Operator:

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. [Operator Instructions] 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.

Chris Concannon:

Good morning, and thank you for joining us to review our second quarter results. 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. We continue 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. We continue to be disciplined around our expense management with total operating expenses increasing 12%, including the impact of Pragma. We released our July trading metrics yesterday, which reflected continued solid growth in our credit complex across most product areas. While our U.S. credit estimated market share continues to disappoint, we believe that our core RF [ph] business, underpinned by our differentiated liquidity in Open Trading reflects our continued leadership in the institutional client to dealer e-trading space. We have a clear strategy to return to market share growth through our global rollout of X-Pro. 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. I would like to welcome Ilene to our first earnings call as CFO. In the short time that she has been here, she has already made a significant impact on the business. And more broadly, we have made several key hires recently, including a new Head of U.S. Sales, a new Head of Global Emerging Markets and a new Head of Client Solutions, all great hires that significantly enhance the already deep bench strength at MarketAxess. 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. The fastest-growing segments of U.S. high-grade trades year-to-date have been portfolio trading and dealer-to-dealer trading, up 94% and 31%, respectively. Client-to-dealer trading is only up 13%. Our estimated share in the dealer-to-dealer segment is down slightly, and we are allocating more resources to attack this segment with expanded dealer trading solutions. While our client-to-dealer segment performs much better in periods of volatility as we have seen over the last few days, we have a clear strategy to reignite growth in our client-to-dealer business by capturing more share in portfolio trading and larger trade sizes. This strategy will be executed through our modernized, easy-to-navigate user interface, X-Pro, which we have been rolling out in stages across products and protocols for our clients. X-Pro is enabled by our proprietary free trade data and analytics designed to help traders achieve better trading outcomes. Furthermore, X-Pro is built on cloud-based technology, so it is easy to make changes and introduce new features and functionality in a matter of weeks. With X-Pro, we are enhancing our portfolio trading solution, giving clients access to our full suite of automation and algo tools to improve workflows and building out our high-touch strategy to attack larger trade sizes with unique AI-powered data. As you can see on the slide, we have already completed a number of important steps in our X-Pro rollout over the last several quarters. The next step for our high-touch strategy is to enhance our PC [ph] offering with the launch of our global multiproduct portfolio trading solution. We are also launching our AI dealer selection tool, which is a smart counterparty selection tool that predicts which counterparty is most likely to win a trade. Last, we are rounding out our custom algos with the launch of our new take algo, which will be available to both clients and dealers. Our announcement yesterday with ICE is a great example of how we are connecting to external platforms to aggregate available liquidity, leveraging the deep liquidity across both platforms. We are opening up our network for clients in order to provide them with the tools and trading options they need to achieve their trading objectives. Our goal is to create an interoperable marketplace that provides our clients access to robust liquidity through protocol agnostic solutions. Slide 5 highlights the multiple cylinders that drive our growth across regions and across products. While our U.S. credit volumes have not been where we would like, we truly are a multidimensional growth story as the largest global network for e-trading. Emerging markets is a perfect example of this multidimensional growth story with growth across all regions, as shown on this slide. Slide 6 provides more detail on the strength of our outstanding emerging markets franchise. Our emerging markets commission revenue increased 22%, with EM TRACE-Eligible estimated market share of 26%, and we are seeing strong growth in emerging markets trading activity across regions with record LATAM and APAC emerging markets trading volume up 27% and 35%, respectively. Over the past year, we have experienced a significant expansion of activity across local markets trading. The EM local markets are the largest opportunity in EM from an addressable market perspective, and involve larger trade sizes because these markets are mostly rates focused. 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. 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. We generated record local markets RFM activity in the quarter, up 45%, which also drove our growth in block trading in local markets. We are very excited about the emerging markets opportunity ahead of us, which we believe is still in very early stages of electronification. 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. It is important to note that our use of AI is a key ingredient across these strategic priorities. In our data business, for example, AI-powered CP+, enabling our automation and algo solutions. In addition, AI also helps to power our algo platform, which was part of our Pragma acquisition. Our AI-enabled Tradability data, designed to provide investors with indicative market depth, is integral to our portfolio trading tool that helps clients make portfolio selection decisions. And finally, our AI-driven dealer selection tool is a key component of our high-touch strategy that targets block-size trading with dealers. Now let me turn the call over to Rich to provide you with an update on our markets.

Ilene Fiszel Bieler:

Thank you, Rich, and thank you, Chris, for those kind remarks. I cannot be more excited about the opportunity ahead for MarketAxess. 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. Looking at each of our revenue lines in turn. This was the second highest level of quarterly commission revenue generation with only 1Q 2024 being higher for commission revenue. 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+. Post-trade services revenue of $10 million was up 10%. The largest driver of other income was an increase in interest income due to the favorable interest rate environment, which contributed $6 million of interest income across our investment portfolio and cash holdings up from $5 million. This was partially offset by a $1 million net foreign currency transaction loss. The effective tax rate was 24.8%, and we reported diluted earnings per share of $1.72. On Slide 14, we provide more detail on our commission revenue and our fee capture. 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 Eurobonds, up 11%. Growth across these product areas was partially offset by lower estimated market share and high yield. The reduction in total credit fee capture from the prior year was driven principally by product and protocol mix, specifically lower high-yield activity and increased portfolio trading. The decline in fixed distribution fees was driven principally by the consolidation of two global banks trading desk operations and migrations to variable fee plans, partially offset by the addition of new dealer fixed fee plans. Turning to Slide 15. We provide a summary of our operating expenses. Second quarter operating expenses of $116 million included $8 million from Pragma. 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. 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 of $480 million to $500 million. 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. 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. We repurchased 243,000 shares for a total of $50 million year-to-date through July 2024. 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. 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 facility. 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. We generated $298 million in free cash flow over the trailing 12 months as an increase of about 21% over last quarter. We believe we are striking the right balance of investing to drive future growth, while at the same time being disciplined stewards of capital. Now let me turn the call back to Chris for his closing comments.

Operator:

[Operator Instructions] Our first question comes from the line of Chris Allen with Citigroup. Please go ahead.

Chris Concannon:

Sure. Thanks, Chris. First, yes, we’re very excited about the ICE announcement. Just a little bit of backdrop, we have a long-standing relationship with ICE around data. We purchased data from ICE and we sell some data to ICE. Separately with the recent acquisition of Pragma, Pragma had an existing technology relationship with the NYSE owned by ICE. So again, just a very strong relationship there. And really, the design of this partnership came out of the request of clients, clients that see liquidity in both our destination in RFQ, but also on the ICE platform. They have two leading platforms that are connecting their liquidity to the benefit of clients. So it’s a very exciting really response to client needs. As we mentioned, it is a shift in strategy here at MarketAxess. We are opening up our network to external destinations, which is a unique shift in strategy. We have said in the opening remarks and on prior calls that we are protocol agnostic. We want to find the right protocols both internally and externally for our clients’ needs, and that’s really what we’re answering here. We are leveraging our institutional distribution and we see the benefits of ICE’s very strong retail and private client distribution. So putting those two liquidity pool together is really an important benefit for both our clients as well as ICE’s strong distribution. Rich, do you want to add to that?

Chris Concannon:

And Chris, just to respond to the second half of your question around algo solutions and accessing additional liquidity destinations. 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.

Operator:

Our next question comes from the line of Patrick Moley with Piper Sandler. Please go ahead.

Chris Concannon:

Sure. Well, I’ll start by saying when you walk through the desert and you see an oasis of volatility, you’re suddenly very excited. But three days is still a little bit too early to predict a trend. We have seen certainly positive trends across the platform during the three days, so we are excited about that. There’s obviously - we’ve seen positive activity among certain participants, particularly our ETF market makers, we’ve seen their activities pick up. If you look at just the overall activity of the fixed income ETFs in the market, 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 just over 50 million shares a day. So many of the positive attributes of volatility are playing out on our platform, and we’re seeing the macro backdrop improve. I would say the question is, is this sustained volatility or is it more short-term volatility that we’ve seen in spikes volatility in the past. I am encouraged that these are economic events driving this volatility, and you tend to have more longer-term volatility play out versus something like a geopolitical-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?

Patrick Moley:

Great. Thanks for the color. That’s it for me.

