Q2 2019 Earnings Call
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2018.
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 Rick.
Good morning, and thank you for joining us to discuss our second quarter 2019 results.
This morning, we reported strong second quarter results driven by record quarterly trading volume with new volume records in high yield emerging markets and eurobonds.
Overall fully electronic trading volume of $527 billion was up 25%.
Compared to Q2 2018.
Open trading volume was up 46% year over year to $131 billion.
Estimated use high grade market share was 18.7%.
This quarter trading activity outside of the US reached record levels with international client volume of 43% to $162 billion.
Second quarter revenues were a record $125 million up 17% compared to Q2 18.
Operating income for the quarter was up 17% to $61 million and diluted EPS was up 19% to $1.27 cents.
In addition to the strong quarterly results. We recently received the great news that market access has been added to the S&P 500 index.
This represents a major accomplishment for our company as we prepare to celebrate our Twentyth anniversary early next year.
Congratulations to all of our employees on this significant achievement.
Last week, we also announced that Ritchie Praeger has joined our board of directors.
Richie recently retired from Blackrock, where he was a senior managing director in charge of global trading liquidity and securities lending.
He will be a valuable asset for the company as a new director.
Slide four highlights market conditions.
Market conditions were mixed during the quarter, which makes us feel even better about the results.
Credit spreads over treasuries continued to tighten leading to an imbalance of by orders, especially in high yield and mm.
We have historically done better in market environments with widening spreads.
Trace volumes remain strong and are up 8% year over year.
We believe this is due to the strong demand for us credit products and the growing level of trading automation in fixed income.
Trading volumes are also undoubtedly benefiting from the significant addition of new entrants in credit trading as a result of the growth in all to all trading.
The treasury yield curve remains flat, while treasury yields decline from Q1.
In this environment, we are pleased to see our average fee capture improved slightly year over year.
Slide five highlights open trading activity.
Open trading experienced another strong quarter.
Adoption continues to grow with volume of $131 billion up 46% year over year.
Open trading represented 25% of our volume in Q2 up from 21% last year.
Over 334000 open trading transactions were completed in the second quarter up from 256000 in Q2 2018.
Open trading liquidity providers or price makers on the platform drove approximately 2.3 million price responses on LIBOR orders of 57% from a year ago.
Liquidity takers saved an estimated $49 million and transaction costs through open trading on the system up 27% from the second quarter last year.
Participants benefited from average transaction cost savings of approximately 2.4 basis points of yield when they completed to use high grade transaction through open trading protocols.
In addition, we estimate that liquidity providers saved an estimated $50 million in the quarter up 46% year over year.
This is the third quarter in a row, where we have delivered estimated total transaction cost savings to our clients of around $100 million.
Open trading volume increased significantly at across all four core products with us high grade up 34%.
US high yield up 49% emerging markets up 55% and eurobonds up 111%.
Open trading has become an important source of new liquidity for credit market participants around the world and is a key competitive advantage for market access.
Slide six provides an update on our global network.
Our global network of investors dealers and alternative market makers continues to expand both domestically and internationally.
International trading activity is accelerating on market access.
Trading activity from European clients was especially robust in the second quarter with overall volume up 46% compared to Q2 2018.
Eurobond volumes were up an impressive 64% year over year.
We are confident we are taking meaningful share in European credit E trading.
Emerging market volume was up 27% to $124 billion with a 51% increase in local market M. trading.
We now have over 1600 firms active on the platform globally.
We currently have nearly 800 active international client firms up 26% year over year.
Across all products the number of active clients continues to grow sequentially.
Penetration across products increased as well with over 900 clients now trading three or more products.
We are excited to see the continued growth of our business outside of the US and believe these results confirm that our value proposition is resonating with clients globally.
Now, let me turn the call over to Chris to provide an update on trading automation and new initiatives. Thank you Rick as you can see slide seven demonstrates the growing momentum of automation and credit trading automation on the market access trading platform continues to expand as both dealers and institutional investors rapidly embrace our trading automation tools. The use of dealer algorithms continues to grow with approximately $2.4 million algo responses in Q2, 2019, and 81% increase year over year, creating a highly competitive trading environment for our clients.
The use of auto execution functionality on our platform by investors is growing rapidly as well in Q2 105000, investor trades took place using our auto acts feature up from 37000 trades in the same period a year ago. This activity was generated by 47 large global asset managers executing trades via auto execution this quarter more than doubled the number of firms using auto execution in the same period last year.
We believe that the cost benefits from improving trading efficiency will continue to drive our investor and dealer clients to higher levels of automation and credit trading while we continue our investment in innovation in this area. Most importantly, we believe that structural increases in trading automation across the market will lead to higher levels of market turnover as we witnessed in other markets slide eight outlines our new business initiatives and technology solutions. We are working on a number of new initiatives than we would like to highlight several today, we have been analyzing the move to self clearing for some time given the continued growth of open trading we have made the decision to transition to self clearing in the us and engage in new settlement agent outside of the U.S.
