auto X, we are also helping clients manage larger-sized trades by leveraging our different trading protocols, including OpenTrade.
Christopher R. Concannon: <unk> helps determine depth of market, while AI dealer select helps clients determined the right dealers to engage with adaptive auto X. We are also helping clients manage larger size trades by leveraging our different trading protocols, including open trading helping.
Chris Concannon: Helping clients manage small and large-sized trades with pre-trade data and analytics, growing our share of portfolio trading, and enhancing our dealer-centric trading protocols like DealerRFQ are key objectives for 2024. Slide six provides an update on market conditions. In the fourth quarter, ETF market maker ADV on our platform was up 68% from the third quarter as market conditions improved, but it was still down 19% from the prior year. Since the Fed's pivot in early December, we have seen a pickup in duration, which has had a positive impact on our U.S. high-grade fee cap. Before I turn the call over to Rich Schiffman, I wanted to provide an update on January activity with one final important trading day remaining in the month. January trends show solid low double-digit growth in U.S. high-grade ADV year-over-year, with estimated market ADV up approximately 15%, indicating lower estimated market share.
Christopher R. Concannon: Helping clients manage small and large sized trades with pre trade data and analytics growing our share of portfolio trading and enhancing our dealer centric trading protocols like dealer arc Q are key objectives for 2024.
Christopher R. Concannon: Slide six provides an update on market conditions in the fourth quarter ETF market maker 80 day on our platform was up 68% from the third quarter as market conditions improved but was still down 19% from the prior year since the fed pivot in early December we have seen it.
Christopher R. Concannon: Pickup in duration, which has had a positive impact on our U S high grade fee capture.
Christopher R. Concannon: Before I turn the call over to rich Schiffman I wanted to provide an update on January activity with one final important trading days remaining in the months January trends showed solid low double digit growth in U S high grade Adv year over year with estimated market Adv up approximately 15%.
Richard Mitchell McVey: Indicating lower estimated market share.
Chris Concannon: January is historically a lower market share month, given seasonally strong new issuance in January. Over $190 billion has been issued so far in January, making it the highest January on record. As a result, trading in newly issued bonds represented approximately 15% of the market, up from an average of 8%. U.S. high-yield ADB is down approximately 30% from elevated levels in the prior year.
Richard Mitchell McVey: January is historically, a lower market share month, given seasonally strong new issuance in January over 190 billion has been issued to date in January making it the highest January on record as a result trading and newly issued bonds represented approximately 15% of the market up from an.
Richard Mitchell McVey: Average of 8%.
Richard Mitchell McVey: U S high yield ADB as down approximately 30% from elevated levels in the prior year. The decline is driven by lower ETF market maker activity and increased focus on distressed names that do not lend themselves to electronic platforms and an increased focus on a strong new issue calendar by our long only account.
Richard J. Schiffman: The decline is driven by lower ETF market-maker activity, an increased focus on distressed names that do not lend themselves to electronic platforms, and an increased focus on a strong new-issue calendar by our long-only accounts. Estimated market ADV is down approximately 9%, indicating significantly lower estimated market. Portfolio trading is on track to be a record month with ADV of approximately $800 million, up approximately 160% from the prior year. Now, I will turn the call over to Rich to provide you with an update on our market. Thanks, Chris.
Richard Mitchell McVey: Estimated market Adv is down approximately 9%, indicating significantly lower estimated market share portfolio trading is on track to be a record month with adv of approximately $800 million up approximately 160% from the prior year now let me turn the call over to rich.
Richard Mitchell McVey: To provide you with an update on our market. Thanks.
Richard Mitchell McVey: Thanks, Chris we made significant progress this quarter advancing our trading business.
Richard J. Schiffman: We made significant progress this quarter in advancing our trading. Slide 8 highlights the strong expansion of our client network. We had a record 2,108 active client firms trading on our platforms in the fourth quarter, which included a record 1,638 client firms active in U.S. credit. Trading volume from hedge fund and private bank clients increased 37% year over year and represented 17% of total credit volume in the quarter, up from 14% in the prior year. On slide 9, we highlight the expansion of our trading business across geographies and products. Fourth quarter growth in international average daily trade volume and trade count was 17% and 19%, respectively.
Slide eight highlights the strong expansion of our client network, we had a record 2108 active client firms trading on our platforms in the fourth quarter, which included a record 1638 client firms active in U S credit.
Richard Mitchell McVey: Trading volume from hedge fund and private bank clients increased 37% year over year and represented 17% of total credit volume in the quarter up from 14% in the prior year.
Richard Mitchell McVey: On slide nine we highlight the expansion of our trading business across geographies and products.
Richard Mitchell McVey: Fourth quarter growth in international average daily trade volume and trade count was 17% and 19% respectively.
Richard J. Schiffman: This was driven by strong Eurobond trading volume of 13% and strong Emerging Local Markets Trading Volume of 26%. Local currency ADV is growing at a three-year CAGR of 21%, and trade sizes $5 million and larger represent 60% of our trading volume. [inaudible] generated a record ADV of 141 million, an increase of 67% compared to the prior year. We are also seeing strong product diversification in municipal bonds, with a record ADV of $539 million. These strong results were driven by record tax-exempt trading volume, up 14%. We had a record 369 active firms on our municipal bond platform, and we are continuing to integrate munibrokers with open trading to expand sources of liquidity for investors and dealers. The adoption of our automation suite of products continues to grow, as shown on slide 10.
Richard Mitchell McVey: This was driven by strong eurobond trading volume up 13% and strong emerging local markets trading volume up 26%.
Richard Mitchell McVey: Local currency Adv is growing at a three year CAGR of 21% and trade sizes $5 million in larger represents 60% of our trading volumes access IQ our front end for private banking clients generated record adv of $141 million an increase of 67%.
Richard Mitchell McVey: Compared to the prior year.
Richard Mitchell McVey: We are also seeing strong product diversification in municipal bonds with record Adv of $539 million.
Richard Mitchell McVey: These strong results were driven by record tax exempt trading volume up 14%.
We had a record 369 active firms on our municipal bond platform and we are continuing to integrate muni brokers with open trading to expand sources of liquidity for investors and dealers.
Richard Mitchell McVey: Adoption of our automation suite of products continues to grow as shown on slide 10.
Richard J. Schiffman: We experienced record automation trade volume and count in the quarter, with three-year CAGRs of 39% and 49% respectively, and a record 185 active automation client firms. Automation trade volume now represents 11% of our total credit volume and a record 25% of our total credit trade volume. There were a record 10 million algo responses from dealers, an increase of 40% year over year.
Richard Mitchell McVey: We experienced record automation trade volume in count in the quarter with three year, CAGR of 39% and 49%, respectively and a record 185 active automation client firms.
Richard Mitchell McVey: Automation trade volume now represents 11% of our total credit volume and a record 25% of our total credit trades.
Richard Mitchell McVey: There were a record 10 million algo responses from dealers and increase of 40% year over year.
Richard J. Schiffman: To share an example of client penetration, our largest automation client executes twice the automation volume of the next largest fund complex. The firm has made a significant investment in automation. We believe this is due, in part, to an increasing need to manage large inflows and smaller size tickets. There were a record 2.2 million trades of $100,000 or greater in U.S. credit on Trace in the fourth quarter, up 15% from the prior year and nearly doubled fourth quarter 21 levels. Slide 11 provides an update on Open Trading, our market-leading, all-to-all liquidity platform. Open trading ADV was $4 billion, and its share of total credit volume was 36%, down from 38% in the prior year but up from 34% in the third quarter of 2023. A record 202 hedge funds provided liquidity through open trading in the quarter, a 9% increase from the prior year.
Richard Mitchell McVey: To share an example of client penetration our largest automation clients executes twice the automation volume of the next largest fund complex.
Richard Mitchell McVey: The firm has made a significant investment in automation. We believe this is due in part to an increasing need to manage large inflows and smaller sized tickets.
There were a record $2 2 million trades, a 100000 or greater and U S credit entrees in the fourth quarter up 15% from the prior year and nearly double fourth quarter 'twenty one levels.