Dan Fannon:

Thanks good morning. I was hoping you could expand on the rollout of X-Pro and how behavior has changed as you’ve been rolling this 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?

Dan Fannon:

Great. Thank you.

Kyle Voigt:

Hey, good morning. Maybe just a question on the concept of moving into larger trade sizes. You have two newer initiatives here with Adaptive Auto-X, which may help chopping up those blocks into smaller trade sizes. And then the high-touch 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?

Rich Schiffman:

Yes. Kyle, I was just going to add to this because you asked which one, it’s really important that we pursue both of these strategies. And I think what clients gravitate to is going to be a function of what’s going on in the market. So if the markets are relatively calm and the dealers are flushed with capital and they’re making markets in large size and taking down risk, in our high-touch solutions through X-Pro where we’re giving advice on where a client should go with those orders 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 and risk positioning, I should say. And that’s a great opportunity then for clients to use our algo solutions, and it makes it very easy for them to leave a resting order in the market and wait till other clients and other risk takers in the market come to them, whether that’s through responding to RFQs or someone engaging directly with that party. So both solutions are being pursued, and we’re kind of positioning ourselves to be successful with this regardless of what the market conditions are.

Operator:

Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Rich Schiffman:

Yes. Thanks, Alex. It’s Rich. And yes, this was really about putting out the liquidity to make sure that clients stay with us 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 is like, well, we don’t want to have to go to another platform to get liquidity, especially on the smallest trades. 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 in being able to keep clients on our platform regardless of the size that they’re looking to trade. With regard to the economics, it’s pretty straightforward. It’s each of our platforms, we make money on the trades. Open Trading transaction fees and ICE has their 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 a markup and best price wins if the level that comes back net of the fees coming across from TMC into MarketAxess, and 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. 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 we’re always open to connecting when there’s unique liquidity available that we can bring to our clients. That’s really the driver for this. Is it going to be additive to the platform? If there’s another venue that has the same liquidity sources that we already have, then there’s not really much to add in that way.

Benjamin Budish:

Hi, good morning and thanks for taking the question. Just one for Ilene. Welcome to the call. Just wondering how you’re sort of thinking about balancing growth and margins? It sounds like there’s a lot of growth initiatives. At the same time, you’re trending 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 philosophical thoughts on growth versus margin expansion? Thank you.

Benjamin Budish:

Got it. That’s helpful. I’ll jump back in the queue.

Jeff Schmitt:

Good morning. Emerging market volumes continue to be a real bright spot. What’s your growth outlook for EM over the next three years to five years since electronic penetration still fairly low there? And is the opportunity - it seems to be in local currency volumes?

Jeff Schmitt:

Got it. Thank you.

Brian Bedell:

Great. Thanks. Good morning. Thanks for taking my questions. 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 how you’re thinking about your overall liquidity pool within the confines of looking at market share and 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, MarketAxess and getting executed at ICE or vice versa?

Brian Bedell:

Yes. That’s great color. And then maybe just on the pricing. I 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 X-Pro, do you view that as a counter to potential pricing pressure from more portfolio trading?

Chris Concannon:

Yes, 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 to certain trade fees. But what’s exciting about that opportunity is because it’s direct to dealer and much more targeted to a dealer, we don’t have variable costs associated with clearing that trade. And so our - it scales from a margin perspective quite attractively at the traditional capture rate that we enjoy on the platform, 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 cost, there’s no variable cost to it.

Operator:

Our next question comes from the line of Simon Clinch with Redburn Atlantic. Please go ahead.

Chris Concannon:

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 for our clients to use, both in times of high vol and low vol. It’s really a question of cost. As spreads gap out in this type of environment, both spreads in a single bond as well as a portfolio trade due. And we’ve seen evidence of these gaps in spread. 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. That said, our clients are in when they have either capital inflows or capital outflows depending on the market environment, they may use portfolio trades to enter and exit more quickly in an environment like this, where there’s certainty of execution. But obviously, over the long period of time, we’ve seen 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 in the last several quarters, and tightened 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.

Ilene Fiszel Bieler:

Thanks so much for the question. Yes. 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, I don’t know that - I would say that there’s a change necessarily. I would start by saying that 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 Chris and the team have been talking about. And we really are a pretty strong cash-generative model, and that does allow us to continue to fund growth, right, to self-fund growth, make investments, et cetera. And really, what this is about is flexibility, right? There’s no exploration on this authorization. So it gives us the ability to opportunistically be in the market and buyback when it makes the most sense for our shareholders, right, in terms of we’re going to obviously continue to return capital to shareholders through dividends, buybacks opportunistically. But if you think about kind of the overall hierarchy, 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. 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, add to efficiency. And then we would - 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. And third, we’ll continue to return capital to 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.

Operator:

Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please go ahead.

Chris Concannon:

Sure. Thanks, Michael. And really, we’re pretty excited about our information services business line. We’re excited about the pipeline of products that we’re bringing. Again, first, we’re bringing product to the platform to help traders determine how to trade, when to trade and many times in the context of a portfolio, trade some of that portfolio construction on what to trade. So there’s key ingredients of our data is making its way first to the platform, and it’s exclusive on our platform. We obviously have some very successful data products like our CP+ data across high-grade, high-yield Eurobonds and more importantly EM, I do think our opportunities in the international sector are quite exciting, particularly those local markets that we’ve talked about today. Our CP+ for EM is in a backdrop of a market where there’s no TRACE, no last sale. These are dark markets, generally broker-driven market. So having a real-time feed 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. Many of the products that we’re putting on the platform like tradability, AI Dealer Selection, CP Inquiry, these are designed for both how traders engage the market, and that’s why they’re exclusively on our X-Pro platform, but also they can be - can help portfolio managers construct portfolios on any given day. So we see an opportunity of pipeline opportunity, not just at the trader level, but also at the portfolio construction level. 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. So and then finally, we haven’t talked about it in a while, but the launch of CP+ for munis is very exciting for us. 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+ 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.

Operator:

Our next question comes from the line of Eli Abboud with Bank of America. Please go ahead.

Rich Schiffman:

Yes. Hi Eli, it’s Rich. Yes, I mean, it’s really up to our friends over at ICE. We’re connecting in. Right now, I believe that they have not combined their two retail entities. The other one was BondPoint. So it’s possible we could connect directly into that one as well. But ultimately, I think that will be coming together and we’ll connect via the existing pipes that we have. So it’s definitely going to be something we’re going to be doing. Again, it’s not just from 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 will tee up in the near future.

Eli Abboud:

Got it. And do you foresee any regulatory risks to the arrangement given the overlap in muni execution?

Eli Abboud:

Got it. Appreciate the color. Thanks.

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.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess First Quarter 2024 Earnings Conference Call.

Stephen Davidson:

Good morning, and welcome to the MarketAxess First Quarter 2024 Earnings Conference Call. For the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company. Rich Schiffman, Global Head of Trading Solutions, will update you on the performance of our markets this quarter, and then I will review the financial results.

Christopher Concannon:

Good morning, and thank you for joining us to review our first quarter results. Turning to Slide 3 of my strategic update. We delivered 4% total revenue growth, including the benefit of our Pragma acquisition and earnings per share was $1.92. While we are not happy with recent trends in our estimated market share in U.S. credit, we recognize the importance of being equally strong in the faster-growing areas of the market and we have a quick strategy to return to higher levels of share growth.

Richard Schiffman:

Thanks, Chris. Slide 9 highlights the continued strong expansion of our client network. We had a record 2,118 active client firms trading on our platforms in the first quarter, which included 1,619 client firms active in U.S. credit and a record 1,066 active international firms.

Christopher Allen:

I wanted to follow up on portfolio trading. You talked in the past about making inroads into the traders who control portfolio trading, who are also the key market participants for block trading. So I wonder if you could give us an update on what kind of progress you have made there adding any new clients? And also the 40% share noted in the last day of April, was that due to one large trade, new clients turning on or some other factors?

Richard Schiffman:

Just the chunky nature of it, and you can have a lot of spikes up and down, Chris, I mean, with adoption on any given day. As Chris pointed out, it's a targeted group. It's a relatively small number of PTs that we're all after. We estimate about 20 to 40 per day of substantial size, call it, $50 million and above. And we're all going after those.