This transition, which we expect to point to take place in the first half of next year will lead to significant variable cost savings and create a more scalable cost structure. We also believe a new global settlement agent will be critical in expanding our local market coverage in our fast growing emerging markets business.
In terms of new technology enhancements, we are looking forward to the launch of live markets. Later this year five markets is an all to all LIBOR order book with streaming dealer liquidity that was developed for the institutional market. It will provide on demand liquidity for our investors and dealer clients, ultimately improving transparency and driving greater transaction cost savings.
We will also be launching a portfolio trading solution to respond to both the recent growth and portfolio trading across the fixed income market and the growth of fixed income EPS. The solution will create a streamline protocol for clients to price and transact large customized fixed income portfolios, while demonstrating best execution with competitive pricing and our proprietary data analytics in the second quarter. We also announced a partnership with virtues RPQ hub to deliver institutional investors, a new cost efficient secure solution for achieving quality execution and aeps aeps have grown quickly to become an important feature of the liquidity landscape in the globe Global credit markets. We believe our partnership with Virtu will provide our clients with seamless access to a global ETF platform.
We are excited to be innovating and investing in technology solutions for our clients that will support the continued evolution of credit trading and we look forward to updating you as these initiatives involve now let me turn the call over to Tony to discuss the financials in more detail.
Thank you Chris.
Please turn to slide nine for summary of our trading volume across product categories.
Overall trading volume was up 25% as we experienced healthy volume growth across each of our core four trading products.
US high grade volumes were up 15% year over year to $265 billion for the quarter on a combination of the gain in estimated market share and higher use high grade trace volumes.
Our other credit category trading volumes were up 40% year over year in large part due to gains in estimated market share.
Our trading volume gains in emerging markets us high yield and European corporate bonds far outpaced the year over year rise in estimated market volumes.
The results were particularly satisfying for these products given an inquiry mix during the second quarter that favorite client buying.
With six important trading days remaining.
July month to date high grade market share is tracking significantly above the second quarter level and our overall July average daily volume.
While lower than the second quarter level is substantially higher than July 2018.
On slide 10, we provide a summary of our quarterly earnings performance overall revenue was up 17% year over year.
The 25% increase in trading volume resulted in a 19% uplift in commissions.
Information services revenue was up 3% on a constant currency basis up 6%.
Post trade services revenue was up 9% and on a constant currency basis up 16%.
Expenses were up 18% and operating income and EBITDA were both up 17% year over year.
The effective tax rate was 23.5% in the second quarter versus 19.5% in the first quarter.
The recognized the amount of excess tax benefits related to share based compensation awards caused the movement in the effective tax rate between the first and second quarters.
While the effective tax rate for the first half of the year was 21.5%.
We expect our effective tax rate for full year 2019 will be in unit near the low end of the guidance range of 20.5%.
Our diluted EPS was $1.27 on a small increase in the diluted share count.
On slide 11, we have laid out our commission revenue trading volumes and fees per million.
Total variable transaction fees were up 27% year over year, largely driven by the 25% increase in trading volume.
You went high grade fees per million was up $9 in the first quarter level as the favorable impact from lower yields and slightly longer years to maturity was somewhat offset by a mix shift in trade size buckets.
Our other credit category fee per million decreased by $6 on a sequential basis.
The contribution to other credit volume from emerging markets high yield and European credit was little changed during the quarter.
A shift in dealer mix accounted for a small decline in emerging markets and high yield fee capture.
We had one dealer migrate from the you've got high grade distribution fee plan to the all variable fee plan during the second quarter, which resulted in a sequential decline in us high grade distribution fees.
Slide 12 provides you with the expense detail.
On a year over year basis expenses were up 18% for the quarter and up 15% year to date.
Compensation and benefits accounted for more than 60% of the absolute change in expenses for both the quarter and year to date.
As we continue to add personnel to support our growth initiatives.
Our year over year increase in head count of 49.
Higher variable bonus provision and higher stock based compensation expense were the main contributors to the rise in compensation and benefits.
We have freshened up the expense forecast and refined our resource requirements necessary to execute on a variety of important initiatives, including those that Chris described.
And now believe that full year 2019 expenses will end up near the high end of the expense guidance range of $256 million.
And just a reminder, that the estimated 2019 expense uplift includes approximately $10 million and expense associated with senior hires and retention activity.
We don't expect to repeat of this type of activity in 2020.
On slide 13, we provide balance sheet information.
Cash and investments as of June Thirtyth were $518 million and trailing 12 months free cash flow reached a record $196 million.
During the second quarter, we paid a quarterly cash dividend of $19 million and also repurchased 13000 shares under our share share buyback program.
