Q2 2024 MarketAxess Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess second quarter 2024 earnings conference call.
Steve Davidson: Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during that time, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. As a reminder, this conference call is being recorded on August 6, 2024. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at Marketaxess. Please go ahead, sir.
Speaker Change: At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you would like to ask a question during that time, please press star followed by the number 1 on your telephone keypad. To withdraw your question, press star 1 again.
Speaker Change: As a reminder, this conference call is being recorded on August 6, 2024. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at Marketaxess. Please go ahead, sir.
Unknown Executive: Good morning, and welcome to the Market Access second quarter 2024 earnings conference call. These statements represent the company's beliefs regarding future events, which by their nature are uncertain.
Steve Davidson: Good morning and welcome to the MarketAxess second quarter 2024 earnings conference call. For the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company.
Speaker Change: Rich Schiffman, Global Head of Trading Solutions, will update you on the performance of our markets this quarter. And then Ilene Fizel Bieler, Chief Financial Officer, will review the financial results.
Speaker Change: Before I turn the call over to Chris, let me remind you that today's call may include forward-looking statements.
Speaker Change: These statements represent the company's belief regarding future events that by their nature are uncertain.
Speaker Change: The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements.
Chris: 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, 2023.
Chris: 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.
Chris: Now let me turn the call over to Chris.
Chris: Good morning, and thank you for joining us to review our second quarter results.
Chris: Turning to slide 3 of my strategic update, we delivered 10% total revenue growth, including the benefit of the Pragma acquisition, and diluted earnings per share was $1.72.
Chris: We continued to execute our strategy this quarter and delivered solid growth in commission revenue across most credit products, with strong revenue growth in our international product areas.
Chris: We continue to be disciplined around our expense management, with total operating expenses increasing 12%, including the impact of PRAGMA.
Chris: We released our July trading metrics yesterday, which reflected continued solid growth in our credit complex across most product areas.
Chris: While our U.S. credit estimated market share continues to disappoint, we believe that our core RFP business, underpinned by our differentiated liquidity and open trading, reflects our continued leadership in the institutional client-to-dealer e-trading space.
Chris: We have a clear strategy to return to market share growth through a global rollout of XPRO. We are also pleased that we are continuing to grow our market share in the global credit e-trading space outside of U.S. credit.
Chris: I would like to welcome Ilene to her first earnings call as CFO . In the short time that she has been here, she has already made a significant impact on the business.
Unknown Executive: We have always guided investors to look at long-term trends and not read too much into the month-to-month gyrations in our estimated market share, as we saw in July. Emerging markets are a perfect example of this multidimensional growth story with growth across all regions, as shown on this slide.
Chris: We have always guided investors to look at long-term trends and not read too much into the month-to-month gyrations in our estimated market share, as we saw in July . Slide 4 lays out our strategic priorities to grow market share.
Speaker Change: The fastest-growing segments of U.S. high-grade trades year-to-date have been portfolio trading and dealer-to-dealer trading, up 94 percent and 31 percent respectively.
Speaker Change: Furthermore, XPro is built on cloud-based technology, so it is easy to make changes and introduce new features and functionality in a matter of weeks.
Speaker Change: Slide 6 provides more detail on the strength of our expanding Emerging Markets franchise. Our Emerging Markets Commission revenue increased 22%, with EM Trace-eligible estimated market share of 26%.
Speaker Change: The top five local currencies represented 58% of local markets trading volume on a constant currency basis, down from 63%, reflecting the increasing breadth of local currencies traded on the platform.
Speaker Change: One of our fastest-growing protocols is Request for Market, or RFM, which is perfectly suited for local markets trading where our clients are trading in larger sizes with limited trading data.
Speaker Change: Slide 7 highlights our strategic priorities that will drive our future success. We are focused on growing our fixed income trading revenue, enhancing our client network experience, delivering innovative technology and data solutions, and driving a high performance team culture. Slide 8.
Speaker Change: It is important to note that our use of AI is a key ingredient across these strategic priorities.
Speaker Change: In our data business, for example, AI powers CP+, enabling our automation and algo solutions.
Speaker Change: Trade volume was up 12% versus last year, with a three-year CAGR of 12%. Trade count was up 14% versus last year, with a three-year CAGR of 22%.
Speaker Change: A key driver of this strength was strong growth in emerging markets trading ADV, up 23% year over year, driven by a 26% increase in hard currency and a 17% increase in local currency trading ADVs.
Unknown Executive: We are also seeing strong contributions from growing client segments, including hedge funds, systematic funds, dealer-initiated flows, and private banks.
Speaker Change: We are also seeing strong product diversification in municipal bonds, with record estimated market share of 7.4%, up from 5.4% in the prior year.
Speaker Change: We expect the soon-to-be-available additional liquidity from ICE TMC to support further market share growth.
Speaker Change: We now have the top 10 largest municipal dealers signed up for tax-exempt and taxable trading on our platform.
Speaker Change: Slide 10 provides an update on OpenTrading, our market-leading all-to-all liquidity pool.
Speaker Change: Open trading ADV was $4 billion and share of total credit volume was 34% in line with the prior year. Open trading generated strong growth in trade count up 18% from the prior year.
Speaker Change: Hedge fund trade activity has continued to expand on our platform with ADV of 1.6 billion in the quarter, up 28% from the prior year. A record 204 hedge funds provided liquidity through open trading in the quarter, a 5% increase from the prior year.