Christopher Allen:

And just on my follow-up, I just wanted to ask about X-Pro. You gave us the metric around the top 20 clients, but I'm wondering where you guys stand in rolling it out to your overall client base. And then specifically, where are you in the process for signing up with dealers for dealer access to X-Pro?

Alex Kramm:

I know there's a lot of focus on portfolio trading. But if I look at your TAM chart, you clearly think that dealer-initiated opportunities is bigger. So maybe you can give us an update there. It's a very crowded space, and you obviously have admitted that you're kind of late to it. So just seeing where you stand today, any inroads you've made, any feedback you've gotten? And how pricing may be a differentiator there in particular?

Christopher Concannon:

And Alex, I'd just add, as Rich was mentioning, some of the new protocols and offerings that we're providing the dealers, one important one, which only rolled out in December of last year is our automation suite. It's quite a popular suite of solutions for our clients. We now provided that automation suite to dealers.

Alex Kramm:

All right. Very good. And then just maybe just a super quick housekeeping question. On FPM, maybe for the first quarter or April. Can you give us a little bit of a breakdown where we stand on the different product types, high yield versus high grades, Eurobonds, et cetera?

Patrick Moley:

I just -- not to hammer on portfolio trading, but appreciate the disclosure around market share in the last day of April being 40%. I was hoping you could just maybe frame -- help us frame that, like how did that compare to the rest of the month and maybe where you've been year-to-date?

Christopher Concannon:

Yes, Patrick. And obviously, we expected a focus on portfolio trading today, and we've obviously been focused on portfolio trading for some time, particularly with rollout of new solutions to solve the portfolio trading market. We do think the portfolio of trade is an important tool for our largest clients.

Patrick Moley:

Okay. And then you repurchased 10.1 million worth of shares this quarter. I think that was the first or the most significant repurchase you did since the middle of 2022. Can you just -- can you talk about that decision and maybe what we should expect in terms of the size and pace of buybacks from here?

Operator:

Our next question comes from the line of Kyle Voigt from KBW.

Richard Schiffman:

Kyle, it's Rich. It's a combination. I mean we were happy to see a little bit of a pickup back from March, 13.9 versus 12.7 from March. We've still got a way to come back, but we're seeing the signs that the market conditions are becoming more favorable. It's a combination of activity from both real money and from the ETF community. So it's definitely trending in the right way here, so.

Richard Schiffman:

That's going to come in place with our next major release, which is coming in the next few weeks.

Daniel Fannon:

Sticking with the topic of PT. I was hoping you could just talk about what you think the normal steady state of this protocol is as a percentage of volume or where it could get to? I think you put out some numbers previously, but the market has continued to evolve. So I was hoping to get your updated thoughts on kind of what you think that protocol can ultimately be on a consistent basis?

Richard Schiffman:

Yes, Dan, I'll just add to that. I mean it's definitely here to stay. It provides a lot of benefits to clients in terms of the workflow. It's going to be interesting to see what happens when the market environment changes and volatility increases and the PT becomes a relatively more expensive trade, whether it's still going to maintain the kind of percent of the market right now, we're seeing roughly around 10%. Whether that number goes down, stays the same, I would not think that that's a number that's going to rise in a high vol environment when it becomes relatively more expensive versus doing trades in comp. So something to consider.

Stephen Davidson:

Dan, it's Steve here. I think if you step back, I think we're exiting a period of some pretty substantial investments that we've made with X-Pro, our proprietary data ADX. So I think we've come out of that period. In the fourth quarter, we achieved some significant efficiencies coming out of the year.

Christopher Concannon:

And I would just remind you that 18% of our expenses are variable. So that's the piece that can move up or down with volumes. So that's an important component to how we think about our guidance. And as we mentioned earlier in the call, we're tracking to the lower end of our guidance, and it's just too early to update where we think we'll end up being in the year.

Jeffrey Schmitt:

On X-Pro, thinking how does it execute portfolio trades differently than what you were doing sort of prior to its rollout? And I guess importantly, though, like how does it compare to competitors now? Do you have any edge there?

Richard Schiffman:

Yes. On the share, I mean, we did see a bit of a decline. We are -- upon analyzing that, it's definitely due to the pickup in portfolio trading that occurred and also on the dealer business. We attribute it mostly to those 2 factors. And hence, the extra effort that we're making in both of those areas. Those are the 2 significant investment areas for us to regain share.

Christopher Concannon:

I would just add that our high-grade market volumes did increase in Q1 by 18%. Our block trading ADV increased as well. And more importantly, our automation continues to grow within the high-grade market. That's one area where we're highly penetrated throughout that area, and we continue to see more automation ramping up.

Operator:

Our next question comes from the line of Brian Bedell from Deutsche Bank.

Operator:

Our next question comes from the line of Michael Cyprys from Morgan Stanley.

Christopher Concannon:

Sure. Obviously, we closed on the Pragma transaction in the fourth quarter, and we're quickly integrating Pragma into the broader MarketAxess technology framework. We're excited about some of the technology synergies that we're seeing. Obviously, Pragma has been a key ingredient to the launch of the first credit algo in the credit space. So we're excited to see that algo and the demand that -- and the feedback that we're getting from clients on the algo.

Christopher Concannon:

Sure. On the EM front, pretty excited about the growth that we've seen in EM in Q1. Obviously, we were seeing lower volumes in 2023. And we weren't expecting that to change, but it did change and obviously saw record volumes, record ADV and obviously, record commission revenue up almost 11% in Q1.

Alexander Blostein:

Just one for me. You spoke extensively today and just over the last couple of quarters that the path towards more of sort of bridging the gap in IG with some of the market share is likely going to come from PT and dealer-initiated RFQ. Can you talk a little bit about the pricing and the fee per million in both of those?

Richard Schiffman:

Sure, Alex. It's Rich. And yes, I did mention about the fee capture in PT being lower. With dealer business, which tends to be -- it's an Open Trading, it's an all-to-all type of business, where we're delivering more value, our fee capture is relatively higher there.

Operator:

Our next question comes from the line of Ben Budish from Barclays.

Richard Schiffman:

Yes. Ben, it's Rich again. And no, we definitely feel strongly about our opportunities there. And you can say, roughly speaking, it's about 30% of our RFQ activity is coming from dealers initiating on the RFQ side. So that has room to grow. And again, as I was just saying, it's a promising area of fee capture. That's, right now, using our RFQ protocols. As we introduce our matching solutions in the market, which we know has been very attractive to firms and also our order book live markets is another area that we think is going to be attractive to that user base, it's pretty significant.

Elias Abboud:

Can we have a little bit more of an update on Adaptive Auto-X? I think last quarter, you mentioned that 13 clients were using it. How has penetration progressed? And what can you share about the early feedback?

Christopher Concannon:

Really, the block trading that we're seeing the success in, particularly in EM, we offer a request for market that has been an offering, a protocol that we launched quite some time ago, and that's really been driving some of our block trading experience here.

Christopher Concannon:

Great. Well, thank you for joining us today. We're exceptionally excited about the things that we're building and rolling out this summer, and we look forward to updating you on our progress at our next quarter call. Thanks, everyone, for joining.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on January 31, 2024. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Chris Concannon:

Good morning and thank you for joining us to review our fourth quarter and full year results. Our underlying revenue growth trends improved during the fourth quarter as we continue to execute our growth strategy. We delivered 11% revenue growth, including the benefit of our Pragma acquisition. Earnings per share was $1.84, an increase of 16%. U.S. high-grade transaction revenue increased 14%. Emerging markets increased 8% and Euro bond increased by 7%. With these improved results in the quarter, we delivered our 15th straight year of record annual revenue. Turning to my strategic update on Slide 3. First, we are delivering innovation with the launch of our new trading platform, X-Pro, designed to address our U.S. credit market share challenges by retooling the delivery of our trading offering. We are pleased to see our portfolio trading clients increasingly leveraging our unique pre-trade analytics, like Tradability which are only available through X-Pro. 30% of our portfolio trades were executed on X-Pro in the fourth quarter, up from 18% in the third quarter. Next, we are enhancing our suite of automation tools with the addition of Pragma. We delivered new records across our automation suite of products in the quarter. Our automation products crossed a record $300 billion in volume for the full year in the fourth quarter. Adaptive Auto-X, our new client Algo solution moved out of the pilot phase during the quarter with a total of 13 clients, including 6 of the largest. Early results show promising transaction cost savings in U.S. high-grade. And last, in terms of execution, our client franchise has never been stronger with a record 2,100 active firms. We delivered strong growth in our international businesses, portfolio trading and municipals. We also generated record revenue in both our market data and post-trade businesses as our investments to broaden our geographic and product footprint continue to pay off. Slide 4 summarizes how powerful data and content on our platform is helping traders achieve better trading outcomes. We want to capture the full spectrum of order flow in the market by helping traders manage their portfolio composition, protocol selection and counterparty optimization. Our data is at the core of these new initiatives we are delivering through X-Pro. From growing portfolio trading market share to increasing our share of larger-size trades, our proprietary data is what differentiates us from other market solutions. In 2023, we had a record $390 million price responses from liquidity providers across our platform which is growing at a 3-year CAGR of 11%. This unique data set and the magnitude of this price information is what powers our proprietary data and insights that we generate for clients on X-Pro. Slide 5 highlights our action plan for stronger market share growth in corporate bonds in 2024. Using U.S. high grade as a case study, we've done a very good job of electronifying small-sized tickets which has been the key value proposition of MarketAxess since our founding. While the history of electronification would indicate that the largest, most complicated block trades would be the last to adopt electronic solutions. Our market has jumped right to the largest and most complicated trades, the portfolio trade. What is left in the middle is trade size is $5 million or greater which is the target market for the rollout of X-Pro. We've heard from our clients that they need better data and workflow solutions to manage this part of the market. In this environment, hiring more traders is not the answer. To help our clients manage protocol and counterparty selection for larger-sized trades, we have launched Tradability and AI Dealer Select. Tradability helps determine depth of market while AI Dealer Select helps clients determine the right dealers to engage. With Adaptive Auto-X, we are also helping clients manage larger-sized trade by leveraging our different trading protocols, including Open Trading. Helping clients manage small and large sized trades with pre-trade data and analytics, growing our share of portfolio trading and enhancing our dealer-centric trading protocols like dealer RFQ are key objectives for 2024. Slide 6 provides an update on market conditions. In the fourth quarter, ETF market maker ADV our platform was up 68% from the third quarter as market conditions improved but was still down 19% from the prior year. Since the Fed's pivot in early December, we have seen a pickup in duration which has had a positive impact on our U.S. high-grade fee capture. Before I turn the call over to Rich Schiffman, I wanted to provide an update on January activity with one final important trading day remaining in the month. January trends show solid low double-digit growth in U.S. high-grade ADV year-over-year with estimated market ADV up approximately 15%, indicating lower estimated market share. January is historically a lower market share month given seasonally strong new issuance in January. Over $190 billion has been issued to date in January, making it the highest January on record. As a result, trading in newly issued bonds represented approximately 15% of the market, up from an average of 8%. The U.S. high-yield ADV is down approximately 30% from elevated levels in the prior year. The decline is driven by lower ETF market maker activity and increased focus on distressed names that do not lend themselves to electronic platforms and an increased focus on a strong new issue calendar by our long [ph] accounts. Estimated market ADV is down approximately 9%, indicating significantly lower estimated market share. Portfolio trading is on track to be a record month with ADV of approximately $800 million, up approximately 160% from the prior year. Now let me turn the call over to Rich to provide you with an update on our market.

Stephen Davidson:

Thank you, Rich. On Slide 13, we provide a summary of our fourth quarter financials. We delivered revenue of $197 million, up 11% from the prior year. These results include $8 million from the Pragma acquisition, of which $6 million is in commission revenues and $2 million is in the technology services revenue line. Foreign currency was a $2 million benefit in the quarter. Record Information services revenue of $12 million was up 15%, including a $400,000 benefit from currency fluctuations. This strong performance was driven by new contracts as we continue to experience strong adoption across our data product suite, especially CP+. Record post-trade services revenue of $11 million was up 24%, including a $600,000 benefit from currency fluctuations. The favorable interest rate environment contributed $6 million of interest income, up from $3 million. The effective tax rate was 16.9% and we reported diluted EPS of $1.84 per share of 16%. Earnings per share benefited from a lower effective tax rate driven by return to provision adjustments and the purchase of transferable tax credits by the company. On Slide 14, we provide more detail on our commission revenue and our fee capture. Total commission revenue increased $13 million or 8% in the quarter. The increase in credit commission revenue was due to stronger estimated market volume and higher fixed distribution fees, partially offset by lower estimated market share and lower average fee per million. The bps at 15 in the quarter was a key driver of a decrease in ETF market maker activity which negatively impacted our U.S. high yield market share. The reduction in total credit fee capture from the prior year was driven principally by product mix with lower high-yield volume and protocol mix, driven by an increase in portfolio trading. On Slide 15, we provide a summary of our operating expenses. Fourth quarter operating expenses of $120 million included $9 million for Pragma, $2 million in acquisition-related expenses and costs associated with efficiency initiatives and a $2 million negative impact from foreign currency fluctuations. On Slide 16, we provide an update on our balance sheet, cash flow and capital management. Our balance sheet continues to be solid with cash and investments totaling $586 million as of December 31 and we had no outstanding borrowings under the credit facilities. During the past 12 months, we paid out approximately $109 million in quarterly dividends to our shareholders. Our Board of Directors declared a regular quarterly cash dividend of $0.74 per share, an increase from $0.72 per share based on the financial performance of the company. On Slide 17, we provide you with our full year 2024 guidance. Revenue from Pragma is expected to grow in the mid-single digits. Pragma's revenue was $8 million in 4Q '23. We expect total expenses to be in the range of $480 million to $500 million off a base of $438 million in 2023. This would imply a growth rate of 12% to the midpoint of the 2024 range. This includes the impact of Pragma, approximately $10 million in efficiency savings in 2024, from the actions taken in 2023 and $4 million in acquisition-related expenses and costs related to the efficiency initiatives included in the 2023 base. We expect the effective tax rate will be in the range of 24% to 25%. Capital expenditures are expected in the range of $60 million to $65 million, of which roughly 80% relates to capitalized software development costs for the investments we are making in new protocols and trading platform enhancements. Now let me turn the call back to Chris for his closing comments.

Operator:

[Operator Instructions] Your first question comes from Chris Allen with Citigroup.

Chris Concannon:

Sure. Thanks, Chris. First, I want to remind everyone, we have our monthly release coming out on Monday. So you'll have all the details on Monday but we did want to provide some level of commentary because we obviously anticipated questions on the January results. Really, first, let's take a step back and take a look at the macro market. The macro market that was unfolding in December as a result of the Fed pause has been very favorable for our market but more importantly, the broader bond market. And we started seeing behavioral changes that were positive in December from overall market volumes. Some of those same factors that we saw in December are continuing to the 24%. It's an attractive rate environment. Bonds are great investments again. I know people are interested in bitcoin but bonds are much safer investments with great yield. But we're also seeing that in the numbers. If you're looking at reallocations that typically happen at the beginning of the year, we're seeing those reallocations play out into fixed income, both at the retail level but also at the institutional level. So the overall market backdrop is quite positive. We also see a very high demand for new issue in January and that's really reflective of that market backdrop. We're seeing really a record January new issue closing in over $200 billion in new issue in the month of January. So that too is a positive sign. That issuers are coming to market in this higher yield environment and find it quite comfortable to be issuing debt in this overall market environment. So all of those are very positive for the bond market more broadly. And as a result, we're seeing high-grade market volumes up 20% year-over-year and up 40% from Q4 from December, actually. So those are all very positive signs of the overall market environment. Our market share in a big new issue month is typically challenged but we do end up seeing -- and again, today is month end. And so we do have a very -- a large active day left in the month and we typically do see a very strong month-end activity when we see that high new issue activity in the month. People obviously moving out of those new issues and rebalancing happening and a sizable index rebalances is also happening. So we do think today will be a very strong day left in the month. So that's why I don't want to speculate on results at this point. High-grade market share has been stable throughout the month. We're seeing portfolio trading activity. We're seeing our typical long-only clients being very active across the high grade market. So a very stable market share month in high grade. High yield, as you mentioned, Chris, it's certainly a different story. The high-yield market volumes are flat year-over-year. We are seeing investors not showing a big appetite for high yield. We have seen a high-yield new issue this month which is sizable for the month. But where we see really a decline in overall market activities across the hedge fund and ETF market maker segment. It is a broad decline across that segment. So we're not seeing or feeling any competitive pressures there. When we talk to those clients, they are indicating that the overall market environment for their models and their business is has declined. And so it's really a segment challenge in the high-yield market. And you see that in the high-yield ETF volumes are down 20% year-over-year. So there just continues to be a thematic challenge within that high-yield market. We saw that in the second and third quarter as well. We did see some pickup in the fourth quarter in high yield but really that high-yield challenge continues. Other areas of our business, EM. EM had a very challenging 2023. The investment thesis was not attractive relative to where yields were at high-grade market share or even treasury market. So the end market volumes were challenged. We're seeing a pickup, we saw a pickup in EM volumes in Q4 and we're actually seeing a positive trend continue into January in EM with market volumes up close to 10%. And we've even seen -- we're approaching a record in our APAC volumes. So we're seeing positive activity across the international business in January. So hopefully, that's a long-winded answer, Chris, to remind everyone that we do have a market volume release coming out on Monday.