Our growing cash flow from operations allows us to increase investment in organic growth opportunities, while simultaneously returning cash to shareholders.
Chris commented earlier on our clearing and settlement initiatives.
We believe that our regulated businesses that handle match principle trading has sufficient liquidity and capital to cover any new deposit or reserve requirements in the near term.
We also do not anticipate any change in our shareholder capital return programs.
Based on the second quarter results. Our board has approved a 51 cents regular quarterly dividend.
Now, let me turn the call back to Rick for some closing comments.
Thank you Tony.
We are happy with the growth we achieved in Q2 trading volumes revenues and earnings.
Open trading is driving transaction cost savings and our international business has never been stronger.
Trading automation is leading to increased client demand for each trading across products.
In this environment of growing client demand, we are actively investing in new products and new trading solutions in order to maximize long term revenue growth opportunities for our shareholders.
Now we will be happy to open the line for your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the one key on your Touchtone Telecom. If your question has been answered or you wish to move yourself from the queue press the pound key and the interest of time, please limit questions to one and one follow up.
And our first question comes from Rich Repetto with Sandler O'neill. Your line is open.
Yes, good morning, Rick and Tony Chris.
First congrats on the out of Ritchie Praeger he's been at the forefront of the conversion to electronics in fixed income so great.
In addition to your board.
The first question is on self clearing.
Can you approximate the savings that now.
Maybe I missed it but can you approximate the savings and when that will be implemented.
So rich it's Tony so on the on the self clearing and declaring initiative. It today, we use a third party clearing broker to settle the match principle trades and when we look at clearing cost as a percentage of open trading revenue that that's one of the principal metrics we use.
It's been Bubbling around 11, or 12 or 13% of open trading revenue.
So we're going to move to the self clearing model in the US you also heard that we're changing out settlement agents outside of the us and the cost structure. It will scale veteran but even as important as that is it's going to improve customer service and better support our emerging markets initiatives. So were theres. There are multiple benefits here when we look at clearing costs as a percentage of revenue use that metric, we believe that we can drive.
Clearing costs in that particular metric into the single digits. So again, if it's 11 or 12 or 13, 13%. We think we can get it into the single digits.
Exact date, it's some time sometime in the first half of the year to hard to pin down an exact date, but expect those expect those savings to flow through.
Over the course of 2020 and rates, it's Chris I'd, just add it's important to point out that we have a well capitalized broker dealer because of the commercial needs, where our counterparty to some of the major institutions around the globe and so that capital.
It is now being deployed.
As clearing fund deposit for our activity. So we don't we don't see an immediate need to further capitalize the broker dealer because it is overcapitalized for commercial reasons and so we're leveraging capital that's sitting on our broker dealer balance sheet and reducing our variable costs of trading. So it's a it's a it's a great great project and one that delivers not only savings but allows us to expand our there is an important point.
The change of the global agent that allows us to expand our local markets in EM, which as you can see our OEM continues to grow rapidly.
Got it okay that you're in a unique position there.
I guess my follow up would be.
This past quarter was.
For those of US it was.
Unique in that.
As far as interest rate movements.
The yield curve and then I guess the question is on macro what do we is there things takeaways.
From what happened in the quarter in regards for the performance either way people trade Bon electronically and this type of environment and the other macro thing I think thats lingering is the potential for our hard Brexit now could you comment on some of these.
Yes.
Factors that are out there that aren't fundamental but are certainly would impact to Rick.
Sure happy to thanks, Rhett Jay the macro environment I commented in the prepared remarks, if you look at a quarter like Q4, when spreads were widening significantly that's typically where we deliver the biggest market share gains. So what we are encouraged by when you look at the first half of this year as it's been a consistent spread tightening environment and spreads have basically recovered almost entirely the move.
From the fourth quarter, so for us to be gaining share and gaining volume the way that we are in what is really an offer wanted environment, where there is a search for yield going on globally.
It gives us great confidence that we are in the midst of a secular change in client behavior toward more trading automation and electronic trading as we look into the second half, it's really hard to predict of course, but.
We now are at lower levels of spreads and lower levels of yields as you have mentioned.
And we would expect as is normally the case seasonally for new issue volume to be lower in the second half than it was in the first half.
With respect to Brexit.
We've been preparing for several years and we feel very good that we are ready for any outcome.
Clearly the view is that the odds of a hard Brexit have increased this week.
But we are ready to go we have all of our regulated entities now set up in the Netherlands, and we have clients in the EU trading through our MTF in Amsterdam everyday so we're ready to switch over the liquidity experiences is very similar in our Amsterdam MTF as it is in the UK and we feel very good about our preparation for Brexit.
Got it. Thank you. Thank you Rick was very helpful.
Thank you and our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks.