Speaker Change: Lower volatility and lower price dispersion in the market continues to reduce the price improvement opportunity in open trading, as shown on the lower left of this slide.
Speaker Change: Open trading continues to be the largest single source of secondary liquidity in the U.S. credit markets, driven by our diverse liquidity pool.
Speaker Change: Adoption of our automation suite of products continues to grow as shown on slide 11.
Speaker Change: We experienced another quarter of strong growth in automation trade volume and record trade count with three-year CAGRs of 29% and 39% respectively, and a record 248 active automation client firms.
Speaker Change: Automation trade volume now represents 10% of our total credit volume and a record 27% of total credit trade count.
Speaker Change: There were 10 million algo responses from dealers, an increase of 38% year-over-year.
Speaker Change: Now let me turn the call over to Ilene to review our financial performance. Thank you, Rich, and thank you, Chris, for those kind remarks. I could not be more excited about the opportunity ahead for Marketaxess.
Eileen: Turning to our results, on slide 13, we provide a summary of our second quarter financials. We delivered revenue of $198 million, up 10% from the prior year. These results include $8 million from the Pragma acquisition.
Speaker Change: Looking at each of our revenue lines in terms, this was the second highest level of quarterly commission revenue generation, with only one Q24 being higher for commission revenue.
Speaker Change: Record information services revenue of $13 million was up 8%. The increase was driven by new contracts as we continue to experience strong adoption across our data product suite, especially CP+.
Speaker Change: Post-transfer services revenue of $10 million, was up 10%.
Speaker Change: The largest driver of other income was an increase of interest income due to the favorable interest rate environment, which contributed $6 million of interest income across our investment portfolio and cash holdings.
Speaker Change: up from $5 million. This was partially offset by a $1 million net foreign currency transaction loss.
Speaker Change: The effective tax rate was 24.8% and we reported diluted earnings per share of $1.72.
Speaker Change: On slide 14, we provide more detail on our commission revenue and our fee capture.
Speaker Change: Total commission revenue was $172 million, representing an increase of $13 million, or 8% for the quarter. The increase in credit commission revenue was due to solid growth across emerging markets, up 22%, U.S. high-grade, up 4%, and euro bonds, up 11%.
Speaker Change: Growth across these product areas was partially offset by lower estimated market share in high yields.
Speaker Change: The reduction in total credit fee capture from the prior year was driven principally by product and protocol mix.
Speaker Change: Specifically, lower high-yield activity and increased portfolio trading.
Speaker Change: The decline in fixed distribution fees was driven principally by the consolidation of two global bank trading desk operations and migrations to variable fee plans, partially offset by the addition of new dealer fixed fee plans.
Speaker Change: Turning to slide 15, we provide a summary of our operating expenses.
Speaker Change: Second quarter operating expenses of $116 million included $8 million from Pragma.
Speaker Change: We are well underway in integrating the high-performing Pragma technologists into the DNA of our organization, and we are leveraging their expertise to drive many of our strategic priorities that Chris highlighted earlier.
Speaker Change: Based on the timing of expenses through the first half of the year and the incremental cost we are expecting in the back half of the year, we now expect our full year 2024 expenses to come in slightly below the low end of the previously stated range, 480 to 500 million.
Speaker Change: On slide 16, we provide an update on our capital management and cash flow. Today, we are announcing that our board has approved a new share repurchase program of $200 million.
Speaker Change: This is in addition to the $50 million that remains under our existing Share Repurchase Program for a total current aggregate outstanding authorization of $250 million.
Speaker Change: We repurchased 243,000 shares for a total of $50 million a year to date through July 2024.
Speaker Change: The new board authorization reflects the board's confidence in the performance and outlook of the company, and is a clear indicator of the company's willingness to repurchase shares more opportunistically, going beyond just offsetting annual dilution from stock-based compensation.
Speaker Change: During the trailing 12 months, as of second quarter 2024, we paid out approximately 59% of our net income through quarterly dividends and share repurchases. We had no outstanding borrowings under the credit facilities.
Speaker Change: The balance sheet continues to be strong, with cash, cash equivalents, and corporate bond and U.S. Treasury investments totaling $559 million as of June 30.
Speaker Change: We generated $298 million in free cash flow over the trailing 12 months as an increase of about 21% over last quarter.
Speaker Change: We believe we are striking the right balance of investing to drive future growth while at the same time being disciplined stewards of capital.
Speaker Change: Now, let me turn the call back to Chris for his closing comments.
Chris: Thanks, Ilene. In summary on slide 17, we continued to execute our growth strategy and delivered solid financial performance in the second quarter.
Chris: We have seen an increase in market volumes and the velocity of trading is trending up. These factors combined with the increased potential for rate cuts in 2024 and the recent increase in volatility are all indicators of an improving macro backdrop for us.
Chris: We are continuing the rollout of X-Pro by extending the platform to our global client base and across most products.
Chris: We are executing our plan to grow market share, our client franchise continues to expand, and our strong geographic product and protocol diversification continues to drive growth.
Chris: Last, we are well positioned to deliver higher levels of growth in the coming quarters. Now we would be happy to open the line for your questions.
Unknown Executive: At this time, we will take your questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: At this time we will take your questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: If you are dialed in and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: We kindly ask that you please limit yourself to one question and one follow-up.
Speaker Change: Our first question comes from the line of Chris Allen with Citigroup. Please go ahead.
Speaker Change: to External Destinations, which is a unique shift in strategy.