Richard Mitchell McVey: Slide 11 provides an update on open trading and our market, leading all to all liquidity pool.
Richard Mitchell McVey: Open trading Adv was $4 billion and share of total credit volume was 36% down from 38% in the prior year, but up from 34% in the third quarter of 2003.
Richard Mitchell McVey: A record 202 hedge funds provided liquidity through open trading in the quarter, a 9% increase from the prior year.
Richard J. Schiffman: Open trading is consistently the largest single source of secondary liquidity in the U.S. credit market. We delivered approximately $702 million in price improvement to our clients in 2023 on lower levels of credit spread volatility during the year. Lower volatility in high yields in mid-2023 had a negative impact on ETF market maker activity, as shown in the chart on the lower right. As activity decreased, the open trading share of high yields moved from 50 plus percent at the end of 2022 to approximately 47 percent in the current quarter. Our launch of open trading in select local markets, including Poland, the Czech Republic, Hungary, and South Africa, is off to a strong start.
Richard Mitchell McVey: Open trading is consistently the largest single source of secondary liquidity in the U S credit markets.
We delivered approximately $702 million in price improvement to our clients in 2023 on lower levels of credit spread volatility during the year lower.
Richard Mitchell McVey: Lower volatility and high yields in mid 2023 had a negative impact on ETF market maker activity as shown in the chart on the lower right.
As activity decreased open trading share of high yields moved from 50% at the end of 2022 to approximately 47% in the current quarter.
Richard Mitchell McVey: Our launch of open trading in select local markets, including Poland, Czech Republic, Hungary, and South Africa is off to a strong start.
Stephen C. Davidson: We were pleased to see the uptick in EM market volumes in the fourth quarter given the lower levels of growth over the last two years. Emerging markets continue to be a very attractive growth opportunity for the company. Now, I will turn the call over to Steve Davidson to review our financial performance. Thank you, Rich.
Richard Mitchell McVey: We were pleased to see the uptick in end market volumes in the fourth quarter, given the lower levels of growth over the last two years.
Richard Mitchell McVey: Emerging markets continues to be a very attractive growth opportunity for the company.
Richard Mitchell McVey: Now, let me turn the call over to Steve Davidson to review our financial performance.
Stephen C. Davidson: Thank you rich on.
Stephen C. Davidson: On slide 13, we provide a summary of our fourth quarter financial... We delivered revenue of $197 million, up 11% from the prior year. These results include $8 million from the Pragma acquisition, of which $6 million is in commission revenue, and $2 million is in technology services revenue. Foreign currency with a $2 million benefit in the quarter. Record information services revenue of $12 million was up 15%, including a $400,000 benefit from currency fluctuation. This strong performance was driven by new contracts as we continue to experience strong adoption across our data products. Especially CP Plus.
Stephen C. Davidson: On slide 13, we provide a summary of our fourth quarter financials we.
Stephen C. Davidson: We delivered revenue of $197 million up 11% from the prior year. These.
Stephen C. Davidson: These results included $8 million from the PRASM acquisition.
Stephen C. Davidson: Of which $6 million in commission revenues and $2 million is in the technology services revenue line.
Stephen C. Davidson: Foreign currency was a $2 million benefit in the quarter.
Record information services revenue of $12 million was up 15%, including a $400000 benefit from currency fluctuations.
Stephen C. Davidson: This strong performance was driven by new contracts as we continue to experience strong adoption across our data products suite, especially Cte plus.
Stephen C. Davidson: Record post-trade services revenue of $11 million was up 24%, including a $600,000 benefit from currency fluctuation. The Favorable Interest Rate Environment contributed $6 million of interest income, up from $3. The effective tax rate was 16.9%, and we reported diluted EPS of $1.84 per share of 16%. Earnings per share benefited from a lower effective tax rate driven by return to provision adjustment.
Stephen C. Davidson: Record post trade services revenue of $11 million was up 24%, including a $600000 benefit from currency fluctuations.
Stephen C. Davidson: The favorable interest rate environment contributed $6 million of interest income up from $3 million.
Stephen C. Davidson: The effective tax rate was 16, 9% and we reported diluted EPS of $1 84 per share up 16%.
Stephen C. Davidson: Earnings per share benefited from a lower effective tax rate driven by return to provision adjustments and the purchase of transferable tax credits by the company.
Stephen C. Davidson: The Purchase of Transferable Tax Credits by the Company. On slide 14, we provide more detail on our commission revenue and our fee cash. Total commission revenue increased $13 million, or 8%, in the quarter. The increase in credit commission revenue was due to higher estimated market volume. Higher Fixed Distribution, partially offset by lower estimated market share and lower average fee per million. The VIX of 15 and a quarter was a key driver of a decrease in ETF market maker activity, which negatively impacted our U.S. high-yield market share. The reduction in total credit fee capture from the prior year was driven principally by product negatives, lower hot ear volume, and protocol.
Stephen C. Davidson: On slide 14, we provide more detail on our commission revenue in our fee capture.
Stephen C. Davidson: Total commission revenue increased $13 million or 8% in the quarter.
Stephen C. Davidson: The increase in credit Commission revenue was due to stronger estimated market volumes and higher fixed distribution fees, partially offset by lower estimated market share and lower average fee per million.
The <unk> 15 in the quarter was a key driver of the decrease in ETF market maker activity, which negatively impacted our U S high yield market share.
Stephen C. Davidson: The reduction in total credit fee capture in the prior year was driven principally by product mix with lower high yield volume and protocol mix driven by an increase in portfolio trading.
Stephen C. Davidson: Driven by an increase in portfolio trades. On slide 15, we provide a summary of our operating expenses. Fourth quarter operating expenses of $120 million included $9 million for Pragma.
Stephen C. Davidson: On slide 15, we provide a summary of our operating expenses.
Stephen C. Davidson: Fourth quarter operating expenses of $120 million included $9 million from Pragma 2 million in acquisition related expenses and costs associated with efficiency initiatives and a $2 million negative impact from foreign currency fluctuations.
Stephen C. Davidson: $2 million in acquisition-related expenses and costs associated with efficiency initiatives, and a $2 million negative impact from foreign currency fluctuation. On slide 16, we provide an update on our balance sheet, cash flow, and capital management. Our balance sheet continues to be solid, with cash and investments totaling $586 million as of December 31st, and we had no outstanding borrowings under the credit facility. During the past 12 months, we paid out approximately $109 million in quarterly dividends to our shareholders.
Stephen C. Davidson: On slide 16, we provide an update on our balance sheet cash flow and capital management.
Stephen C. Davidson: Our balance sheet continues to be solid with cash and investments totaling $586 million as of December 31.
Stephen C. Davidson: And we had no outstanding borrowings under the credit facilities.
During the past 12 months, we paid out approximately $109 million in quarterly dividends to our shareholders.
Stephen C. Davidson: Our Board of Directors declared a regular quarterly cash dividend of $0.74 per share, an increase from $0.72 per share, based on the financial performance of the company. On slide 17, we provide you with our full year 2024 guidance. Revenue from Pragma is expected to grow in the mid-single digits. Fragment's revenue was $8 million in 4Q23. We expect total expenses to be in the range of $480 million to $500 million, off a base of $438 million in 2020.
Stephen C. Davidson: Our board of directors declared a regular quarterly cash dividend of <unk> 74 per share an increase from 72 per share based on the financial performance of the company.
Stephen C. Davidson: On slide 17, we provide you with our full year 2020 for guidance.
Stephen C. Davidson: Revenue from <unk> is expected to grow in the mid single digits.
Stephen C. Davidson: <unk> revenue was $8 million and <unk> 23.
Stephen C. Davidson: We expect total expenses to be in the range of $480 million to $500 million off a base of $438 million in 2023.
Stephen C. Davidson: This would imply a growth rate of 12% to the midpoint of the 2024 range. This includes the impact of approximately $10 million in efficiency savings in 2024 from the actions taken in 2023, and $4 million in acquisition-related expenses and costs related to the efficiency initiatives included in the 2023 budget. We expect the effective tax rate will be in the range of 24% to 25%. Capital expenditures are expected to be in the range of $60 million to $65 million, of which roughly 80% relates to capitalized software development costs for the investments we are making in new protocols and trading platform enhancements. Now, let me turn the call back to Chris for his closing comments. Thanks, Steve.