A couple of questions on the new business initiatives the live markets.
Description seems like it would compete a bit more with the banks directly.
Just in terms of going after new issue can you talk about that offering in more detail. Please.
Sure.
Live markets is not designed to compete with the banks, it's actually designed to help the banks provide what they've built on their side, which is a streaming liquidity.
Streaming deal or liquidity, we're seeing it today in response to our queues. So it facilitates both banks and non banks ability to stream to clients across.
The most liquid end of the bond market.
What's what's unique about log markets.
Not only does it help facilitate ill liquidity being driven from the banks, but it also allows investors to rest orders.
Really for the first time in the bond market. If you think about the overall global market.
In fixed income it's driven by.
Request for quote where clients are asking the community for a price now our investors with the introduction of line markets clients will be able to place orders.
In a market that is available to all and that's a that's a critical function that has been missing from the bond market. Its a function that we take for granted in other markets. Both the futures market, where clients can rest orders and and obviously the equity market globally, where clients can rest orders. We are building a place for clients to rest orders side by side with dealers to stream price to clients.
Great.
Follow up for Tony just wanted on expenses.
Thinking we can get the high end for this year, but thinking about next year, where you have the self clearing coming in the I think you said the rollback of roughly $10 million in retention and obviously if it can be ongoing investment in the core business and so there's just directionally or kind of from a growth perspective, how we should think about 2020.
Hey, you know from a from an expense perspective would be helpful.
While down his early too early to start talking about 2020 at least at least with some specificity but.
I mentioned the prepared remarks that.
We have the senior hire activity and net retention activity, it's not likely to repeat in 2020 that was.
That was around $10 million and.
While you're not prepared to give an exact range right now just a couple of items to think about and the first one we're going to continue to invest so we're continuing to invest in people and an infrastructure to support growth and we believe that's what that's what our shareholders are looking for we're not we're not playing this for the short term and we want to make sure that we're capitalizing on the opportunity in front of us. So we're going to continue to invest the.
Senior hire activity, while it's in the base, we don't intend on hiring another president, although sometimes I do.
I do wonder about that and we're not hiring up another president if you will.
[laughter] and also you will see what level will not be in Q1, you will see the benefit come through for that for this clearing clearing initiative and changing clearing arrangement. So you will see that coming through.
Definitely in the back half of the year, yes, right the tough to give a range right now but I.
I think all of us would be.
Would be a little bit surprised if you saw an expense increased like you're seeing this year 15 up 15% year over year.
Again with some of those items at a pointing out here and not likely to see that repeat again in 2020 and Dan It's important to point out on the self clearing initiative. It is a lengthy approval process. So it requires your investment at the front end of the process, so people and platforms need to be in position away before launch date. So most of that investment will happen this year and.
You will see a run rate in this year that will follow into self clearing in the first half of next year.
Great. Thank you.
Thank you and our next question comes from Kyle Voigt with KBW. Your line is open.
Hi, good morning.
If I could just ask a couple of follow ups on the live markets initiative and are focused on new issues and story bonds can you help frame the percentage of total second secondary market trading that this offering will address and then can you share anything in terms of where you think the net capture rates will shake out.
Any incentives that that may need to be in place for that for the dealers.
Sure happy to take that one Kyle good morning, but.
As we as we've said on previous calls live markets is really aimed at the very liquid end of corporate bond trading, which historically interestingly enough is not where we have done our best in market share.
And.
Part of that market is clearly newly issued bonds in the other or the large benchmark deals that.
The trade in a very liquid way throughout most trading days.
And I guess, the other clear focus for us in live markets is it increasing block trading market share.
What we have seen in the OEM as the investment in the request for market protocol significantly improved our results in block trades and block trades now.
It make up a significant part of our growth in.
M. trading, especially in local markets and there is some similarity here with alive markets initiative in terms of aiming at the very liquid end of the market.
And the block trading market when we try to estimate what percentage of trace if you look at.
The percentage of trace that we think is attributable to newly issued bonds and benchmark large deals.
It's probably around 25% of total trace volume.
It's difficult to be exact but it's a significant part of the market. We're active there today, but these protocols, we think have a real chance to increase.
Our share in that part of the market.
Fee capture of course is tied to bid offer and bid offer is tighter on these bonds.
So we would expect that the combination of larger trades.
And lower bid offer with suggested fee capture in this part of the market will be lower but of course, it's all additive topline revenue versus where we are today.
Okay right.
Just to clarify or should we think about maybe half the fee capture in high grade or is it something lower than that.
Yes, it's too early to know specifics on it.
I wouldn't think that that would be too far off the mark.
But.
Those details are still in front of us.
Okay great.
And then just maybe one on auto execution continues to grow really rapidly.
But in terms of volume I think it's still only around 4% of your total volume picks up substantially year over year. Just wondering if you could help frame, where you think that buy side auto acts can go as a percentage of our market access as total volume is it something that and three year five years it could be.