Alex Kramm:

Yes. Just staying on market share but zooming out a little bit, obviously and thanks for that chart. I think that's new. So that breaks down the trades volumes and by kind of size of trades and where you focus and obviously a lot of initiatives going on. But when I think about your core business today, can you just remind us what you're seeing on a competitive side there? I mean, obviously again, market share growth comes from gains in these new areas. But just wanted to get an update on how you think you're defending your kind of home turf. And if you're seeing any sort of market participants try other platforms in your kind of home turf like what are the reasons that they are citing why they may be looking at other platforms before they look at yours?

Richard Schiffman:

Yes, Alex, it's Rich. Yes, I was just going to say building on Chris' comments, the part of the market where we're strongest, where the Open Trading has the biggest impact, the institutional client business. That's 2/3 of the market. We know we've got some work to do in the dealer business, for example, that's about 1/4 of the market. And then PT, as Chris talking about where we're also growing, that's just 7% of the breakdown. And then the last component is retail which we're really not in and that's about 2%. So we feel really good about our core business, the offering that we have there. And then we're investing considerably with X-Pro, with our dealer business to capture that other roughly about 1/3 [ph].

Daniel Fannon:

I wanted to follow up a bit on that line of questioning. But thinking about it from a fee per million perspective, how does the increasing contribution from these newer protocols impact the overall fee per million when you talked about your RFQ business, institutional being the strong backbone but how do things like portfolio trading have an impact relative with that mix?

Richard Schiffman:

Yes, Chris, it's Dan, yes, just to add a little bit on it. I mean the transaction fees, I mean, they're broadly set by bid-ask spread in the market. And also on the value of the service that we provide. So it kind of runs the gamut. The Open Trading is most valuable where we deliver the most value to our clients and number was somewhere $700 million-ish north of that in what was a relatively lower benefit delivered. That number has been quite a bit higher in the future. So those trades go for a relatively higher fee rate. And then all the way on the other end of the spectrum is process trades where it's either de minimis or zero and we don't count those even in our volumes. So it's really just clients using our plumbing to process the voice trades. Things like PT, it is closer, it's closer to a process trade than it is to an in-comp trade all to all and taking advantage of Open Trading. So that is going to be at a relatively lower fee rate and of course, you guys are all familiar with the duration impact in some of our fee products where that's going to have a change as interest rates are changing and maturities are changing. One thing about it, we talk about size is also a factor in the transaction fees that we charge and with the move towards automation and Algos being used to break blocks into smaller pieces, that's going to mean smaller-sized trades which leads to relatively higher fee per million capture. So that's a trend that will work in our favor over time. But generally, the rate card is pretty stable and you've got these other variables in terms of product mix, duration mix that reflect themselves in the overall average fee rate that you see published each quarter.

Benjamin Budish:

I wanted to circle back to I think it was Chris Allen's question at the beginning. And I know you're about to put out of the January release but maybe thinking about February and how the rest of the year might evolve. Could you maybe talk about the sort of impact of new issuance, clearly, there's a market share impact during that month but how do you see that typically unfold as we go through the year? Perhaps in February is another solid new issuance month. Does that mean at some point, we see a big pickup in secondary market trading and any other macro impacts you think could start to reverse? And what do you think would start to work in the right direction as we go through the year?

Operator:

Our next question comes from Jeff Schmitt with William Blair.

Chris Concannon:

Sure. And again, we just came out of pilot. So to be clear, we had a pilot that we ran. We now -- we kept that pilot small to a small list of clients because we wanted to really have a focused attention, both in terms of our development as well as our -- in terms of our overall guidance and support for that new innovative solution in the fixed income market. It's the first time an Algo -- a client Algo was launched in credit. So it's a pretty exciting time. We've now -- what it means to come out of pilot means we are now open opening up that offering to all clients. And so the demand is quite high. The pipeline is long. We're super excited about what it means. The positives that we've seen are really the execution quality that clients are enjoying. Remember, this algorithm is designed to be a passive solution so you can manage orders throughout the day and take advantage of opportunities where another client or even another dealer is trying to request price from the market. The algorithm will automatically respond to those prices. So it's quite a sophisticated tool. So it takes a while for a trader to learn all the different versions, all the different algorithms that they can customize and build. So it's an exciting time for us and an exciting time for that rollout of Adaptive Auto-X. More importantly, Adaptive Auto-X is just one feature among many within our automation suite. So we don't -- we see it as a critical piece of the path forward but the overall adoption of automation is what we're so focused on. And that automation suite of products continues to grow. Adaptive -- think of Adaptive as the most complicated, most sophisticated piece of the automation suite. But the demand for automation is high, as I mentioned, given the expense budgets of our largest clients. The other piece to recognize and Rich had it in his opening remarks, the disparity of use of automation is quite high in our market. And he mentioned our largest automation users 2x the next largest client. So when you -- from an AUM perspective, we have not fully penetrated the automation suite across all our clients. So there's large disparity of use and -- but some really exciting use cases. I can't talk about automation without mentioning. We just awarded the largest trader on MarketAxess that trader using -- leveraging our technology, leveraging automation had a record number of trades by an individual 240,000 tickets were executed by this one individual. She is 26 years old and works for a very -- an important client who adopted automation. They saw technology as an opportunity and she took that automation tool and achieved a record volume. So just -- it's truly astounding when you see an individual trader fresh out of college trade over 240,000 tickets just leveraging the technology. That's the power of this automation suite. Adaptive Auto-X is a component of that and the demand has never been higher for this product category. And I'll also remind you that the great part about automation is it's highly dependent on data. So the data that you feed it improves its performance, we alone have that CP+ solution and we also have a great deal of proprietary market data that we're feeding into that automation suite over 2024. So you'll just see a great deal of stickiness around that product. But just wildly successful and really exciting to see an individual trader able to trade that many tickets in a given year.

Simon Clinch:

Hi, everyone. Just following on from the last question. I was kind of interested is in -- if -- let's put aside the market conditions for now and just think about what's in your control and just how should we think about the speed at which X-Pro and Adaptive Auto-X can actually start to have an impact on your relative market share position in the -- assuming the current prevailing environment just continues. Are we talking about something that can last 2 years to really start to bear fruit? Can we see results this year? Just give us a sense of how the rollout can be managed.

Richard Schiffman:

Yes, Simon, I would just add to that. You can think of X-Pro it's the tool that makes a trader's manual activity more productive and that's definitely around the larger trays, more complex or handling large list and things and that's why we have it focused on PTs. The automation, that's going to transform the way people do the large number of flow tickets that they have to bang through and Chris just gave that one example of a trader with hundreds of thousands of trades that they need to work. I can see as the automation matures, gets more widely adopted. If you think about it compared to a portfolio trade which is also a convenience service, right, when a trader buy-side trader has hundreds, if not thousands of line items that they have to get done and they're basically offloading that activity to a dealer to handle the role in one shot. So the automation can actually, I think, eat into that type of activity as people get comfortable with using that and then they can focus their time on the relatively small number of line items in a very large basket that need the traders attention. So it will be interesting over the coming years to see how those two kind of vie for some of that activity.