Stephen C. Davidson: This would imply a growth rate of 12% to the midpoint of the 2024 range.
Stephen C. Davidson: This includes the impact of <unk>.
Stephen C. Davidson: Approximately $10 million in efficiency savings in 2024 from the actions taken in 2023 and $4 million in acquisition related expenses and costs related to the efficiency initiatives included in the 2023 base.
Stephen C. Davidson: We expect the effective tax rate will be in the range of 24% to 25%.
Stephen C. Davidson: Capital expenditures are expected in the range of 60 to 65 million of which roughly 80% relates to capitalized software development cost for the investments, we are making in new protocols and trading platform enhancements.
Stephen C. Davidson: Now, let me turn the call back to Chris for his closing comments. Thanks, Steve in summary on Slide 18, we continued to execute very well against our growth strategy in the fourth quarter the market backdrop improved through the fourth quarter supported by a potential pivot from the federal reserve in December our focus.
Chris Concannon: In summary, on slide 18, we continue to execute very well against our growth strategy in the fourth quarter. The market backdrop improved in the fourth quarter, supported by a potential pivot from the Federal Reserve in December. Our focus in 2024 is on growing corporate bond market share by leveraging XPRO to retool the delivery of our full suite of products and services. XPRO will be integral to bringing all our data, automation tools, and protocols together to address trades of all sizes and complexities.
Christopher R. Concannon: 2024 is on growing corporate bond market share by leveraging X pro to retool the delivery of our full suite of products and services X pro will be integral to bringing all our data automation tools and protocols together to address trades of all sizes and complexity are.
Chris Concannon: Our client network has never been stronger, with continued expansion across client segments, regions, and products. As we continue to execute and deliver on our key focus areas for 2024, we believe we are well-positioned to deliver higher levels of growth in the quarters ahead. Now, we would be happy to open the line for your questions. All right. At this time, I would like to remind everyone that in order to ask a question, press star then the number one on your telephone keypad. Please limit your questions to just one. Your first question comes from Chris Allen with Citigroup. Please go ahead.
Client network has never been stronger with continued expansion across client segments regions and products as we continue to execute and deliver on our key focus areas for 2024, we believe we are well positioned to deliver higher levels of growth in the quarters ahead now we would be happy to open the line for your questions.
Speaker Change: Alright at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Please.
Please limit to just one question.
Speaker Change: Your first question comes from Chris Allen with Citigroup.
Chris Allen: Please go ahead.
Christopher John Allen: Yeah, morning, guys; I was hoping you could help us unpack the January commentary. Market share decline in high grade, no surprise there, given the given the issuance levels, high yield, implied market share is about 13%, which is a fairly low level. So just trying to understand the share dynamics, maybe the traction you're seeing on XPRO versus other protocols, and what's contributing to kind of the share declines, maybe a little bit more so the high yield on the high. Sure. Thanks, Chris.
Chris Allen: Yes. Good morning, guys I was hoping you could help us unpack the January commentary.
Chris Allen: Market share declines in high grade no surprise, there given the issuance levels high yield implied market share is about 13%, which is a fairly low level. So just trying to understand the share dynamics maybe the the.
<unk> X pro.
Chris Allen: Versus other protocols.
Chris Allen: Contributes the share declines, maybe a little bit more sort of the high yields on the hybrid.
Speaker Change: Sure. Thanks, Chris.
Chris Concannon: First, I want to remind everyone we have our monthly release coming out on Monday. So you'll have all the details on Monday. But we did want to provide some level of commentary because we obviously anticipated questions on the January results. But really, first, let's take a step back and take a look at the macro market. The macro market that was unfolding in December as a result of the Fed pause has been very favorable for our market, but more importantly, the broader bond market. We started seeing behavioral changes that some of those same factors that we saw in December are continuing into the 24. It's an attractive rate environment. Bonds are great investments.
Speaker Change: First.
Speaker Change: I want to remind everyone we have our monthly.
Speaker Change: The release coming out on Monday, So youll have all the details on Monday.
Speaker Change: We did want to provide some level of commentary because we obviously anticipated questions on.
Speaker Change: The January results.
Speaker Change: Really first let's take a step back and take a look at the macro market. The macro market that was unfolding in December as a result of the fed pause has been very favorable for our market, but more importantly, the broader bond market we start.
Speaker Change: Seeing behavioral changes.
Speaker Change: That were positive in December from overall market volumes.
Speaker Change: Some of those same factors that we saw in December are continuing to the 24, it's an attractive rate environment.
Speaker Change: Bonds are great investments again, I know people are interested in bitcoin, but.
Chris Concannon: Again, I know people are interested in Bitcoin, but bonds are much safer investments with great yields. But we're also seeing that in the numbers. If you're looking at reallocations that typically happen at the beginning of a year, we're seeing those reallocations play out in fixed income, both at the retail level and also at the institutional level.
Speaker Change: Bonds are much safer investments with great yield.
Speaker Change: We're also seeing that in the numbers. If you are looking at.
Speaker Change: Reallocations that typically happen at the beginning of the year, we're seeing those reallocations play out into fixed income.
Speaker Change: Both at the retail level, but also at the institutional level. So the overall market backdrop is quite positive.
Chris Concannon: So the overall market backdrop is quite positive. We also see a very high demand for new issues in January, and that's really reflective of that market backdrop. We're seeing a record January new issue, closing in on over 200 billion dollars in new issue in the month of January. That, too, is a positive sign that issuers are coming to market in this higher yield environment and find it quite comfortable to be issuing debt in this overall market environment. So all these are very positive for the bond market more broadly. And as a result, we're seeing high-grade market volumes up 20% year over year and up 40% from Q4 to December actually. So those are all very positive signs of the overall market environment. Our market share in a big new issue month is typically challenged, but we do end up seeing, and again, today is month end. And so we do have one very large active day left in the month.
Speaker Change: We also see a very high demand for new issue.
In January and Thats really reflective of that market backdrop, we're seeing a really a record January new issue.
Speaker Change: Closing in over $200 billion in new issue in the month of January so that too is a positive sign.
Speaker Change: That issuers are coming to market in this higher yield environment and find it quite comfortable to be issuing debt in this overall market on a market environment. So all of those are very positive for the bond market more broadly.
Speaker Change: And as a result, we're seeing high grade market volumes up 20% year over year and up 40% from Q Q4 from December actually so those are all <unk>.
Very positive signs of the overall market environment, our market share in a big new issue month is typically challenged.
Speaker Change: But we do end up seeing it again today is months and.
Speaker Change: And so we do have a very.
Speaker Change: Large active day left in the month and we typically do see a very strong month and activity when we see that high new issue activity in the month.
Chris Concannon: And we typically do see very strong month-end activity when we see that high new issue activity in the month. People are obviously moving out of those new issues and rebalancing happening, and a sizable index rebalance is also happening. So we do think today will be a very strong day left in the month. So that's why I don't want to speculate on results at this point.
Speaker Change: People, obviously moving out of those new issues.
Rebalancing happening in <unk>.
Speaker Change: Sizable index rebalancing is also happening. So we do think today will be a very strong day.
Speaker Change: Left in the month, so thats why I don't want to speculate on results at this point.
Chris Concannon: High grade market share has been stable throughout the month. We're seeing portfolio trading activity. We're seeing our typical long only clients being very active across the high grade market. So a very stable market share month in high grade. High yield, as you mentioned, Chris, is certainly a different story. The high yield market volumes are flat year over year.
Speaker Change: High grade market share has been stable throughout the months were seeing portfolio trading activity. We are seeing are our typical long only clients being very active across the high grade market. So a very stable market share month in.
Speaker Change: In high grade high yield as you mentioned, Chris is that certainly a different story the high yield market volumes are flat year over year.
Chris Concannon: We are seeing investors not showing a big appetite for high yield. We have seen a high yield new issue this month, which is sizable for the month. But where we see a decline in overall market activities across the hedge fund and ETF market maker segment, it is a broad decline across that segment. So we're not seeing or feeling any competitive pressures there.