Our quarter or half their volume or more.
Sure I'll take that it's Chris.
We see client adoption.
Across the board from most of the large.
Fund complexes most of that adoption involves smaller ticket sizes.
Either under a million or under 2 million.
And most of the firms are getting comfortable once they adopt that we do see affirms increasing.
To penetrate more of their trading activity across investment grade and high yield than we would expect auto execution.
To bleed into other products as well.
If you think about muniz, which are much smaller trade size provided you are comfortable with the liquidity and the.
The liquidity on the platform and the price that we are delivering you get comfortable with auto execution. So we see with declines that have adopted it further penetration and higher growth rates.
Which would suggest a much higher percentage of our total volume being auto X. I think it's important to point out that thats one side of the trade that is the client.
Auto executing their request for quote and those responses.
We still are looking at solutions similar to an auto responder, where clients are able to respond to other.
Request for quote so there are a variety of auto execution solutions, we continue to analyze and we continue to hear from the clients that will drive auto execution to a much higher percentage of our overall volume.
Okay. Thank you.
Thank you and our next question comes from Ken Hill with Rosenblatt Securities. Your line is open.
Hey, good morning.
So my first question kind of go back to the new business initiatives.
I know you guys have these opportunities kind of identified.
Im guessing project out and expected launch here for a couple of the big ones here in the fourth quarter, but if we look beyond that so I guess the next wave of initiatives what are the areas of the market and you guys are focused on that seem maybe a little bit too terribly far more investment overtime.
I think the nice part about the credit spaces.
We see ample opportunity for investment over the next three to five years, we're still in pretty early stages of Electronification of the credit markets Clearly Asia is an area of investment for us.
Given the beginnings of greater electronic trading adoption in the region.
And we would also see electronic trading demand growing in additional credit products. We're at very early stages in municipal bond trading, but we like some of the trends.
And client.
Input that we're getting for our Muni bond product.
This structured product market, including asset backs and non agency mortgages has opportunities to expand electronically. So we're you know we're looking at a broad menu of opportunities globally, and we're matching that against increased demands for automation coming from both our dealer and investor clients. So it is an attractive space in terms of the number of growth opportunities that we see in front of us.
And Rick I would just add that we're seeing continued growth in our request for market.
Where clients are requesting a two sided market first the single sided request for quote.
That's been a wonderful driver and euro bonds and emerging markets growth rates that you've seen here today. So we are expecting further investment.
In functionality similar to request for market and obviously the investment in the auto ex features that we just mentioned I think thats, a multi year investment because clients continue to request.
Small changes small adjustments.
As we rollout all of these features.
Okay.
And one thing that wasn't on that slide, but I think you guys had announced earlier in the year with the refund identified data partnership just wondered if we could get any color on the early traction there, but you guys have and getting back.
Sure.
On that what's great about data as we continue to produce it without making substantial investments and it's really about distribution. The roof refitted relationship is an important relationship for us because of their massive global distribution we're seeing.
A lot of activity again, it takes out a fairly long lifecycle to sell through that distribution channel, but we're we're seeing a lot of activity through that distribution channel around our key data products.
And so we do expect a later in the year.
To see more activity.
Coming out of that relationship.
Okay. Thanks for the details.
Thank you and our next question comes from Q Miller with Buckingham. Your line is open.
Hi, Thanks for taking my questions.
Yes, hi, everyone around the eurobond market and obviously, that's an area, where we've seen greater adoption of electronic trading.
You guys have had a lot of success in gaining market share you know more recently.
Just wanted to get a sense of if you're seeing competitors in that space react in any way and are they making changes to their platform to train.
Protect their share and.
Mimics some of the success success that you're having.
Are you seeing anything just in terms of the competitive landscape for you from the eurobond area.
You know I think as we've suggested in past calls that European clients are responding to a couple of parts of our value proposition.
In European trading and by the way, it's well beyond euro bonds European clients are extremely active in emerging markets trading.
On market access as well as us credit trading, but clearly the liquidity solution that we're offering is different from competitors.
And the combination of broad based dealer liquidity and open trading liquidity is unique and is driving transaction cost savings and I think thats a big part of why were doing better in the European region. I would also point to data, we're using data to drive trading.
Activity and market share gains and we have terrific.
Pre trade price discovery and data products for European clients, including.
CP, plus which has been winning multiple awards this year as.
One of the best real time pricing tools for the global credit markets. So I think that that combination of a unique liquidity pool driving down transaction costs and high quality reliable pre trade data is really changing the dynamic in the competitive landscape in Europe , and it's a meaningful change.
You can see that with some of our competitors in the volumes that they're reporting that we are clearly taking share and we're excited that there is more to come for us given the success that we're having in the European region.