Alexander Blostein:

Just another one around X-Pro. And if I were to kind of tease out maybe the message that you guys are trying to ultimately articulate is you're defending your turf in what's been established in high-grade and you're going after larger size in the market with various new tools. So as you're rolling this out, how big of an uplift, I guess, is that for the client? So does that require any incremental technology spend on their behalf or it's as easy as you roll it out and then it's just a matter of them getting to know the protocol and using it? And then I guess, ultimately, when you look at your high-grade market share, what is the goal, right? You guys have been kind of in the range. So if all of these protocols are successful, what kind of market share do you think you can get in the high-grade space?

Chris Concannon:

And Alex, I'll just add what's interesting and it's really the -- I mentioned earlier about portfolio trading. We did launch X-Pro for portfolio trading. That was the first piece of the X-Pro platform that we launched and we saw very positive feedback and very positive results around portfolio trading. Portfolio trading will continue to be a big part of our market. It is certainly an efficient way to get exposure for the buy side. But as we move more of the market to electronic trading, those efficiencies should spread across other areas of the market. The way I think about it is what X-Pro is doing is just replicating what the trader is doing over chat or phone. And so it's an easier conversion to an electronic solution when you're replicating exactly what the trader is doing elsewhere because you're not really changing the outcome of the trade. You're just making it that much more efficient to manage that many more line items. So what's attractive about X-Pro is it allows the trader to have pre-trade analytics and then decide what protocol they want to use. And the important part of the X-Pro solution is that high-touch solution, whether you're putting it in a basket and trading it as a portfolio or you're trading the individual line items, you're literally replicating what you were doing on the desk over the phone and in chat. And that's the key ingredient to the offering.

Brian Bedell:

Great. Chris, just going back to a question that you answered two questions ago. On the segment challenges in the high-yield market broadly. Maybe just how are you viewing that playing out? Do you see those challenges being overcome and see more of a rebound in that market in the sort of near term? Or do you think it's a little bit more structural? And then to what extent would that be a potential headwind on fee per million, just from the mix favoring high grade?

Operator:

Our next question comes from Patrick Moley with Piper Sandler.

Chris Concannon:

Thanks. And I wish I could be precise on market share growth across a very complicated set of buckets. But I will walk you through kind of how we're thinking about our attack plan for that market, particularly in 2024. As we launch 2024 and think about our strategy across that market landscape. Again, the overall market environment is positive. So the market that we're staring at, particularly the high-grade market, we think turnover will continue to increase. So the market backdrop is quite positive. I'll do it in size buckets to help the largest size being the portfolio trade -- it's the largest block trade we see on the market. It's the most complicated trade baskets within the portfolio trade are actually growing. So we see baskets over 1,000 line items and I think they'll continue to grow. The reason why our portfolio trade, I would expect that portfolio trading market to continue in '24. As AUM grows at a large investment fund complex, they will use portfolio trading to get that immediate exposure. So sometimes it's just easier given the inflows and outflows of capital to use a portfolio trade but we also have the ability to move that portfolio to trade to a line item trade and have it trade as a list. But our offering in X-Pro is designed to target that market and we're leveraging both the power of X-Pro, meaning the number of line items that it can handle but also the trading and data analytics that are available for the trader to manage those line items, we'll be able to pull line items in and out exchange line item. So we are targeting that 7% of the overall market quite aggressively, largely because not that it's a big part of the market but more importantly, that same trader trades the next bucket which is large size trades. And so being on the desktop of the trader using our X-Pro for portfolio trading is a key ingredient to the next largest size of the market. Typically, traders that are trading portfolio trades are the high-touch traders, so they're managing all the block trades. So we'll be able to arm that same trader with an X-Pro solution, a high-touch X-Pro solution that gives them, again, pre-trade analytics, for each line item, each large block. It can indicate the depth of the market, things like Tradability will indicate what is the true depth of the market? What can the market swallow given the size of the block that you want to trade. And then the second key ingredient, we're already hearing feedback from clients on this one is, typically, traders know the dealer they want to select they don't always know the second or third dealer in that bond. So AI Dealer Select is a key ingredient for the traders as they think about their trading to larger block size workflow. What's interesting about this segment of the market, call it, the $3 million to $10 million or greater than $5 million. Dealers have told us that they've fully automated their pricing algorithms so they can price bonds across a broad set of CUSIPs and icons [ph]. Now that they have that pricing power, they'd like to receive trades in electronic form that they can trade electronically. That's efficient for both the dealer and the client. So there's kind of a sweet spot around that $3 million to $10 million size block trade in our market where both dealer and clients both are looking for a better solution, a more automated electronic solution and so that's the size that we're attacking. And then the other large piece, we obviously are quite sizable in the under $5 million that's where All-to-All is a key ingredient. The size of the trade is small enough that you don't worry about market impact or market information leakage and so you can get the full benefits of All-to-All. It's also the fastest-growing part of the market, as we mentioned, ticket sizes, ticket numbers have doubled over the last 2 years and ticket sizes have declined. So managing small tickets along list of small tickets is a key attribute of the X-Pro solution because it's attached to our automation suite of products, so you can certainly manage more tickets. And then the last piece, the dealer-to-dealer market is a market that we've been serving for quite some time, like things like dealer RFQ is a key ingredient to that market. I would argue that's an underserved market. The dealers growing demand for exiting inventory is high and continues to get higher as bank capital rules come into play. So we do think our investment in the dealer segment with things like dealer RFQ, our mix, mid-market session offering. Those are all at price points that are quite attractive to a dealer -- the other piece of the puzzle is we're seeing dealers come in and adopt our automation suite. So the automation suite that we built out for clients are now being used by dealers for that dealer-to-dealer business. So we're really attacking each one of those buckets and they're largely interrelated buckets as we look at it. Rich, any other thoughts?

Operator:

Our next question comes from Toby Voigt with KBW.

Chris Concannon:

Sure. So as we mentioned in our opening remarks, we've given the guidance on '24. We're guiding an expense target around $480 million to $500 million with the Pragma expenses added in there. And as you mentioned, that's a single-digit growth rate down from historical growth -- expense growth rate of double digits. We looked at the investments we've made over the past number of years. The firm has grown substantially. Our tech team has grown substantially and that was all because, one, we're managing the current platform, a sizable platform. As Rich mentioned, we're 20% of the U.S. credit market. So there's a great deal of maintenance in the current platform. And at the same time, we're investing in new platforms and an entirely new tech stack. So it tends to ramp up your investment in both people, software and hardware and development and that's what you're seeing in those numbers. We looked at how we allocate those expenses and how we allocate those resources across the broader MarketAxess and we've made some allocation adjustments. So really, what you're seeing in this lower single-digit guidance is really us being mindful of not only the opportunity we have ahead of us but mindful of where we think our focused investment should be. And so that's -- when you think about our tech plant, the X-Pro solution is a global solution. So it's not a high grade or high-yield only. It really is rolling out across the entire globe. We're targeting Europe in the second quarter and we're targeting global portfolio trading in the second quarter on X-Pro. So it's a global solution addressing all of our products. We think that's a worthwhile investment because it obviously brings benefits to each of our products, including things like EM. We're seeing portfolio trading in EM that we want to address. So we're excited about the investments we made. We're not saying we've stopped investing. We will, in fact, continue to invest in technology and continue to invest in people in 2024. So embedded in that guidance is a continued investment in the overall talent in our market. But we certainly feel comfortable about the years of investments that we have made and obviously, a sizable investment with the acquisition of Pragma with all of their tech team coming into the MarketAxess full. As we start to unwind and see the benefits of Pragma in our overall tech stack it's really -- we're starting to see the future opportunities for the Pragma technology moving throughout the MarketAxess offering. So one, Pragma is a key ingredient to our automation offering as we look at the end of the pilot of Adaptive Auto-X and the continued roll out of Adaptive Auto-X, they will be a key ingredient to our overall automation solution. So when we think about low touch trading, Pragma will be a key API or X-Pro solution embedded in X-Pro and so that's part of our tech investment is embedded in that Pragma acquisition as well. So we feel very comfortable about the massive investments we've made and we're looking at moving slightly down to a single-digit expense growth rate. I will remind you, though, that 18% of our expenses are variable. So those do move as our top line will move around. So as volumes go up, our clearing costs will go up as well as a result of that overall volume number clearing through our platform. So right now, we're very comfortable with where we are in terms of the guidance for 2024. We think that's a new expense level that we're comfortable with going forward as well.