Speaker Change: both internally and externally for our clients' needs. And that's really what we're answering here. We are leveraging our institutional distribution.
Speaker Change: A very strong retail and private client distribution. So putting those two liquidity pools together is really an important benefit for both our clients as well as ICE's strong distribution.
Speaker Change: Rich, do you want to add to the... Yeah, yeah, thanks, Chris. So, yeah, we're really excited about this one because it's complimentary liquidity pools.
Rich: from them that our clients that they they love our institutional workflow the ability to RFQ and Do lists and have it processed very efficiently back into their systems But they wanted to get the odd lot and what we call micro lot liquidity, especially under hundred bonds in size
Rich: that TMC is really a specialist in. So this allows us to bring it all together for our clients through open trading.
Rich: So they don't have to do anything different. They don't have to go anywhere else.
Rich: They just put their inquiries into our system, their orders, the way they always have, but now they get access to this expanded liquidity pool.
Rich: So it's a great combination. It'll be interesting in corporates as well. I mean, that's, of course, a much stronger area for us. But as we have introduced investment grade trading on price, which is very attractive to private banks,
Rich: This is another area where some of that retail liquidity can flow through to our institutional clients.
Unknown Executive: And Chris, just to respond to the second half of your question around ALGO solutions and accessing additional liquidity destinations, you know, with the acquisition of Pragma, we now have the technology and the wherewithal to add to ALGOs both our internal destinations and internal protocols as well as external. So this does open up that opportunity to have available for our clients a variety of protocols and a variety of both internal and external destinations through the ALGO technology. Thanks, guys. I'll be right in the queue.
Rich: And Chris, just to respond to the second half of your question around algo solutions and accessing additional liquidity destinations.
Chris Allen: You know, with the acquisition of Pragma, we now have the technology and the wherewithal to add to Algo's both our internal destinations.
Chris Allen: and internal protocols as well as external. So this does open up that opportunity to have available for our clients a variety of protocols and a variety of both internal and external destinations through the ALGO technology.
Speaker Change: Thanks, guys, and I'll be right in the queue.
Speaker Change: Our next question comes from the line of Patrick Moley with Piper Fandler. Please go ahead.
Patrick Molle: And this is it. I hope that this is helping to make the process look like they're becoming a little more favorable for you guys. So could you maybe just talk about what you've seen over the last few days in terms of client engagement, protocol utilization,
Speaker Change: You know, there's there's obviously we've seen positive activity among certain
Speaker Change: Just the overall activity of the fixed income ETFs in the market.
Speaker Change: You know, you saw HYG go from an average of 30 million shares a day to over 100 million shares a day. So certainly positive trends and LQD also went from an average of call it 25 million shares a day to
Speaker Change: I would say the question is, is this sustained volatility or is it more short-term volatility that we've seen in spikes in volatility in the past?
Speaker Change: I am encouraged that these are economic events driving this volatility, and you tend to have more longer-term
Speaker Change: driven volatility of that. So certainly the rates backdrop is encouraging and the overall macro environment is encouraging, but again, we're only seeing three days of this volatility. Rich, anything to add? Yeah, to caveat the comment also with three days, and of course, we looked closely yesterday about what was going on.
Rich: When you see the market getting that choppy, you know, that's where the relative importance of liquidity versus workflow.
Rich: you know starts to tip the balance and unsurprisingly you know when we looked at you know say OT numbers for yesterday just to give some color on a day like yesterday we see you know OT up around 50%
Rich: sustainable you know throughout a month but it is indicative about what happens
Rich: When you get into a higher vol environment and
Speaker Change: And our clients start to think a lot more about, how do I get the best...
Speaker Change: Pricing on this trade, how do I make sure I get responses?
Speaker Change: for what I need to trade versus, you know, am I in the most efficient workflow in doing a PT, for example. It doesn't mean PTs go away, obviously, but on a relative basis...
Speaker Change: You see this shift back to a protocol where the pricing matters a lot more than in calm waters.
Speaker Change: Great, thanks for the call. That's it for me.
Speaker Change: Our next question comes from the line of Dan Fannin with Jeffreys. Please go ahead.
Dan Fannin: Thanks. Good morning. I was hoping you could expand on the rollout of XPro and how behavior has changed as you've been rolling us out selectively to certain subsets of clients. So just curious as to what the change in behavior, increase in velocity, and or activity has been post adoption.
Speaker Change: Thanks, and I'm sure we're pretty excited about the rollout of X Pro.
Speaker Change: Again, we started this over a year ago.
Speaker Change: really targeting our most active traders among our largest clients.
Speaker Change: where we saw a high ticket count and they saw they need they had a need for the benefit of the new technology and the workflow that it presents.
Speaker Change: We're now seeing over 60% of the trade activity from our largest
Speaker Change: Clients coming through XPRO so a very successful rollout across just traditional RFQ
Speaker Change: The second phase of the Expo rollout was really targeting portfolio trading.
Speaker Change: starting in the third quarter of last year.
Speaker Change: And now, I'm happy to report that Expro is seeing, just in the second quarter, about 56%
Speaker Change: of the Portfolio Trades came through XPro.
Speaker Change: Again, an encouraging stat and overall our portfolio trading volume is up in the second quarter and continues certainly here into July .
Speaker Change: The expo rollout is now headed to Europe . We're launching our, what we call our global PT solution, which allows
Speaker Change: Clients-to-Trade global product across the platform.