Speaker Change: We are seeing investors not showing a big appetite for high yield.
We have seen.
High yield new issue this month.
Speaker Change: It is.
Speaker Change: Sizable for the month, but where we see a really a decline in overall market activities across the hedge fund and ETF market makers segment it.
Speaker Change: It is a broad decline across that segment, so we're not seeing or feeling any competitive pressures there when we talk to those clients. They are indicating that the overall market environment for their models and their business has declined and so it's a really a segment challenging in the high yield market.
Chris Concannon: When we talk to those clients, they are indicating that the overall market environment for their models and their businesses has declined. And so it's really a segment challenge in the high yield market. And you see that high yield ETF volumes are down 20% year over year. So there just continues to be a thematic challenge within that high yield market. We saw that in the second and third quarters as well.
Speaker Change: When you see that in the in the <unk> high yield ETF volumes are down 20% year over year. So there just continues to be.
Thematic challenge within that high yield market we.
Speaker Change: We saw that in the second and third quarter as well, we did see some pickup in the fourth quarter in high yield.
Chris Concannon: We did see some pickup in the fourth quarter in high yield, but really, that high yield challenge continues. Other areas of our business, EM. EM had a very challenging 2023. The investment thesis was not attractive relative to where yields were in the high grade market share, or even treasury markets.
Speaker Change: But really that high yield challenge continues.
Speaker Change: Other areas of our business <unk> had a very challenging 2023.
Speaker Change: The investment thesis was not attractive.
Attractive relative to where yields were at high grade market share or even even treasury market. So the end market volumes were challenged we are seeing a pickup we saw a pickup in.
Chris Concannon: So market volumes were challenged. But we're seeing a pickup. We saw a pickup in EM volumes in Q4. And we're actually seeing a positive trend continue into January in EM, with market volumes up close to 10%. And we've even seen, we're approaching a record in our APAC volumes. So we're seeing positive activity across the international business in January. So hopefully, that's a long-winded answer, Chris, to remind everyone that we do have a market volume release coming out on Monday. Thanks. All right, our next question comes from the line of Alex Kramm with UBS. Please go ahead. Yes, hey, everyone, just staying on market share, but zooming out a little bit, obviously, and thanks for that chart. I think that's new, that breaks down the trace volumes and, you know, by kind of size of trades and where you focus and obviously, a lot of initiatives going on. But when I think about your core business,
Speaker Change: Volumes in Q4, and we're actually seeing a positive trend continue into January in the EM with market volumes up close to 10%.
Speaker Change: And we've even seen we're approaching a record in our APAC.
Speaker Change: Volumes, so we're seeing positive activity across the international business in January.
So hopefully thats a long winded answer.
Speaker Change: Chris.
Speaker Change: Remind everyone that we do have a market volume release coming out on Monday.
Thanks, Chris.
Speaker Change: Alright. Our next question comes from the line of Alex Kramm with UBS. Please go ahead.
Alex Kramm: Yes, Hey, Hello, everyone, just staying on market share, but but zooming out a little bit obviously and thanks for that that charge I think thats new to that breaks down.
Alex Kramm: The trace volumes and bye.
Alex Kramm: Bye bye kind of size of trades, and where your focus and obviously a lot of initiatives going on but when I think about your core business. Today can you just remind us.
What youre seeing on a competitive site. They are I mean, obviously again market share growth comes from from from gains in these new areas, but just wanted to get an update on how you think you are defending your home turf and if you're seeing any sort of market participants try other platforms.
Alex Kramm: Home turf like what are the reasons that they are citing where they may be looking at other other platforms before they look at yours. Thanks.
Alex Kramm: Great question Alex.
Alex Kramm: First our core business to remind everyone is the institutional bond market.
Speaker Change: Our clients are global.
And they are seeking liquidity across the broad spectrum of the fixed income market.
Speaker Change: It's dominated that market is dominated by request for quote.
I've been to have one of the largest electronic request for quote I'll remind everyone that traders are regularly requesting prices over the phone and requesting prices over chat.
Speaker Change: The market is dominated by that request for price. The biggest part of the market is the non electronic part that phone and chat. So when we think about what is the real competition that we're seeking is that phone and chat market that we think is key.
Speaker Change: Quite addressable and in this environment, where we're seeing more trade activity. When you think about the number of tickets that our clients have to do.
Speaker Change: With the attractiveness of the overall.
Speaker Change: <unk> market from an investment perspective, our clients are telling us they are not hiring more traders they have to do more with less and so again that that demand from our traditional core client. The institutional client is quite high as we enter 2024 with a positive.
Speaker Change: Backdrop for the overall fixed income market.
With regard to competitive pressures, we see competitive pressures across the market, particularly in the dealer to dealer business, where dealers are taking down a large position in a bond and looking to unwind that inventory as quickly as possible. We do think that's an important part of the market and it grow.
Speaker Change: <unk> part of the market because if you look at dealers balance sheets, they are not going to be improving with the pending regulatory changes on bank balance sheets, we actually think dealer inventory will be down down as a result of those regulatory changes, which means the demand for.
Speaker Change: Dealer execution solutions is going to be high so we do see.
Speaker Change: Competitive pressures across our marketplace, particularly in the dealer to dealer space that space I'll remind you is equate competitively priced space because dealers can certainly move activity overnight.
Speaker Change: The other area of competitive pressure as the portfolio trading space, we obviously have seen competitors step into that space.
Speaker Change: And provide solutions and we were slow to move on those solutions, we have now reacted quite aggressively.
Speaker Change: Our portfolio trading share has picked up and we actually had record portfolio trading in Q4.
When I look at the portfolio trading adoption.
Made this reference in our opening remarks, I am Super encouraged that the most complicated block trade that we see in the fixed income market is now electronic so if you look at the portfolio market is dominated by request for price on a basket of bonds.
Speaker Change: It's quite a complicated trade and these are sizable over $100 million in terms of size.
Speaker Change: Those are now being addressed with electronic solutions, both our competitors as well as ours and we've just rolled out our ex pro PT solution with lots of data and pre trade analytics firm what I'm excited about is that part of the market. The more complicated end of the market.
Speaker Change: Has adopted electronic trading for block trades.
Speaker Change: An area that most people question, whether or not electronic adoption would play out.
Speaker Change: And then.
Speaker Change: So those are really the two areas that we're seeing competitive impact I don't know rich if you want to add anything to that yes. It was hi, Alex It's rich, yes, I was just going to say building on Chris's comments.
Richard Mitchell McVey: The part of the market, where we are strongest where the open trading has the biggest impact the institutional client business Thats two thirds two thirds of the market.
No. We've got some work to do in the dealer business. For example, that's about a quarter of the market and then Pts as Chris talking about where we're also growing that's just 7% of the breakdown and then the last component is retail which were really not in and that's about that's about 2%. So we feel really good about our core business the offering that.
Richard Mitchell McVey: We have there and then we're investing considerably with X pro with our dealer business to capture that other roughly about a third.
Speaker Change: Makes sense. Thanks.
Speaker Change: Alright. Our next question comes from Dan Fannon with Jefferies. Please go ahead.
Daniel T. Fannon: Thanks, Good morning, I wanted to follow up a bit on that line of questioning but thinking about it from a fee per million perspective, how does the increasing contribution from these newer protocols impact the overall fee per million. When you talked about your <unk> business institutional being the strong backbone, how do things like portfolio.
Daniel T. Fannon: Trading have an impact relative to that mix.
Speaker Change: Sure Dan happy to start.
Speaker Change: No.
Speaker Change: Rich has some thoughts on that as well first of all.
I always like to start from the larger broader.
Speaker Change: Backdrop, obviously.
Speaker Change: In this environment post the fed pause.
Richard Mitchell McVey: We're actually seeing years to maturity average weighted years to maturity.
Richard Mitchell McVey: Improve which has an impact on our fee capture so the market environment that we're now entering its more likely that average.
Average weighted.