Thanks, Rick that's really helpful.
And then just on the expense guidance the update there towards the upper end of the range.
Is there an assumption just in terms of market activity in the second half of the year relative to the first half and half.
Just the change primarily all driven by the increase in the business investments.
You, it's Tony I wouldn't say that it's.
Market activity related win.
When we freshened up the forecast for the rest of the year, we're looking at the resources required to execute on all of these initiatives.
Most of the uplift is people related.
Although there is there are several other line items like clearing costs like the this clearing initiative there is in implementation fees.
Theres, even some occupancy uplift in London, there is various employee benefit programs and train because theres been a number of items that went into the mix, but but by and large it is people I mean that is the swing factor.
Got it Thats helpful. Thank you.
Thank you and our next question comes from Rich Repetto with Sandler O'neill. Your line is open.
Yes, just.
Tony just a quick follow up on the July volumes, you said that they were.
Compared to last year, they are above it which is.
Barring a very weak last year.
But down from.
Down from Twoq pretty wide range I guess the point is could you get.
Additional color on Barmes July today.
Yes so.
It sort of gave an upper end of the boundary there with.
With two Q, we're at 8.4 billion average daily volume in Q2 and.
The commentary you going to have to decipher what what the word substantially higher means substantially higher than July 2018, it some the market environment and the market volumes in July while down seasonally from June and and the second quarter, which happens every July market volumes are actually pretty healthy. So when you look at us high grade market volume month to date is up about 5% net after remember we have six trading days left and we also have the impact of July 3rd July 15, there. So market volumes are pretty healthy even in high grade when you look at high yield emerging markets and eurobond market volumes month to date, all three of them are tracking up more than 20% year over year. So.
There is.
While.
Well, we're saying that abbvie is tracking below.
The second quarter, which will be very typical for July .
Remember, we've got market volumes in there. We also said that that us high grade market share is tracking well above the second quarter. So.
Hard to be not much more specific than that but we've kind of put a put a little bit of.
Heavily weighting down market volumes, but that will improve as the month goes on so you do it you did have to quiet days around the fourth but the trends are really positive as Tony pointed out on market share and and overall if you look year over year market share gains are looking really solid so were encouraged in the quarter is off to a good start.
Got it got it seems like every Monday is weighing on market volumes as well.
But anyway the.
The question I have is for Chris and.
As you go to a streaming platform I guess.
And just for Rick as well the question is how much of the market do you think.
Good.
You know.
Do you think this will be a significant play or.
Like say in us equities, where Chris comes from.
It will be like a small portion like dark pool volumes because.
You also seems like you have more competition.
You know in the streaming that have streaming platforms already but certainly don't have the liquidity you have in the RF Q model.
Just trying to see how much of a competitive.
You know how much you can take and how much a competitive.
You know most you have.
So.
Good question, obviously, we think like markets is an important feature that we're delivering to the global credit market. It's something that clients are clients don't see anywhere else and they don't have access to something like it. So it is unique for the global credit market. We do think it will ramp up quite slowly as.
Dealers get comfortable pricing on a streaming credit platform and as clients get more comfortable using click to trade something that's new to them as well I just think the innovation is really allowing clients to market their interest their pricing interest in bonds.
If you think about your average portfolio. They there's an offer in that portfolio on every bond in the portfolio that has no place to be placed in the market. Unlike most other instruments that they trade in those large managed funds. So that it is a unique innovation in the corporate bond market to allow an investor to reflect their pricing interest in a bond and and have it sit.
Either the full size were small size with a hidden liquidity behind it. So I think it's going to allow us to drive innovation across the bond market because of the functionality that we can embed in that market once it's up and running but again I want to make sure. It's clear that we do think it will take time for this market to develop on log markets. We are targeting a small subset.
Of the bond market, which is the most liquid into the bond market.
And we're allowing.
An important functionality in the market the log markets functionality is that dealers can stream their prices in ER and thats something we already see them doing in request for quote they are responding with a.
An automated market price and so we're just allowing that functionality to bleed into log markets.
Enrich remember when you talk about competition for streaming streaming today is primarily in the rates market not in credit. So we believe that this the network that we've established and the significant advantage that we have in play and order flow gives us a great head start.
In leading the move toward more automated means of trading through live markets and streaming quotes.
So it's been a very liquid market phenomena, so far and we think now at the liquid end of corporate bonds. The market investment in automation means that it's ready to start moving toward corporate bonds.
Got it and one last quick question why would someone requested a two sided quote would be simply just the high their intentions.
Yes, it's it's primarily due it has much less information leakage.
The client.
Likes to two.
To basically camouflage the side of the market that they intend to trade on and request a two sided market and by the way we get positive feedback from the dealer community because it works for them because you don't have the winner's curse, where everyone knows which side of the market. They traded on so in certain products like ATM, it's proven to be very popular with both investors and dealers.