Speaker Change: And it's exciting to finally have XPRO in Europe and available in EM, where we're also seeing.
Speaker Change: growing demand for portfolio trading across both the euro market as well as the EM market. So still early days for the global rollout of Expro, but very encouraging signs.
Speaker Change: of what XPRO is capable of. More importantly, the development cycle around the new tech is quite rapid.
Speaker Change: certainly more rapid than our legacy platform. And we're able to deliver new tech and new functionality in a much more rapid delivery, particularly given that it's cloud-based technology.
Speaker Change: with obviously additional capacity, but the turnaround for development is quite high, which allows us to address clients' needs in a much more rapid pace.
Speaker Change: So all the benefits of XPro that we have predicted are playing out as we roll out across the globe.
Speaker Change: Great, thank you.
Speaker Change: Our next question comes from the line of Kyle Voigt with KBW. Please go ahead.
Kyle Voigt: Hey, good morning. Maybe just a question on the concept of moving into larger trade sizes.
Speaker Change: You have two newer initiatives here with Adaptive Auto X, which may help chopping up those blocks into smaller trade sizes.
Speaker Change: and then the HITOUCH offering that you've been speaking about for the past quarter or so. I guess, what do you see as the bigger opportunity for helping move that block market electronic between those two initiatives near term? And how does that compare to how you view the block market evolving over the long run?
Speaker Change: Sure. On the block market, first of all, just to put it into context,
Speaker Change: Over 40% of the trace market is greater than $5 million in trade size. So it's the largest segment of the market.
Speaker Change: That is still largely non-electronic, and so solving the transition from phone and chat to an electronic solution is our goal as we set out to roll out new tech and new products for our clients.
Speaker Change: There is actually an acceptance of moving blocks to an electronic form.
Speaker Change: but provided they replicate the current phone-based market. So protecting from information leakage is probably the key ingredient that we hear from our clients.
Speaker Change: Our HITOUCH solution that we're rolling out in XPro, really the first leg of HITOUCH was portfolio trading with the additional pre-trade analytics that we embedded in our portfolio trading solution, but also carrying those pre-trade analytics.
Speaker Change: into our high-touch solution for block trade sizes.
Speaker Change: It's a much more targeted solution where you can target one or several dealers.
Speaker Change: And what we do is we enrich the platform with unique proprietary data. Two key data elements that I'd point out are.
Speaker Change: One is our AI-based dealer selection tool.
Speaker Change: which really is looking at dealer activity on our platform, dealer acts information and helping a trader decide who is more likely to not only respond but win your request for price.
Speaker Change: The other piece of the puzzle is a new data product called...
Speaker Change: CpInquiry, which is really designed for both the size and the direction that the trader is trading. It gives real-time price information and predicts price for both your direction as well as your size. So it's a critical ingredient.
Speaker Change: to traders that are trading block size.
Speaker Change: separately
Speaker Change: And you are correct, it is designed to not only help clients trade without crossing spread, but also
Speaker Change: So, if the markets are relatively calm, and the dealers are flush with capital, and they're making markets in large size and taking down risk.
Speaker Change: Then our high-touch solutions.
Speaker Change: through XPRO, where we're giving, you know, advice on, you know, where a client should go with those orders.
Speaker Change: is a great way to trade it. But if we end up in a much choppier market, and we've seen this time and again in the past, where the dealers have tended to back off in terms of liquidity positioning,
Speaker Change: Both solutions are being pursued and we're kind of positioning ourselves to be successful with this regardless of what the market conditions are.
Speaker Change: Thank you.
Speaker Change: And I guess bigger picture, you know, Muniz's is still a fairly small part of the market, but are you seeing a push from clients asking you to break down the silos with any other larger liquidity pools, particularly in corporate bonds? Thanks.
Rich: Yeah, thanks, Alex. It's, it's rich. And yeah, this was what this was really about. And that's where ICE TMC comes in. Now they can just come to Marketaxess, and they can get all of their trades done. So for us, it was very attractive to keep clients on our platform regardless of the size that they're looking to trade. You know, with regard to the economics, it's pretty straightforward.
Speaker Change: Yeah, thanks, Alex. It's Rich. And yeah, this was this was really about
Speaker Change: putting out the liquidity to make sure that clients stay with us.
Speaker Change: and keep their orders here. As I mentioned earlier, they like the workflow. It's very effective for an institutional investor to come in. But the request we were getting, it's like, well, we don't want to have to go to another platform to get liquidity, especially on the smallest trades.
Speaker Change: in being able to keep clients on our platform regardless of the size.
Speaker Change: that they're looking to trade.
Speaker Change: You know, with regard to the economics, it's it's pretty straightforward. It's it's each of our platforms.
Speaker Change: We make money on the trades, open trading, transaction fees, and...
Speaker Change: themselves. So there's not a payment going one way or the other. It's taken out of a markup and best price wins if the level that comes back, net of the fees coming across from
Speaker Change: So, it's pretty straightforward when it comes to the economics. The last part was about, you asked about connecting to other venues. I'd say, you know, we're always open to connecting when there's unique liquidity.
Speaker Change: available that we can bring to our to our clients. That's really the driver for this. Is it going to be additive to the platform? If there is another venue that has the same liquidity sources that we already have, then there's not really much much to add in that way.
Speaker Change: Our next question comes from the line of Benjamin Budish with Barclays. Please go ahead.