Michael Cyprys:

Just a question on the automation set of tools that you have. I was just curious where you're seeing the traction across the suite of tools so far as well as from customer set and what's the potential for generative AI to help turbocharge the offering over time?

Richard Schiffman:

Yes, Michael, I would just throw in on the AI piece. I think the most interesting area where it's going to have an impact is helping to find the other side of the trade, who out of the over 2,000 clients might be interested in what somebody is trading right now because today, everybody has to express their interest either by submitting orders or creating watch list and things. It's a pretty manual process. But if you go on to Amazon, it always seems to know what you might be interested in buying at any given time. I could see AI having an impact that way and being able to notify people when there are things that they could be interested in that they could act on and be on the other side and capture that bid-ask spread. So, things we're looking at pretty closely.

Chris Concannon:

Thanks and thank you all for your questions. We look forward to a great 2024. We have lots of innovation, as you heard on the call coming out over the course of the year. We look forward to talking to you in the next quarter. So, thank you.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded on October 25, 2023. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Chris Concannon:

Good morning. I'm very pleased to update you on the significant progress we made in the third quarter to enhance our franchise and drive long-term growth. First, in terms of the quarter, we generated revenue of $172 million, earnings per share was $1.46 on net income of $55 million. Our quarterly results were impacted by unusually low levels of credit spread volatility during the seasonally slower summer period. But we are seeing some early positive signs of higher volatility in October. We are not happy with our growth rates in U.S. credit, but we believe we are taking the right steps to improve our growth rates in our business in the years ahead. Turning to my strategic update on Slide 3. We continue to innovate through the launch of our new trading platform, X-Pro. X-Pro delivers our proprietary data for pre-trade analytics and protocol selection. We specifically targeted portfolio trading solutions in X-Pro to address our U.S. high-grade market share challenges. In low volatility market environments, protocols like portfolio trading become more prevalent with portfolio trading rising to 7% of trades during the quarter. Activity on dealer-centric protocols also increases in low volatility markets and we are continuing to focus our growing -- on growing our Mid-X and dealer RFQ protocols. We believe that we have a superior dealer RFQ solution because of our comprehensive Open Trading liquidity. We are pleased to see our portfolio trading clients increasingly leveraging, our unique pre-trade analytics like tradability, only available through X-Pro. 35% of our portfolio trades were executed on X-Pro in October month to date, up from 18% in the third quarter. We continue to deliver unique data and functionality enhancements to our portfolio trading offering in X-Pro. X-Pro integrates our real-time data, our pre-trade analytics, and our trading protocols into a simple trader cockpit that allows the user to seamlessly manage more line items and being more productive. Adaptive Auto-X, a fully automated trader solution provides a suite of sophisticated AI-driven trading algorithms that integrate all of our trading protocols to programmatically improve execution outcomes while reducing market impact. Execution solutions like X-Pro and Adaptive Auto-X allow traders to fully leverage the power of MarketAxess, operating in a far more efficient manner while accessing the best possible liquidity and pricing available in the market. These products answer our clients' growing demand to help them do more with less. Although Adaptive Auto-X was still in pilot phase during the quarter, early results show promising transaction cost savings and reduced market impact in U.S. high grade. Our client franchise has never been stronger with a record of over 2,000 active clients across 67 countries. We delivered strong growth in our international businesses and in municipals. As well as record data revenue as our investments to broaden our geographical and product footprint pay off. We closed the acquisition of Pragma, we integrated the muni-broker platform, and we rolled out Open Trading to several emerging local markets, further solidifying our global leadership in emerging markets e-trading. Slide 4 illustrates how we are integrating our next-gen proprietary data with X-Pro to help traders do more with less. Our unique proprietary data helps clients with their portfolio construction objectives by leveraging liquidity scores, tradability data and our soon-to-be launched matchability data. These data tools can help clients predict the price of a bond, the depth of the market and the likelihood of finding another matching buyer seller on the platform. Our data tools also help clients optimize their protocol selection across RFQ, Open Trading, portfolio trading or automation. Last, with the launch of our AI dealer select data, we can now help inform our clients about their optimal dealer selection based on the bond they are trading. Slide 5 highlights the expansion of our addressable market. Acquisitions totaling approximately $360 million and significant organic investments in new products and protocols over the past several years have expanded our addressable market by an estimated $3 billion across credit, rates, data and post trade. We believe that our acquisition of Pragma will be a key accelerant of our ability to capture this opportunity while enhancing our technology footprint. An expanding market, higher trading velocity, new product expansion and new protocols and workflows are all additional levers of growth that could enhance our addressable market. Slide 6 provides an update on market conditions. Since the end of the third quarter, volatility has continued to move higher, which has benefited ETF market maker activity and U.S. high-yield estimated share. High-yield ETF market maker ADD on our platform is up 94% from the third quarter. With over $7 trillion in global corporate debt set to mature in the next three years, borrowers will have to refinance their debt at much higher rates, creating the potential for higher levels of turnover in the secondary markets. Proposed new additional bank capital requirements could lead to further constraints on bank balance sheets for market making, highlighting the importance of a diverse liquidity pool like Open Trading. Before I turn the call over to Rich Schiffman, I wanted to provide an update on October. Current October trends show high-grade estimated market share and market volumes slightly above September levels. While high-yield estimated share and market volumes are both above September levels. We have five important trading days remaining in the month, and both high-grade and high-yield market share normally show increases in the last week of the month. Additionally, global portfolio trading ADV in October is approximately $770 million, up 77% from Q3 levels. Now let me turn the call over to Rich to provide you with an update on our market.

Christopher Gerosa:

Thank you, Rich. On Slide 13, we provide a summary of our quarterly financials. For the quarter, we delivered revenue of $172 million, in line with prior year. Record Information Services revenue of $12 million was up 22%, this strong performance was driven by the healthy pipeline of new contracts as we continue to experience strong adoption across our data product suite. The favorable interest rate environment contributed to $6.6 million of interest income, up from $1.4 million. The effective tax rate was 23.4%, and we reported diluted EPS of $1.46 per share. On Slide 14, we provide more detail on our commission revenue and our fee capture. Total commission revenue decreased 2% in the quarter, but year-to-date is running 2% above prior year. The decline in credit commission revenue was due to lower estimated U.S. credit market share and lower total credit fee capture partially offset by revenue generated from strong international trading volumes. The lower levels of credit spread volatility during the quarter contributed to a decrease in ETF market making maker activity, which had a negative impact on our U.S. high-yield market share. The reduction in total credit fee capture from prior year was driven principally by the lower duration of U.S. high-grade bonds traded over our platforms and a product mix shift in other credit products, primarily in U.S. high yield. On Slide 15, we provide a summary of our operating expenses. Third quarter operating expenses increased 10%, mainly driven by the continued investments in trading system enhancements and our data product offering. Approximately 42% of the increase in operating expenses is due to employee compensation and benefits as we increased headcount 17% to support our revenue growth initiatives. The 15% increase in depreciation and amortization expense was due to higher software development costs and acquired intangible amortization expense. Professional and consulting expenses related to M&A were $1.1 million during the quarter and $2.1 million year-to-date. Our operating expense growth rate would have been 7%, if you exclude the impact of foreign exchange and M&A. On Slide 16, we provide you with our updated full-year 2023 expense guidance. Based on the progress operating expenses and the acquisition of Pragma, the company is refining its previously stated full-year 2023 expense guidance range of $418 million to $446 million to a new range of $432 million to $438 million. Lower variable cost savings from incentive compensation expense and clearing costs was mostly offset by $12.5 million of incremental M&A-related expenses. Excluding M&A-related expenses, our core expense growth rate is expected to be approximately 8%. Our estimated Q4 direct operating expense for Pragma is $8.5 million, which includes acquired intangible amortization expense. For modeling purposes, Pragma's third quarter 2023 total revenue was $6.9 million. On Slide 17, we provide an update on our balance sheet, cash flow and capital management. Our balance sheet continues to be solid with cash and investments totaling $553 million as of September 30 and we had no outstanding borrowings under the credit facilities. On October 2, we purchased Pragma for approximately $129 million, consisting of $81 million in cash and $48 million of stock. We continue to actively invest our cash to take advantage of the favorable interest rate environment to continue to deliver strong net interest income in the coming quarters. During the past 12 months, we paid out approximately $108 million in quarterly dividends to our shareholders, and our Board of Directors declared a regular quarterly cash dividend of $0.72 based on the financial performance of the company. Now let me turn the call back to Chris for his closing comments.