I understood. Thanks, Thanks for the follow up information. Thank you.
Thank you and our next question comes from Jeremy Campbell with Barclays. Your line is open.
Hey, Thanks, a lot guys.
Just I think a lot of questions been asked here hopped on a little bit late I, just wanted to talk a little bit about portfolio trading and maybe what the opportunity you're going to see there I presume.
Those little bit hand in hand, with your virtue partnership so maybe any color on read sort of volumes from both those items and if it will compete with our kind of dovetail with.
Ices intentioned along to launch their fixed income create redeem GTF hub at some point in the future.
Great question the portfolio trading, we see portfolio trading happening in the market.
On an average trading day, we continue to hear from our clients. How they are constructing portfolio trades and putting up portfolio trades right now the the efficiency of that process. Just the workflow is is very difficult for both client and dealer because its passing spreadsheets back and forth.
What's unique about our portfolio trading solution is it's leveraging some of the functionality that we already have things like list trading and it's allowing.
And investor to market a portfolio request a prices across the portfolio on a single net basis. So they can market their portfolio.
Not just one dealer price respond, but multiple dealers price respond which is a very important best execution functionality in the in the credit market and it allows for investors to manage that large portfolio and and show it to dealers across our platform. So thats a unique a unique solution. We continue to hear from our clients asking for the functionality. So thats one of the reasons why we are driving to deliver that.
On on the unique.
Data analytics that we can provide not only do we have our composite plus pricing that helps you price the portfolio, but as part of the virtue partnership we're delivering an easy NAV.
Pricing solution.
We expect to be out in the in the in the fall and that will help people pricing portfolios relative to portfolios of DTF. So there will be the ability to compare the live he may have as part of the virtue relationship with a portfolio that your pricing.
If it's an index based portfolio.
And if I just got there there how off the ground I assume this would you know probably a year that already have a liquidity provider for high grade and high yield fixed income so.
We might see incremental flow done portfolio trading side come through you guys in that pipe.
Yeah. We believe this is obviously capturing traits that are being conducted today in the market that we're not seeing we do see parts of those trades really the the follow on as the portfolio is on what unwound by a dealer will see certain elements of that portfolio trade coming through our platform, but today, we see trades going up on trace that we're not participating in and that's really the driver to deliver this.
It also will reduce.
The inefficiencies around the workflow for our clients because it will seamlessly go through our trade reporting and our clearing solutions for our clients and flow back into their own assets.
And so that's one of the one of the drivers that we see the opportunity now we do think that it will allow for a because it is efficient and given the growth of DTF fixed income ETF trading we do think it will.
Allow our clients to trade more portfolios.
That they are not currently trading so we do think it will create trades that don't have havent happened in the market today.
Great and Tony I think you had mentioned that some of the expenses to build out the clearing the self clearing side of things is already kind of contemplated in the higher end of the 19 died.
But I think that was also mentioned that self clearing is a bit of a lengthy approval approval process. So I guess I'm. Just wondering is market access currently running with some sort of redundancies or is that yet to come at this point I'm just trying to figure out how much more it'll cost to build out the self clearing versus the savings are going to see there.
Yes, so it's important to point out that the self clearing up the majority of the costs will.
Not the variable cost, but the fixed cost to build out will be contained in.
In 2019, meaning head counts that we need to add people and employees in specialists that support the clearing function because don't let the approval process. They expect.
To have all your people and processes in place and the ability to.
Run test trades through the clearing cycle that all needs to be done at the front end of the approval process. So expect the majority of those fixed costs expenses to be incurred in 2019 in 2020. When you make the switch you are running really a redundant self clearing operation as well as outsourcing your clearing to a third party. That's when the switch takes place and and really you see the benefit of reduced variable costs coming through.
What we're predicting is first half of 2020.
Just just to follow on that when we look at.
Three to five year expense savings from trade settlement combined with the improvement in customer service. This is a very high ROI activity.
So we feel very good about what we're doing and.
We think that this will make a significant difference in our margins as we continue to expand open trading.
Great. Thanks, so much.
Thank you. Our next question comes from Chris Allen with Compass point Your line is open.
Good morning, guys I wanted to follow up on the commentary you made earlier, just about taking share and EM and euro bonds.
It sounds like you're taking it you're seeing increased block activity Im wonder if thats coming from local ongoing global dealers and euro bonds is that.
Taking it for some of the existing electronic platforms.
Any color there would be helpful.
Sure.
On the.
And we've talked about this in prior quarters as well, but we do think that the investment. We've made now over 19 years has created a really unique global m. solution and the liquidity comes from a combination of the large global dealers active any Evan importantly in local markets a lot of the local banks that make make markets in those currencies. So that it's a time consuming exercise to work our way around the world and now have 26 active local markets and you put the global dealer is the local dealers and in some markets now were even able to apply the benefits of open trading and you have a really unique liquidity solution that is highly efficient for m. trading for our clients.