Unknown Executive: It's each of our platforms; we make money on the trades, open trading transaction fees, and ICE has its fee model for when they're trading. And the respective platforms are able to collect the revenue themselves. So there's not a payment going one way or the other. It's taken out of the markup, and the best price wins. If the level that comes back net of the fees coming across from TMC into Marketaxess, then that will be at the top of the stack. And that's where the investor will trade, and otherwise, it might be coming directly from one of our liquidity providers on the system. Hi, good morning, and thanks for asking.
Benjamin Budish: Hi, good morning and thanks for taking the question. Just one for Ilene, welcome to the call. I'm just wondering how you're sort of thinking about balancing growth and margins. It sounds like, you know, there's a lot of growth initiatives at the same time. You're trading towards the low end of your target range for OPEX. You're buying back more shares opportunistically. So how are you thinking about the priorities there and any, like, longer term, you know, philosophical thoughts on growth versus margin expansion? Thank you.
Eileen: Sure, thanks so much for the question, Benjamin.
Eileen: You know, it's, we really look to strike the right balance, right, between everything that you're saying. Obviously, growth is incredibly important to us, and you've seen us really invest for growth, right? You've seen that over the course of the last two years, and I think you're starting to see some of the success from those investments, and some of that success actually, you know, these are not usually exclusive in terms of concepts, right? If you think about what happened with expenses, for instance, to your point, this quarter, you know, I would put those into two different categories, two different pockets of success, right? One of them is that we've seen some efficiencies coming through from some of those investments,
Eileen: And you can really see that with a good example is the Pragma acquisition, right? So that's something that we did for both growth and efficiency and really being able to leverage that technology.
Eileen: If we go into sort of expenses again, and I'm happy to kind of go into more detail here, I'm sure some folks have some questions about this as well, but if you look at sort of Chris also talked about some really important hires, right, that have not yet come on and they're not yet in our run rate from an expense perspective. We expect, you know, if you think about sort of other things to drive growth in the back half of the year that we would see maybe another 10 million in timing of expenses that are not in the current run rate.
Eileen: And so that includes things like marketing expense, T&E, you know, things.
Eileen: things like that. And so those are, you know, as well as the more technology expense. So you can see in the way I'm answering this, that these are not mutually exclusive concepts, right? You can run a disciplined, efficient organization while you are investing and driving growth. And I think that's, that's really our focus on our plan.
Speaker Change: Got it. That's helpful. I'll jump back in the queue.
Speaker Change: Our next question comes from the line of Jeff Schmitt with William Blair. Please go ahead.
Jeff Schmidt: Good morning. Emerging market volumes continue to be a real bright spot. What's your growth outlook for EM over the next three to five years since electronic penetration? Still fairly low there. And is the opportunity, it seems to be, in local currency volumes?
Speaker Change: Yeah, great question and obviously we had a lot of focus on the EM market opportunity in our opening remarks.
Speaker Change: Obviously, this is one of the largest markets outside the U.S. credit market and a market that we are fully engaged in and continue to see signs of growth across the U.S.
Speaker Change: across our platform and across regions.
Speaker Change: In particular, we've been adding local markets to our platform, and as you mentioned, seeing sizable growth in that local market.
Speaker Change: arena. And in fact, our overall local market revenue was up 22% in the quarter. And, you know, we're still seeing engagement from our clients across the local markets.
Speaker Change: There's been changes in the index, the large indexes that are followed by many of our investors and one key ingredient is India being added to the index, so we do see that broad EM market still being a very attractive asset across
Speaker Change: The broader investment arena and having access to all those local markets is a key ingredient for our platform.
Speaker Change: What one driver that we've seen is growth of portfolio trading across the EM market so
Speaker Change: Not at the levels that we see in high grade right now, but certainly there's higher demand for access to portfolio liquidity in that EM market, and certainly we're seeing some benefits across our portfolio trading tool in EM.
Speaker Change: The other area that we're seeing growth is in block size liquidity on the platform.
Speaker Change: We saw a record of block trading.
Speaker Change: In E-M on the platform, largely driven from the local markets and the rates nature of those local markets. So again, some very positive factors playing out in that E-M market and obviously still highly in demand.
Speaker Change: across our global investors.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead.
Brian Biddell: Great. Thanks. Good morning. Thanks for taking my questions. And welcome, Ilene, to the call as well. Maybe just to go back to the ICE agreement. Can you just talk about just how we think about market share in the space? Does this change that dynamic in terms of
Brian Biddell: How are you thinking about your overall liquidity pool within the confines of looking at market share?
Speaker Change: Realize that the revenue will happen where it gets executed, but does that change your reporting in any way in terms of something coming through, let's say, market access and getting executed at ICE or vice versa?
Speaker Change: Thanks for the question, and it's an area that I've...
Speaker Change: Spent many a year in, you know, when it comes to routing and both external and internal liquidity will be very transparent around both our market share. It's really based on where the trade reports flow from. So certainly, look, you have two leading liquidity pools, particularly in munis.
Speaker Change: We hit a record eight and a half percent of the muni market in July , so we're very excited about
Speaker Change: I'm going to turn it over to William to talk about the level of liquidity we are hitting on our own platform. We have also seen the rise of ICE bonds and the growth that they have seen in the retail segment of the market. We think connecting those two leading liquidity pools
William: really solves the need for clients, which is access.
William: to liquidity just more broadly across the market.
William: The structure of this is unique in the bond market.
Speaker Change: But it's a structure that we've seen in other markets play out quite successfully. And when I look at our client needs and where their areas of resources are being dedicated, it's largely being dedicated to collection of assets.