Richard Mitchell McVey: Weighted average years to maturity will increase not decrease so that's a very positive outcome for our overall fee capture environment as we head into 2024, and we certainly see opportunities for that those numbers move around.
Richard Mitchell McVey: In a more positive direction.
Richard Mitchell McVey: Certainly the dealer to dealer business as I mentioned is a lower priced capture rate business.
Richard Mitchell McVey: Dealers are quite price sensitive and we will move their business around so I would expect that business to be at a lower capture overtime portfolio trading the key to the portfolio trading I think.
Richard Mitchell McVey: It is in fact, a lower capture rate business, but the key to winning that business is really data and analytics when portfolio of first came onto the market, we saw clients putting up sizable line items.
Richard Mitchell McVey: And trying to figure out whether they should do a portfolio trade or not now.
Richard Mitchell McVey: Now that market is involve evolved quite a bit and we're seeing clients. The size of the line items are much smaller than that optimizes price, but more importantly, they are trying to optimize price during the trade and that requires a great deal of data and analytics live in the in the solution that you are using and Thats.
Richard Mitchell McVey: Why we've seen an uptake in portfolio trading on our platform and in particular X pro is loaded with.
Richard Mitchell McVey: New data and analytics.
Richard Mitchell McVey: For traders to determine how to optimize their portfolio on the fly.
Speaker Change: Rich any other thoughts on the capture rate because it's Dan Yeah, just to add a little bit on that.
Daniel T. Fannon: The transaction fees I mean, they're broadly set by by bid ask spread in the market and also on the value of the service that we provide so we kind of runs the gamut. The open trading is most valuable where we deliver the most value to our clients and the number was somewhere $700 million ish north of <unk>.
Daniel T. Fannon: <unk> of that in what was a relatively lower.
Benefit delivered and that number has been quite a bit higher in the future. So those trades.
Daniel T. Fannon: Go for a relatively higher fee rate and then all the way on the other end of the spectrum is process trades, where it's either de minimis or zero and we don't count those even in our volumes. So it's really just clients using our plumbing to process.
Daniel T. Fannon: The voice the voice trades.
Things like PT is closer it's closer to a process trade that it is too and in comp trade all to all and taking advantages advantage of open trading so that is going to be at a relatively lower fee rate.
Daniel T. Fannon: Of course, you guys are all familiar with the duration impact and some of our fee.
Daniel T. Fannon: <unk>.
Daniel T. Fannon: Where.
Daniel T. Fannon: That's going to have a change as interest rates are changing and maturities are changing one thing about it we.
Daniel T. Fannon: Talk about.
Daniel T. Fannon: Size is also a factor in the transaction transaction fees that we charge and.
Daniel T. Fannon: With the move towards automation.
Daniel T. Fannon: And al goes being used to break blocks into smaller pieces thats going to mean smaller size trades, which leads to relatively higher fee per million capture so thats a trend that will work that will work in our favor over time, but generally the rate card is pretty stable and you have got these other variables in terms of product mix duration.
Daniel T. Fannon: Mixed debt.
Daniel T. Fannon: Reflect themselves in the the overall average fee rates that you see published each quarter.
Speaker Change: Great. Thank you.
Speaker Change: Your next question comes from Dan <unk> with Barclays. Please go ahead.
Daniel T. Fannon: Hi, good morning, and thanks for taking the question I wanted to circle back to I think it was Chris Allen's question at the beginning and I know you're about to put out a January released but maybe thinking about February and how the rest of the year might evolve could you maybe talk about the sort of impact of new issuance.
Daniel T. Fannon: Clearly there is a market share impact during that month, but how do you see that typically unfolds as we go through the year, perhaps of February is another solid new issuance months does that mean at some point, we see a big pickup in secondary market trading in any of the macro impacts you think could start to reverse and what do you think could start to work in the right direction as we go through the year. Thank you.
Speaker Change: Sure Ben Great question look the new issued new issue.
Speaker Change: <unk> market when we see a record market like we've seen in January.
Ben: We see that as a positive sign for market volumes.
Ben: And we've seen that play out in terms of market volumes. It does have an impact on our market share but we.
Ben: We're more about growing revenue and growing volumes and so it's it.
Ben: It has a temporary impact on share, but a positive longer term impact on the overall market and market volumes.
Ben: Volumes, particularly secondary market volumes remember people are moving out of.
Ben: Product and into new issue. They are reallocating, a typically into that new issue and we do see that high.
Ben: Hi activity at month end like a day like today, we'd see high activity as a result of a sizable new issue market.
Ben: As they reallocate.
Ben: Those those portfolios.
Ben: What I think more broadly outlook for 2024, it's quite an attractive outlook for our marketplace and then.
Ben: We are a key component of that overall market. So we feel very positive about 2024 I will tell you. Our clients are exceptionally positive about the reallocation that typically happens at this point in the rate cycle, where you see people moving from from stocks.
Ben: Into bonds and we're starting to see that you can see it in the retail numbers on our market retail numbers are growing and thats really reflective.
Ben: An early indicator of how people are thinking about this more attractive rate environment.
Ben: So when we talk to our clients they are bullish about.
More allocations more dollars are being allocated into the fixed income market. What's interesting is.
Ben: They are not bullish about their overall revenues coming in as a result of AUM growing dramatically a lot of that AUM will grow in lower expense ratio products.
Ben: <unk> and Etfs.
Index based products.
So they are still watching their expenses quite carefully even as AUM is growing and this more attractive rate environment and that's why the demand that we're hearing from clients. They are managing more on.
Ben: On the same fixed budget and that requires them to.
Ben: Things like automation and use electronic trading.
Ben: Have more efficient tools like an X pro.
Ben: It's really about doing more with less on the client side. So that that is a running theme.
Ben: Our clients in this kind of environment and quite positive as.
Ben: As we look out into 2024.
Speaker Change: Great. Thank you so much.
Our next question comes from Jeff Schmidt with William Blair. Please go ahead.
Jeff Schmidt: Hi, good morning.
Jeff Schmidt: So it sounds like you've fully rolled out adaptive auto accident quarter.
Jeff Schmidt: What do you see client penetration to that protocol, increasing too in 2024, and yes, you are coming off the Palisades just curious if anything stood out or do you want to highlight that you learned during that phase.
Sure and again, we just came out of pilot so to be clear.
Jeff Schmidt: We had a pilot that we ran we know we kept that pilot small to a small list of clients. Because we wanted to really have a focused attention. Both in terms of our development as well as our in terms of our overall guidance and support.
Jeff Schmidt: For that new innovative solution in the fixed income market. It's the first time, an algo a client algo was launched in credit. So it's a pretty exciting time, we have now what it means to come out of pilot means we are now open opening up that offering to all clients and so the demand is quite.
Speaker Change: Hi, the pipeline as long, we're super excited about what it means.
Speaker Change: The positives that we've seen.
Speaker Change: Or really the execution quality that clients are enjoying remember this algorithm is designed to be a passive solution. So you can manage orders throughout the day and take advantage of opportunities where a another client or even another dealer is.
Speaker Change: Is trying to request price from the market the algorithm will automatically respond to those prices. So it's quite a sophisticated tool.
Speaker Change: So it takes a while for a trader to learn all the different versions all the different algorithms that they can custom customize and build so it's an exciting time for us and exciting time.
Speaker Change: For that rollout of adaptive auto ex more importantly, adaptive auto acts as just one feature among many within our automation suite. So we don't we see it as a critical piece of the path forward, but the overall adoption of automation.
Speaker Change: Is what were so focused on in that automation suite of products continues to grow adaptive think of adaptive as the most complicated most sophisticated piece of the automation suite, but the demand for automation as high as I mentioned, given the expense budgets of our large.
Speaker Change: As clients.
Speaker Change: The other piece to recognize and rich had in his opening remarks, the disparity of use of automation is quite high in our market and he mentioned our largest.
Speaker Change: Automation users two times the next largest client.
Speaker Change: So when you from an AUM perspective, we have not fully penetrated the automation suite across all our clients. So there is large disparity abuse.
And but some really exciting use cases.
Speaker Change: I can't talk about automation without mentioning we just awarded the largest trader.