So it is a combination there when you look at euro bonds.
The rapid growth that we've seen over the last four to six quarters to us clearly reflects that we're gaining significant share and from some of the competitor reports, we see their volumes in euros going the other way. So when we when we look at combined Eightv in euros, even use credit.
We feel increasingly positive about our market position in Europe , and we think that there is still a significant growth opportunity in front of us with clients really embracing the liquidity solution that we're offering and Chris I would just point out from a competitive standpoint, we are competing against platforms that either our free we're at a lower cost.
So really our clients are seeing the benefits of the trade outcome there net savings.
When you factor in those costs and that's that's a huge driver.
Of our growth our competitive growth. So we are we're growing against platforms that are charging either no cost or a lower rate and I think in emerging markets as Rick pointed out okay.
A key benefit for our global clients is the unique liquidity pool that we have a NASA. These these are local dealers quoting on a platform and the benefits for those local dealers. They have access to a network of clients that they would need to arm sales forces across the globe to obtain those clients. So we are really a network for the local dealers and that's why we've had great success on onboarding those local dealers them return to providing unique pricing in our emerging markets complex and so we're really getting the benefit of the network.
That has taken years to build.
And again I have to point out we are growing against the competition, despite lower costs and when it comes to fees from the competition.
And then just the change in the global Claire.
That's a global third party you talked about from a clearing prospectively.
So thats going to help you supporting him efforts moving forward is that kind of help you penetrate new markets or just deeper penetration of existing markets any color there would be helpful and thats. It for me.
Sure. It's really two benefits one is we do.
Get a lower cost of our current activity across the local markets. Today. So we are achieving some lower variable fees for our emerging markets business.
And our European business.
More importantly, it it does access further local markets.
Beyond the current local markets that we offer so we're excited about the growth opportunity that it provides but also providing us with a cost savings at the same time.
Thank you and our next question comes from Patrick O'shaughnessy with Raymond James Your line is open.
Hey, good morning, guys. So curious on what your current thoughts are on the opportunity with Chinese bonds, I think particularly now that you as rating agencies are going to be allowed to rate onshore Chinese corporate debt.
Yeah, I think it's a a a significant new opportunity for a global fixed income investors and also for us and it's extremely early days.
In the opening up of the Chinese market and as you know Patrick that is being done through their bond connect hub, we have increasing dialogue with the decision makers at bond connect both PBC and.
The Hong Kong stock exchange and we are optimistic that they are increasingly aware of the global order flow that we can help to deliver.
For for onshore Chinese government bond trading.
But when you look at the size of that market.
It will be one of the new fixed income trading opportunities available to investors around the world.
Great. Thanks, Rick and then maybe Chris to follow up on something you said earlier, you kind of talked about your belief that Electronification will result in increased trading velocity or turnover do you think that we are seeing signs of that already taken place or is it more that that it's your expectation that will take place going forward.
I do think the turnover is showing signs of an increase in turnover. If you look at the new issue market declining with the overall turnover year over year comparison. So I do think we're seeing signs of it but when I look at the automation that were delivering today, it's still so small compared to what we can deliver as a platform.
I have higher hopes that that turnover will increase as we make it more efficient really when you look at when automation has been delivered and other markets in the futures market in particular, when you went from a floor based market to an electronic market two things happen one fees, obviously, the cost of trading and the efficiency of trading increased the cost of trading decreased but more importantly, the spread decreased and that allowed clients to have higher turnovers trades that didnt exist and then the more or less efficient market suddenly started to exist and we do believe there are portfolio trades out there that.
Pmts want to make but right now the cost of flipping from one bond to another is too costly and that those those trades will happen as we reduce the spread across the market.
And deliver more automation to the workflow of those those portfolio managers. So.
I think there are signs of it but when I look at what we have done in automation, while I'm excited about the volume its still small and still early days.
I really feel like many of the major market players are still testing out that automation tool.
So.
There are signs, but it's still early days.
And Patrick I just follow on that in addition to the growing automation story that Chris outlined.
I mentioned in the prepared remarks, we are definitely benefiting from the influx of new significant market participants to credit really couldnt participate in the old model.
And not only have we seen.
A nice increase over the last two years the pipeline of new participants that we see that we expect to come in over the next two or three quarters is also meaningful. So I think this the opening up of market through the market through all told protocols is is really building a much stronger base for market turnover in the future.
Great. Thank you very much.
Thank you.
And that's all the time, we have for questions I would now like to turn the call back to Mr. Rick.
Rick Mcvey for any further comments.
Thank you very much for joining us this morning and enjoy the rest of the summer we'll talk to you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great.