Speaker Change: and not really technology solutions for trading assets. And so we're helping solve those resource needs.
Speaker Change: Large institutional investors are able to access our platform, and now we'll be able to access both our platform and another leading pool of liquidity through the ICE bonds relationship. So it's really solving client needs, which is the focus.
Speaker Change: Obviously, we'll be very transparent on where transactions take place and who's the beneficiary of that revenue getting executed.
Unknown Executive: And then maybe just on the pricing, realize a lot of this is due to the mix, certainly between high yield and investment grade. But as portfolio trading or as you're more successful in portfolio trading going forward, do you expect that to be a headwind on pricing? And also, the high touch strategy, in contrast, within XPRO, do you view that as a counter to potential pricing pressure from more portfolios?
Speaker Change: That's a great color. And then maybe just on the pricing, realize a lot of this is due to the mix.
Speaker Change: Certainly between high yield and investment grade, but as portfolio trading, or as you're more successful in portfolio trading going forward, do you expect that to be a headwind?
Speaker Change: on pricing and also the high-touch strategy in contrast within X-Pro. Do you view that as a counter to potential pricing pressure from more portfolio trading?
Speaker Change: Hey Brian , it's Ilene. Nice to talk to you. Let me start on that and then Chris might want to come in with some of his views as well.
Speaker Change: You know, I would say the first thing to think about when you look at sort of the fee capture and fees per million is overall, you know, how is pricing, what is it looking like, and how are we seeing our fee cards? And they've really been stable.
Chris Allen: So we're not seeing moves or changes really in terms of the overall fee pricing mechanism.
Chris Allen: protocol and product mix, which you commented on, right? And we do know that, you know, the portfolio trading, obviously, we were really quite happy to see our share at 17.2 percent in July. And obviously, you know, that had some impact. One of the other things I would note, though, is that
Speaker Change: You know, our Muni business, we also saw good share there as well, and we saw, you know, increasing share there, and we had some dealers come on that were part of the Muni Brokers Acquisition, and they're on some legacy fee plans, right? And so there are different puts and takes here. I think we also have to remember how this model works in terms of
Speaker Change: These as well. And so if you think of high grade, for instance,
Speaker Change: And you think of duration, I think we talked a little bit just, you know, both Rich and Chris have talked about the environment and obviously it's early days. And so we need to see how this all plays out in the macro. But, you know, I'm sure I don't have to tell you, I know how closely you follow what's going on in the macro, but we've seen, for instance, if you think about the curve, right?
Speaker Change: We're at a point right now where we see, you know, just yesterday, a normalizing, albeit for a moment, of twos and tens, and we're seeing really the least inverted relationship over the, I'd call it, last,
Speaker Change: What two years in terms of the steepening of possibility for steepening of the curve when you mix that With if you think about what we're seeing in the rate environment, right? It's a forward curve now, you know as of yesterday was pricing in four or even five rate cuts And we know that just you know a few weeks ago. That certainly wasn't what we were seeing in the forward
Speaker Change: So, when you put those macro factors together, and again, we are going to have to see how this all plays out, but when you put those together and you think about duration for us.
Speaker Change: We know, for instance, that, you know, those are, those are positive.
Speaker Change: Signals for us in terms of how our pricing works there for, you know, high grade.
Speaker Change: And so, you know, if we remind about the sensitivities there, right, every one year increase in weighted average years to maturity traded on the platform is a benefit of approximately, call it $15 in high grade, right?
Speaker Change: And then there's also the sensitivity to yields, right? So if we think about the yield curve, if the first 100 basis points was lower, seeing a benefit.
Speaker Change: to high-grade fee capture of approximately $3 to $5 per million. So when you put those together, you know, depending on what goes on, that's $15 to $20 in high-grade that you can see in terms of fee capture. So I think there's lots of puts and takes here to think about in terms of the model, but I would just say overall keeping in mind that we have not seen differences to the stability of our fee cards.
Speaker Change: I don't know if you wanted to add anything on that.
Speaker Change: Yeah, Brian , I'll just add on the high-touch solution that we're rolling out. It is targeting, obviously, larger trade sizes that come with our traditional capture. There are embedded caps for certain trade fees.
Brian Biddell: But what's exciting about that opportunity is because it's direct to dealer and much more targeted to a dealer.
Brian Biddell: We don't have variable costs associated with clearing that.
Brian Biddell: that trade. And so it scales from a margin perspective quite attractively.
Brian Biddell: at the traditional capture rate that we enjoy on the platform.
Brian Biddell: But the variable costs aren't there. So the margin for those trades are technically higher just given the size of the trade, the capture, and the underlying cost. It's just a platform course cost. There's no variable cost to it.
Brian Biddell: Great. That's great, Carla. Thank you both.
Brian Biddell: Our next question comes from the line of Simon Clinch with Redburn Atlantic. Please go ahead.
Unknown Executive: Hi everyone. Thanks for taking my call. I was wondering if you could, I'm just going back to the comments you're making, Chris, about the past three days. I know it's short term, but a lot of the things are moving in the direction that you would hope to see. I was wondering if you could comment on what the similar dynamics would be in portfolio trading in terms of variable penetration in the market and the liquidity provided for that protocol in a period of heightened volatility. Have you seen any sort of real change in the dynamic there?