Speaker Change: On market access.
Speaker Change: That trader.
Speaker Change: Using leveraging our technology leveraging automation had a record number of trades by an individual.
Speaker Change: 240000 tickets were executed by this one individual.
Speaker Change: She has 26 years old.
Speaker Change: And works for a very.
And important clients, who adopted automation they saw a technology as an opportunity.
Speaker Change: And.
Speaker Change: She took that automation tool and achieved a record volumes. So it's truly astounding when you see an individual trader.
Speaker Change: Fresh out of college trade over 240000 tickets just leveraging the technology. That's that's the power of this automation suite adaptive auto acts as a component of that and the demand has never been higher for this product category and also.
Speaker Change: To remind you that the great part about automation is its highly dependent on data. So the data that you feed it.
Speaker Change: Improves its performance.
Speaker Change: We alone have that CP plus solution and we also have a great deal of proprietary market data network feeding.
Speaker Change: Into that automation suite over 2024, so youll just see a great deal of stickiness around that product.
Speaker Change: But just wildly successful.
Speaker Change: Really exciting to see.
Speaker Change: Individual trade are able to trade that many tickets in a given year.
Speaker Change: Okay, great. Thank you.
Speaker Change: Your next question comes from Simon Crunch with Redburn Atlantic Please.
Speaker Change: Yeah.
Simon Crunch: Hi, Ron Hi, Thanks for taking my question just following on from the last question I was kind of interested in it.
Simon Crunch: Let's put aside the market conditions for now and just think about what's in your control and just how should we think about the speed at which.
Simon Crunch: <unk> X pro and adaptable connections ought to have an impact on your relative market share position.
Simon Crunch: Our position in the car.
Simon Crunch: Assuming the current prevailing environment just continues.
Simon Crunch: Talking about something that can last you take two years to really start to bear fruit can we see results. This year, just give us a sense of how the rollout.
Simon Crunch: Can be managed.
Speaker Change: Sure Simon.
Simon Crunch: First.
Simon Crunch: When I look at what we're doing with X pro.
Simon Crunch: Sure.
Simon Crunch: We have to refresh the market access technology were re facing how.
Simon Crunch: How the traders in the bond market look at market access so.
Simon Crunch: It is a technology change that we must make it also helps our refresh of the entire <unk>.
Simon Crunch: Stack underneath market access so it's a key element of key strategic technology change that we're making.
Simon Crunch: The good news as we make it we can actually change.
Simon Crunch: The workflow for our clients and deliver better solutions.
Simon Crunch: And better data to our clients through the rollout of <unk>. This has been in the works for a number of years. So we're excited that it's now live and being rolled out across our clients.
Simon Crunch: So very positive news on just the basic X Pro features we are seeing.
Simon Crunch: At the trader level.
<unk> and trade efficiency for the traders on X pro it's been fairly consistent as we rollout X pro that the trader volume that volume that that trade. Our handles goes up by about 20% given the workflow and efficiency of X pro.
Simon Crunch: Their trades that they execute on average go up 30% so.
Simon Crunch: A highly useful tool to manage the growing tickets that are traders are seeing on their desktop.
Simon Crunch: We also are embedding unique data features into X pro and building, what we call high touch and low touch solution. So traditional market access was very focused with all to all on.
Simon Crunch: Call it $3 million and under trades, we actually do much larger trade sizes than that but.
Simon Crunch: The way traders manage their workflow they were very focused on.
Simon Crunch: What they could send to all to all and that would be sent to market access as you think about X pro in its rollout, we're targeting that larger trade sizes.
Simon Crunch: Hi, touch trade, the $3 million and above.
Simon Crunch: Think of it as the 3 million to $10 million is the sweet spot those are a long list of trade sitting on deaths that both the dealer and the client with like a more efficient outcome for those trades and so thats pro allows a trader to adopt.
Simon Crunch: Whatever protocol they want they can loaded on X pro and do a phone trade taken loaded on extra <unk> and go to one dealer. They can go to three dealers, where they can go to all to all all of the pre trade analytics is designed to guide that trader on what protocol, they want to use and even what.
Simon Crunch: Inter party they want to select from.
Simon Crunch: Key ingredients that I think our clients haven't ever seen before.
Simon Crunch: It's a unique offering within X pro.
Speaker Change: Yes, I mean, I would just add to that you can think of Expro. It's the tool that makes the traders manual activity more productive and thats definitely around the larger trades more complex or handling large list and things and Thats why we have been focused on Pts.
Speaker Change: Automation, that's going to transform the way people do.
Speaker Change: The large number of flow tickets that they have to bang through and Chris just gave that one example of a trade with.
Hundreds of thousands of of trades that they need to work.
Speaker Change: I can see is the automation.
Speaker Change: Matures. It gets more widely adopted if you think about it compared to a portfolio trade, which is also a convenience.
Speaker Change: Service right when a when a trader buy side trader has hundreds if not thousands of line items that they have to get done and they are basically offloading that activity to a dealer to handle their all in one shot.
Speaker Change: So the automation can actually I think eat into that type of activity.
Speaker Change: As people get comfortable with using that and then they can focus their time on the relatively small number of line items in a in a very large basket that need the <unk>.
Speaker Change: Traders' attention so it'll be interesting over the coming years to see how those two kind of vie for some of that activity.
Speaker Change: Thanks appreciate it.
Speaker Change: Your next question comes from Alex Blaustein with Goldman Sachs. Please go ahead.
Alexander Blostein: Hey, Hey, Chris Hey, everybody just another one around <unk>, if I were to kind of tease out maybe the message that you guys are trying to ultimately articulated you're defending your turf.
What's been establishing high grade.
Alexander Blostein: And you're going after larger size in the market with various new tools. So as you're rolling this out how big of an uptick uplift I guess is that for the client. So does that require any incremental technology spend on their behalf or is as easy as you roll. It out and then it's just a matter of them getting to know the protocol and using it and then I guess ultimate.
Alexander Blostein: When you look at your high grade market share what is the goal you guys have been kind of in the range of all of these protocols are successful.
Alexander Blostein: What kind of market share do you think you can get in the high grade space.
Alexander Blostein: Yeah, Hey, Alex it's rich.
Richard Mitchell McVey: On the first part of the question about <unk> I mean, it's definitely our objective to make it as painless as possible for the end users. So there is nothing new they have to do it's really just coming into our workstation as they always do and selecting the new option for using this interface and the ability to get their orders and is also exactly.
Richard Mitchell McVey: The same as they have been doing in the past the big challenge for US and this will take some time our objective is to get all of the orders from the buy side traders and even whether they're going to trade it electronically or not.
Richard Mitchell McVey: We believe they will benefit from all of the data and analytics that we have in the <unk> Pro platform and then that will lead to a greater amount of those trades, taking place electronically and to Chris's point earlier.
Richard Mitchell McVey: A lot of that is going to continue to be the in comp and taking advantage of open trading, but there might be some trades are some orders in there that they may just want to work with a small number of dealers and there'll be able to very effectively do that from X pro as well. So it's a tool to try to capture all of this activity.
In terms of share goals I mean, certainly we're after the whole market here, but we also recognize that not every order that comes in from a buy side firm is necessarily going to be.
Richard Mitchell McVey: Out in comp in the traditional way that we've served the the market.
Richard Mitchell McVey: Historically, so we're after all of that activity is going to come in a variety of ways, whether it's <unk>, whether it's bilateral trades, whether it's fully in comp whether it's matching whether it's RF Q X pro is that cockpit for the trader to manage all that different way all those different ways that they may want to interact with.
Richard Mitchell McVey: The market.
Richard Mitchell McVey: And Alex I'll, just add what's interesting and it's really the.
I mentioned earlier about portfolio trading we did launch <unk> pro for portfolio trading that was the first piece of the X pro.
Richard Mitchell McVey: Platform that we launched and we saw very positive feedback and very positive results around portfolio trading portfolio trading will continue to be a big part of our market.
Richard Mitchell McVey: Certainly an efficient way to get exposure for the buy side, but as we move.
More of the market to electronic trading those efficiencies should spread across other areas of the market.