Simon Quinch: Hi everyone, thanks for taking my call. I was wondering if you could, I'm just going back to the comments you're making Chris about the past three days, I know it's short term,
Chris Allen: A lot of the things moving in the direction that you would hope to see. I was wondering if you could comment on what the similar dynamics would be in portfolio trading in terms of variable penetration in the market and the liquidity provided for that.
Speaker Change: Protocol in a period of heightened volatility. If you've seen any sort of real change in dynamic there, that'd be useful. Thanks.
Speaker Change: Again, it's three days. So I do want to caveat what we're seeing in just three days. I do think portfolio trading is a key tool adopted by our clients and will remain a tool.
Speaker Change: for our clients to use, both in times of high vol and low vol. It's really a question of cost.
Speaker Change: It spreads GAP out in this type of environment.
Speaker Change: both spreads in a single bond as well as a portfolio trade do, and we've seen evidence of these gaps in spread.
Speaker Change: They do gap out in this environment, so it just becomes a different trade from what it was just four days ago. So we have seen, and it's again three days, but lower levels of PT activity.
Speaker Change: That said, our clients are in, when they have either capital inflows or capital outflows.
Speaker Change: Depending on the market environment, they may use portfolio trades.
Speaker Change: to enter and exit more quickly in an environment like this where there's certainty of execution.
Speaker Change: But obviously, over the long period of time, we've...
Speaker Change: seen, you know, portfolio trading, mid-market trading, like those session-based trading, those are harder to execute in heightened volatility versus the low volatility that we've been experiencing for literally the last several quarters.
Speaker Change: and Titan spreads over the last several quarters. So again, three days does not predict a trend, but what we certainly thought would happen in higher volatility, we're seeing playing out in the market.
Speaker Change: Great, thanks. And I guess just a follow-up.
Speaker Change: Could you just...
Speaker Change: Give us a sense of sort of how you're thinking about the capital allocation going forwards. You used your free cash flow, you've clearly you've got 250 million dollars of buyback authorization here, so
Speaker Change: How you think about putting that to work, but generally speaking, longer term, is there any change to how you're looking at the balance sheet, et cetera, thanks.
Speaker Change: Thanks so much for the question. Yeah, I mean, I would say that if you think about capital optimization, right, and how we look at it and really driving value for our shareholders with capital optimization.
Speaker Change: You know, I don't know that I would say that there's a change necessarily, I would start by saying that, you know, the new authorization really does reflect, as I said in my comments, the board's confidence in the future performance of the company and our ability to generate cash, right? As we continue to execute on the strategy that.
Speaker Change: Chris and the team have been talking about.
Speaker Change: And, you know, we really are a pretty strong cash-generative model, and that does allow us to continue to fund growth, right, to self-fund growth, to make investments, et cetera. And really what this is about is flexibility, right? There's no expiration on this authorization. So it gives us the ability to opportunistically be in the market and buy back when it makes the most sense for our shareholders, right, in terms of, you know, we're going to obviously continue to...
Speaker Change: Return capital to shareholders through dividends, buybacks opportunistically, but if you think about kind of the overall hierarchy, you know, our focus continues to be to reinvest in the business, right? We really want to drive that long term opportunity that we see in the fixed income market.
Speaker Change: You know, we're going to continue to look at bolt-on acquisitions, similar to Pragma that we've been talking about, that allow us to take technology and leverage it across the tech stack, which is going to enhance our capabilities.
Speaker Change: Add to Efficiency. And then we would, you know, and I would say it's really important. One thing I would say about utilizing that cash and balance sheet in that way is that it's really important to do this with the expected amount of rigor and discipline, and that's really important.
Speaker Change: And CERB will continue to return capital shareholders through dividends and buybacks and be opportunistic with that. And that's really what this is about. We just have that additional flexibility now.
Michael Cyprys: Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please go ahead.
Speaker Change: Great. Thanks so much.
Speaker Change: Our next question comes from the line of Michael Cyprys with Morgan Stanley . Please go ahead.
Michael Cypress: Great, thank you. Good morning. I just had a question on information services. I was hoping maybe you could elaborate on some of your key initiatives to drive growth with the information services and technology.
Michael Cypress: services businesses that you have. I know in the past you've mentioned some opportunities around indexing and end-of-day pricing. Just curious where those initiatives stand. What are some of the steps you're looking to take over the next 12 to 24 months? And as you sort of look at the contribution of revenues in those line items today, I guess, how do you think about that mix changing as you look at over the next three to five years? Thank you.
Speaker Change: Sure. Thanks, Michael. And really, we're pretty excited about our information services business line.
Speaker Change: We're excited about the pipeline of products that we're bringing.
Speaker Change: Again, first, we're bringing product to the platform.
Speaker Change: to help traders determine how to trade, when to trade.
Speaker Change: and many times in the context of a portfolio trade.
Speaker Change: Some of the portfolio construction on what to trade.
Speaker Change: So there's key ingredients of our data is making its way first to the platform and it's exclusive on our platform.
Speaker Change: We obviously have some very successful data products like our CP Plus data.
Speaker Change: across high-grade, high-yield, Eurobonds, and more importantly, EM.
Speaker Change: I do think our opportunities in the international sector are quite exciting, particularly those local markets that we've talked about today. Our CP Plus 4 EM is in a backdrop of a market where there's no trace.
Speaker Change: No last sale.
Speaker Change: These are dark markets, generally broker-driven markets, so having a real-time feed.
Speaker Change: is a very important component to being a dealer or being a client in that market. So we do see a great opportunity for our real-time data feed across the international sector and certainly seeing opportunities as we offer that data feed in APAC, in LATAM, and throughout Europe .
Speaker Change: Many of the products that we're putting on the platform like tradeability.
Speaker Change: AI Dealer Selection, CP, Inquiry, these are designed for
Speaker Change: both how traders engage the market and that's why they're exclusively on our Expo platform but also they can be can help portfolio managers construct
Speaker Change: Portfolios on any given day. So we see an opportunity, a pipeline opportunity, not just at the trader level, but also at the portfolio construction level.
Unknown Executive: Separately, you mentioned our index opportunities. Obviously, we announced a partnership with MSCI. We're excited about the indexes that we have crafted with MSCI as part of that partnership, and we think there's a bigger opportunity in that fixed income index market as more and more products and more and more investors move to passive strategies across the fixed income landscape and not just managed strategies. And then, finally, we haven't talked about it in a while, but the launch of CP Plus for MUNIs is very exciting for us.
Speaker Change: Separately, you mentioned our index opportunities.
Speaker Change: Obviously we announced a partnership with MSCI.
Speaker Change: We're excited about the indexes that we have crafted with MSCI as part of that partnership, and we think there's...
Speaker Change: a bigger opportunity in that fixed income index market as more and more products and more and more investors move to.
Unknown Executive: Not only does it help power our automation suite in the MUNI market, which is growing rapidly, but it's a new data product, a new real-time data product in the MUNI market, and something that is certainly needed in that market. So we see a really heightened opportunity as we roll out CP Plus for MUNIs as well. So again, strong product in the current mix and opportunities for growth, but very excited about the pipeline and the opportunity behind the pipeline of growth as well. Thank you.
Speaker Change: Passive Strategies Across the Fixed Income Landscape, and not just.
Speaker Change: Manage Strategy. So, and then finally, we haven't talked about it in a while, but the launch of
Speaker Change: CP Plus for Munis is very exciting for us.
Speaker Change: Not only does it help power our automation suite in the muni market, which is growing rapidly.
Speaker Change: but it's a new data product, a new real-time data product.
Speaker Change: In the muni market and something that is certainly needed in that market
Speaker Change: So we see a really heightened opportunity.
Speaker Change: as we roll out CP Plus for munis as well. So again, strong product in the current mix and opportunities for growth.
Speaker Change: but very excited about the pipeline and the opportunity behind the pipeline of growth as well.
Speaker Change: Great, thank you.
Speaker Change: Our next question comes from the line of Eli Abboud with Bank of America. Please go ahead.
Eli Abboud: Good morning. Thanks for taking the question. You mentioned that you're connecting to TMC specifically. So I was wondering if there's an opportunity to grow this partnership with ICE. Could you enable connectivity to ICE's other execution assets, like BondPoint and NYSE bonds, as a next step?
Speaker Change: or maybe is there a way to leverage your overlap in fixed income data?
Rich: Yeah, hi Elias. It's Rich.
Unknown Executive: Yeah, I mean, it's really up to our friends over at ICE. You know, we're connecting. Right now, I believe that they have not combined their two retail entities. The other one was Bond Point.
Speaker Change: Yeah, hi Elias, it's Rich. Yeah, I mean it's really up to our friends over at ICE, you know, we're connecting in. Right now I believe that they have not combined
Speaker Change: There are two retail entities. The other one was Bondpoint.
Speaker Change: So it's possible we could connect directly into that one as well.
Speaker Change: You know, I think that'll be coming together and we'll connect.
Speaker Change: via the existing.
Speaker Change: pipes that we have.
Speaker Change: So, it's definitely going to be something we're going to be doing, again, it's not just for munis, it's for corporates as well. So, if they've got the additional liquidity on their other venue, I'm sure that's one that we'll tee up in the near future.
Speaker Change: And Eli, I'd just add to those comments, I mean, we are excited about the ICE relationship and, more importantly, the retail opportunity.
Eli Abboud: that we see in the overall market. We see SMAs growing rapidly, they're at $2 trillion.
Speaker Change: today, expected to go to $5 trillion. We're seeing a great deal of SMA activity on our platform because they traditionally come through the institutional execution.
Speaker Change: you know, areas of large investors.
Speaker Change: but they also execute on a platform like ICE.
Speaker Change: I think both parties coming together in this unique partnership.
Speaker Change: ...leverages the growth of the overall retail market, whether it comes through traditional retail, or if it comes through SMA, like we're seeing on our platform.
Speaker Change: Yeah, a lot of excitement around this partnership and really what it says about our view of market and market structure going forward in the fixed income market.
Speaker Change: And do you foresee any regulatory risks of the arrangement given the overlap in meeting execution?
Speaker Change: No, in fact, these are two.
Speaker Change: To connectivity points where their liquidity is their liquidity. It's represented on our platform.
Speaker Change: and our liquidity will be represented on their platform as well. So it's a way for our clients to benefit through a technical connection and a commercial relationship. So we would not expect any regulatory concerns around how we structure the partnership.
Speaker Change: Got it. Appreciate the call. Thanks.
Speaker Change: This will conclude our question and answer session. I will now turn the call back to Chris Concannon for closing remarks.
Chris Concannon: Thank you for joining us today. Obviously, we're excited about the macro backdrop in the market and recent volatility and looking forward to update you at the next quarter. So thanks for joining us today.
Speaker Change: This concludes today's conference call. You may now disconnect.