Richard Mitchell McVey: The way I think about it is what <unk> is doing is just replicating.
Richard Mitchell McVey: What the trader is doing over chat or phone and so.
Richard Mitchell McVey: It's easier conversion to an electronic solution when you're replicating exactly what the trader is doing elsewhere, because you're not really changing the outcome of the trade youre, just making it that much more efficient to manage that many more line items.
Richard Mitchell McVey: So what's attractive about.
Richard Mitchell McVey: X pro as it allows the trader to have pre trade analytics, and then decide what protocol they want to use an <unk>.
Richard Mitchell McVey: The important part of the <unk> solution is that high touch solution, whether youre, putting it in a basket and trading as a portfolio where you are trading the individual line items you are literally replicating what you were doing on the desk over the phone and in chat and Thats the key ingredient to the offering.
Richard Mitchell McVey: Okay.
Mike will go to our next question here, Brian Bedell with Deutsche Bank. Please go ahead.
Brian Bedell: Great. Thanks, very much for taking my question.
Brian Bedell: You're just going back to.
Brian Bedell: A question that you answered.
Brian Bedell: To go.
Brian Bedell: On the segment challenges in the high yield market broadly maybe just.
Brian Bedell: How are you viewing that playing out do you see.
Brian Bedell: This challenge is being overcome and see more of a rebound in that market.
The near term or do you think it's a little bit more structural and then to what extent would that be a potential headwind on fee per million just just from the mix.
Hi, great.
Brian Bedell: Sure.
Speaker Change: First I do view it as we've seen these.
Speaker Change: Loans in the high yield market in the past that market segment is obviously, a powerful part of the market.
Speaker Change: When I look at.
Speaker Change: <unk> high yield Etfs volumes down 20%. It makes a lot of sense for me and we've talked to those clients and they explain how their models work and why they are not working in this current environment.
Speaker Change: We also see that the demand for high grade it at a high level from the institutional market. So we understand.
Speaker Change: The disparity in product that we're seeing we are also seeing this this month.
Number of distressed.
Bonds.
Speaker Change: Move into the distress category and those tend not to trade actively on electronics solutions, but the bigger impact is really the segment impact of client segment impact and in high yield.
Speaker Change: Again, I do think it's temporary and we would expect that.
That market at high yield market volumes to be up in a more positive.
Speaker Change: Backdrop that we're seeing in 'twenty four.
Speaker Change: And so I do think it's temporarily the market environment, that's delivering those high yield challenges both to the market our market segment and then our market share.
Speaker Change: Okay.
Speaker Change: Great. Thank you.
Speaker Change: Alright. Our next question comes from Patrick <unk> with Piper Sandler. Please go ahead.
Patrick: Yes. Good morning, Thanks for taking my question.
So I just wanted to go back to slide five and the corporate bond market share opportunity.
Patrick: As we look at these five buckets.
Patrick: Here I was just hoping maybe you could walk us through.
Patrick: Each bucket like what your market share is today.
Patrick: And then given that you <unk>.
Patrick: <unk> identified it as a major focus area for this year, maybe you can share like <unk>.
Patrick: In each bucket like what sort of share gains you would expect in 2024, and then maybe longer term, where do you see your market share growing two in each of these buckets. Thanks.
Thanks.
Wish I could be precise on market share growth across our <unk>.
Patrick: Complicated set of buckets, but I.
Patrick: I will walk you through kind of how we're thinking about our attack plan for that market, particularly in 2024, as we launched 2024 and think about our strategy across that market landscape again, the overall market environment is positive so.
Patrick: The market that we're staring at particularly the high grade market. We think turnover will continue to increase so the market backdrop is quite positive.
Patrick: I'll do it in size buckets to help.
Patrick: The largest size being the portfolio trade, it's the largest block trade we see on the market. It's the most complicated trade baskets within the portfolio trade are actually growing so we see baskets over a 1000 line items.
Patrick: And I think they will continue to grow.
Patrick: The reason why our portfolio trade I would expect that portfolio trading.
Patrick: Our market to continue in 'twenty four as AUM grows at a large investment fund complex. They will use portfolio trading to get that immediate exposure. So sometimes it's <unk>.
Patrick: <unk>, given the inflows and outflows.
Patrick: Capital to use a portfolio trade, but.
Patrick: But we also have the ability to move that portfolio trade too.
Patrick: Line item trade and have it.
Patrick: <unk> is a list.
Patrick: But our offering an X pro is designed to target that market and.
Patrick: We are leveraging both the power of <unk>, meaning the number of line items that it can handle but also the trading and data analytics that are available for the trader to manage those line items will be able to pull line items in and out.
Patrick: Change line items. So we are targeting that 7% of the overall market quite aggressively largely because.
Patrick: Not that it's a big part of the market, but more importantly that same trader trades. The next bucket, which is large size trades and so being on the desktop of the trader using our X pro for portfolio trading is a key ingredient to the next largest size of the market.
Patrick: Typically traders that are trading portfolio trades are the high touch trader so they're managing all of the block trades. So it will be able to arm that same trader with an expert solution high touch X pro solution that gives them again pre trade analytics.
For each line item each large block it can indicate the depth of the market things like trade ability will indicate what is the true depth to the market what can the market swallow given the size of the block that you want to trade and then the second key ingredient we're already hearing feedback from clients on this one is <unk>.
Patrick: <unk> traders know the dealer they want to select they don't always know the second or third dealer in that bond. So AI dealers select is a key ingredient for the traders as they think about their trading larger block size of workflow. What's interesting about this segment of the market call. It.
Patrick: $3 million to $10 million or greater than $5 million.
Patrick: Dealers have told us that they've fully automated their pricing algorithms. So they can price bonds across a broad set of <unk> and <unk>.
Patrick: Now that they have that pricing power they'd like to receive trades in electronic form that they can trade electronically that's sufficient for both the dealer and the client so theres kind of a sweet spot around that 3% to $10 million size block trade in our market, where both dealer and client.
Patrick: Both are looking for a better solution a more automated electronic solution.
Patrick: And so thats the size that we're attacking and then the.
Patrick: Other large piece, we obviously are quite sizable in the under $5 million, that's where all to all is a key ingredient the size of the trade is small enough that you don't worry about market impact our market information leakage.
Patrick: And so you can get the full benefits of all to all it's also the fastest growing part of the market as we mentioned ticket sizes ticket numbers have doubled over the last two years and ticket sizes have declined so managing small tickets along list of small tickets is a key attribute of.
The <unk> solution, because it's attached to our automation suite of products. So you can certainly manage more tickets and then the last piece the dealer to dealer market is a market that we've been serving for quite some time like things like <unk> as a key ingredient to that market I would argue that's an underserved market.
Patrick: Dealers growing demand for exiting inventory is high and continues to get higher as bank capital rules come into play So we do think.
Patrick: Our investment in the dealer to dealer segment with things like dealer RF Q are mid <unk> mid market session.
Patrick: Offering those are all at price points that are quite attractive to a dealer. The other piece of the puzzle is we're seeing dealers come in and adopt our automation suite. So the automation suite that we built out for clients are now being used by dealers for that dealer to dealer business. So we're really attacking.
Speaker Change: Each each one of those buckets and they're largely interrelated buckets as we look at it rich any any other thoughts yeah, I guess I'd just add to that I mean, if you look at the slices here call. It two thirds there.
Speaker Change: <unk>.
Richard Mitchell McVey: Don't know where say, 2020% if we're using investment grade as an example in terms of market share you've got obviously the way we come to that number is not across all the different sizes in ways. We trade rates is going to be relatively lower share in the blocks and then we have very high penetration in some of the what we call kind of our sweet.
Richard Mitchell McVey: <unk> anything kind of north of 100 and up to <unk>.
Richard Mitchell McVey: Going up to about $5 million and things so.
Richard Mitchell McVey: That segment of the market, though and I don't have the overall electronic total for it but it's likely it's going to be a very high percentage of electronic trading.
Richard Mitchell McVey: And then is this.
Richard Mitchell McVey: This larger segments here.
Richard Mitchell McVey: 5 million, let's call it an investment grade that has relatively lower penetration rate now.
Richard Mitchell McVey: It's going to be real work to get traders to be thinking more electronic.
Richard Mitchell McVey: In that size and Thats all the work that that Chris has been describing on the on the other questions here with X pro and things so.
Richard Mitchell McVey: It's a battle there is going to be different types of protocols newly issued bonds. For example is one that's right now very much tied to going back.
Richard Mitchell McVey: To dealers.
Richard Mitchell McVey: It may be being done more on the phone or via instant messaging and things. So we believe we've got all the tools in the two thirds of the market and we're investing in the new capabilities now to capture that.
Richard Mitchell McVey: That top end.
Speaker Change: Alright, great. Thanks for the color guys.
Richard Mitchell McVey: Thanks.
Richard Mitchell McVey: Our next question comes from Tobey Voight with cable W. Please go ahead.
Tobey Voight: Hey, Kyle.
Tobey Voight: Eight.
Tobey Voight: Just wanted to ask a two part question on expenses Chris.
Tobey Voight: Chris you've been messaging for some time now that expense growth was likely to shift a little bit lower versus where <unk> been over the past five years or so.
Tobey Voight: We saw that in the 2024 expense guide of 6% organic.
Tobey Voight: When you think about the operating environment is still very competitive there is still a very large runway ahead to capture market share. So I guess the question is in context of the operating environment can you walk through how you balance pulling back a bit on the expense growth rate in 'twenty four versus maintaining or even accelerating that expense growth for protocol development of our new.
Tobey Voight: <unk>.
Tobey Voight: Also wondering if you can just provide a kind of an.
Tobey Voight: An update to medium term outlook for expense growth and how we should think about that.
Tobey Voight: Sure.
Tobey Voight: So as we mentioned in our opening remarks, we've given the guidance on 'twenty four.
Tobey Voight: Our guidance.
Tobey Voight: <unk> expense.
Tobey Voight: Target around 48 $480 million to $500 million.
Tobey Voight: With the with the Pragma expenses added in there.
Tobey Voight: And as you mentioned thats.
Tobey Voight: Yes.
Tobey Voight: Single digit growth rate down from.
Tobey Voight: Historical growth expense growth rate of double digits.
Tobey Voight: We looked at.
Tobey Voight: Looked at the investments we've made over the past number of years. The firm has grown substantially our tech team has grown substantially and that was all because one we're managing the current platform a sizable platform as rich mentioned, our 20% of the U S credit market. So there is a great.
Tobey Voight: <unk> of maintenance.
Tobey Voight: Current platform and at the same time, we're investing in new platforms.
Tobey Voight: On an entirely new tech stack, so it tends to.
Tobey Voight: Ramp up your investment in both people software and hardware and development and Thats, what youre seeing in those numbers, we looked at how we allocate those expenses and Hello, we allocate those resources across the broader.
Tobey Voight: Market access and we've made some allocation adjustments, so really what youre seeing in this.
Tobey Voight: Lower single digit.
Tobey Voight: Guidance is really us being mindful of not only the opportunity. We have ahead of us, but mindful of where we think.
Tobey Voight: Our focused investments should be.
Tobey Voight: So that's when you think about our tech plant.
Tobey Voight: The <unk> solution is a global solution. So it is not a high grade or high yield only it really is rolling out across the entire globe.
Tobey Voight: Targeting Europe in the second quarter and we're targeting.
Tobey Voight: Global portfolio trading in the second quarter.
Tobey Voight: On <unk>.
Tobey Voight: A global solution addressing all of our products.
Tobey Voight: Thats, a worthwhile investment because it obviously brings benefits to each of our products, including things like E. M. We're seeing portfolio trading in the <unk> that we wanted to address so we're excited about the investments we made were not.
Not saying we've stopped investing we will in fact continue to invest in technology and continue to invest in our people.
Tobey Voight: People in 2024, so embedded in that.
Tobey Voight: Our guidance is our continued investment in the overall talent in our market, but we certainly feel comfortable about the years of investments that we've made and obviously a sizable investment with the acquisition of pragma with all of their tech team coming into the market access full.
Tobey Voight: As we start to unwind and see the benefits of pragma in our overall tech stack.
Tobey Voight: Really we're starting to see the future opportunities for the Pragma technology.
Tobey Voight: Moving throughout the market access offering so one pragma is a key ingredient to our automation offering as we as we look at the.
Tobey Voight: The end of the pilot of adaptive auto ex and the continued roll out of adaptive auto ex they will be a key ingredient to our overall automation solution.
Tobey Voight: So when we think about low touch trading pragma will be a key API or X pro solution embedded in X pro.
Tobey Voight: So that's part of our tech investment is embedded in that pragmatic acquisition as well. So we feel very comfortable at the NASA the investments we've made.
Tobey Voight: And we're looking at moving slightly down to a single digit expense growth rates I will remind you, though that 18% of our expenses are variable. So those do move as our topline will move around so as volumes go up or clearing cost will go up.
Tobey Voight: As well as a result of that overall.
Volume number clearing through our platform.
Tobey Voight: So right now we're very comfortable with where we are in terms of the guidance for 2024, we think thats, a new expense a level that we're comfortable with going forward as well.
Tobey Voight: Okay.
Speaker Change: Great. Thank you very much.
Speaker Change: Okay. Our final question comes from Michael Cyprus with Morgan Stanley. Please go ahead.
Great. Thanks for squeezing me in here just a question on the automation set of tools that you have I was just curious where youre seeing the most traction across the suite of tools, so far as well as from customer side and whats the potential for generative AI to help turbocharge the offering over time.
Great question, Michael Obviously, I Love I Love to talk about automation, obviously, because the growth rates there are sizable.
Speaker Change: In terms of what we saw in the fourth quarter, our automation grew close to 39% year.
Speaker Change: Year over year, so the demand is high and as as I mentioned.
Speaker Change: Prior question.
Speaker Change: Seeing a woman.
Speaker Change: 26 years old be the number one trader on market access is reflective of the power of this automation tool.
Speaker Change: It is powered by a unique data it allows someone who is new to the market mind you.
Speaker Change: Be able to trade over 240000 trades in a single year.
Speaker Change: There is AI indirectly in our automation suite.
Speaker Change: Our CP plus and the data products that we're rolling out things like trade ability AI dealers select those are all driven off of our AI tools as we produce data.
Speaker Change: <unk> auto ex has components of AI in it as it looks at and behaves throughout the day. So I do think there is greater opportunities for seeing AI development across the automation suite.
Speaker Change: But I also think we're seeing low penetration of automation in some key clients and certainly when they hear about.
Speaker Change: The successes that some of their peers or are making in automation and obviously when they hear about the success of a 26 year old of being the number one trader on market access they're going to be interested in that automation suite of products. So we think there is huge demand in 24 for the <unk>.
Speaker Change: <unk> suite and pretty optimistic about what clients can do with it.
Speaker Change: And as you were asking the AI solution is is indirectly embedded in our automation suite, but we think theres more to do and a huge opportunity around AI.
Speaker Change: Yes, Michael I would just throw in on the AIP I think the most interesting area, where it's going to have an impact is helping defined.
Michael J. Cyprys: On the other side of the trade who out of over 2000 clients might be interested in what somebody is trading right now because today everybody has to express their interest either by submitting orders or creating watch list and things, it's a pretty manual process, but if you go onto Amazon. It always seems to know what you.
Michael J. Cyprys: Might be interested in buying at any given time.
Michael J. Cyprys: Could see AI, having an impact that way and being able to notify people. When there are things that they could be interested in that they could act on and be on the other side and capture that bid ask spreads. So things were looking at pretty closely.
Speaker Change: Great. Thanks, so much I appreciate it.
Speaker Change: Okay.
Speaker Change: Alright, I will now turn the call back over to Chris Concannon for any closing remarks.
Thanks, and thanks. Thank you all for your questions. We look forward to a great 2024, we have lots of innovation as you heard on the call are coming out over the course of the year. We look forward to talking to you in the next quarter. So thank you.
Speaker Change: Thank you that concludes today's call. Thanks for joining you may now disconnect.
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