Operator:

[Operator Instructions]. Your first question comes from the line of Chris Allen from Citi. Please go ahead.

Chris Concannon:

Great. Good morning, Chris. Thanks for the questions. Just with regard to the current activity, I think it's important to look at credit spread volatility. Obviously, we do see higher levels of VIX volatility in the market, which has been driving high-yield ETF activity. But when it comes to the credit spread volatility, it remains fairly unchanged from September, high-yield credit volatility is only slightly up. So we're encouraged by the increase in volatility, as I mentioned, high-grade market share is running just slightly above September. Obviously, we have the five remaining days in the month which is a critical part of the month where volumes do increase. And high yield, given that slight increase in volatility is above September levels. And then with regard to portfolio trading, we are seeing our clients leveraging portfolio trading as a protocol. We've seen that grow this year, certainly in the lower ball months that we saw in Q3. We continue to see demand for portfolio trading solutions. And we're continuing to enhance our X-Pro as we roll it out to users. We specifically built X-Pro to target portfolio trading and rolled that out in August. So it's still very early days of our X-Pro for portfolio trading, and we're encouraged by where we stand today. And as I mentioned in the month of October, 35% of our global PTs have been on X-Pro, and that's up from just Q3. But again X-Pro right now it's still early days as we roll out additional enhancements.

Operator:

Your next question comes from the line of Patrick Moley from Piper Sandler. Please go ahead.

Christopher Gerosa:

Yes. This is Chris. It's a good run rate for 2024. We're still finalizing the purchase price accounting around that. But the current estimate is roughly $1.5 million of that $8.5 million represents the acquired intangible amortization expense. And so I would expect that to be a decent run rate with modest growth consistent with our core growth for planning a 2024 budget. We're still working through our budget process for '24. But in terms of layering on top of your models, I would assume that's a good run rate for you.

Operator:

Your next question comes from the line of Alex Kramm from UBS. Please go ahead.

Christopher Gerosa:

Sure, Alex. Well, obviously, we were pretty excited about that last week of September because we were coming off a quarter of fairly low vol and low volumes. The month was, if you recall, a very large new issue month both in high grade and high yield, and we typically see higher closing monthly -- month end closing activity with regard to the new issue. So there's a higher level of turnover going into that month end of people repositioning some of that new issue bond activity. So there was -- we did see that in September and October. Obviously, new issue is slightly lower. But we typically, in the last five days of the month, the last four days of the month around month end see higher levels of volume in the market, but also MarketAxess experiences slightly higher market share during those periods as well.

Alex Kramm:

Excellent. Thanks for the color.

Benjamin Budish:

Hi, thanks for taking the question. I wanted to follow-up on the prior question on Pragma. Chris, you said in your prepared remarks, you think it's going to be a key accelerant of your ability to capture the expanded TAM. I wonder if you could expand on that. And then maybe for Chris, just on terms of modeling for next year, where the revenue is going to be reported? And how should we think about sort of the growth rate of the Q3 number you alluded to earlier? Thanks.

Christopher Gerosa:

And then on the revenue projections, we're still working through, as I mentioned earlier, the budgeting process for '24. But I called out, the quarterly revenue is roughly around $7 million. So there is that slight drag when you layer in the intangible amortization expense on the total $8.5 million. But I think those two numbers are good numbers used for run rate with a modest growth rate in each line item.

Operator:

Your next question comes from the line of Dan Fannon from Jefferies. Please go ahead.

Chris Concannon:

Sure, Dan. First, our ETF market makers make up about 20% to 25% of that volume. More importantly, we've certainly seen systematic hedge funds that have been during the credit market pickup in activity across both high grade and high yield, but particularly large presence in the U.S. credit market. The overall activity, while volumes are slightly up, the overall activity is across all shapes and sizes of firms, both large investment managers as well as ETF market makers and the hedge fund community. So we are seeing a pickup across all firms. We continue to see portfolio trading used as a solution across our largest clients. We're seeing more and more international clients using portfolio trading solutions as well. So again, multiprotocol selection is definitely the theme. The other theme that's critically important is our clients are not adding traders. They are consistently asking us to deliver technology solutions that solves workflow efficiencies for them, because they are not adding traders. And so all of it if you look at the theme of what we're rolling out from a technology perspective, it's really allowing traders to do more with less, consistently more with less and that's the feedback that we're getting from our clients.

Operator:

Your next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.

Richard Schiffman:

Hey, Brian, it's Rich here. You can talk about the X-Pro adoption and it's been going great. We've got it up now over a 100 firms active and 180 traders on it. As Chris noted earlier, we've been focused quite a bit on our most active PT or portfolio trading users because the productivity gains for them are particularly pronounced. It's also out there for those doing large list tending to trade with a lot of small trades, X-Pro really is outstanding in that way, because it's easier to manipulate large numbers, in large list, in large portfolios things of that sort. So we're going to continue with that emphasis. It's the big push on PT, at our most active users with lots -- large numbers of tickets. And we expect this type of adoption to continue at this kind of pace should be growing pretty rapidly.

Brian Bedell:

That's great color. Thank you so much.

Operator:

Your next question comes from the line of Simon Clinch from Redburn Atlantic. Please go ahead.

Chris Concannon:

Sure. Great question. Well, first, when it comes to all-to-all trading and Open Trading, there's a very important dynamic called the Network effect that Open Trading delivers. And we are seeing alternative liquidity providers entering the market globally across U.S. credit, Eurobonds as well as EM. So we continue to see new alternative liquidity providers entering the market. We also, if you think about the dynamics and the enhancements that we're adding to our marketplace, we're allowing our clients to be providers of liquidity. Adaptive Auto-X, our algo solution and a key ingredient to that is allowing clients to quietly enter the market, both on the passive side, meaning being a liquidity provider as well as on the aggressive side. So we are growing the all-to-all network across all our products. So you can't look at it as a static offering today. It continues to expand globally. It does have spikes of activity during higher vol, obviously. And those -- we have seen those in the past. The one other important thing to mention when we're thinking out longer term, the regulatory landscape is constantly changing. And right now, we continue to hear from globally on enhancing bank capital rules. And those proposals that are out there are tightening bank capital rules, and we heard from one very large bank recently in their earnings call. Mentioned that it could tighten capital rules by as much as 20%, which would obviously impact dealer liquidity in the U.S. in credit globally. And so those -- the importance of alternative liquidity solutions will gain over time if those bank capital rules continue to tighten. Rich, do you want to add anything?

Simon Clinch:

Great. Appreciate that answer. Thank you.

Kyle Voigt:

Hi, good morning. I'm going to try to squeeze in a two part question on pricing. Historically, there hasn't been much or any transaction pricing pressure in the industry. And it seems like there's still a really wide and unique moat around Open Trading due to your liquidity pool and that network effect you just mentioned in the prior question. But with respect to protocols where there may be somewhat less differentiation on liquidity, is pricing becoming even a small part of client decisions on where to trade for protocols like PT or standard RFQ trading? So that's the first part of the question. Second part of that question is really has to do with -- do you think any of your clients are becoming sophisticated enough to RFQ out to all platforms where pricing may be already impacting where they execute orders if the cover price the same across those platforms?

Richard Schiffman:

Yes. Kyle, I'll just add to Chris' comments on the fees and things that come up there. We price our service commensurate with the value that's delivered with it. And you're aware of that in the fee schedule, there's -- for example, high yield, where it's $0.03 to $0.06 or Open Trading, where we have our highest fees that we're charging where we think we're delivering the most value to our clients. The individual performance to what we call price improvement from Open Trading that comes, right now, we're at lows where it's just shy of 2 basis points in high grade, and it's about $0.28 in the last quarter in high yield. Those price improvements or execution cost savings, that's net of the fees that we charge. So when it comes to the decision for where someone is going to trade, where you can get that type of performance, additional quality of execution, net of the fees that we're charging, it's a pretty easy decision about where to send the inquiries. So if there's a competing platform where the actual transaction fee is a little bit smaller, we're talking about tens of basis points or a couple of cents compared to the performance that gets delivered when Open Trading wins. And as I noted before, we're the large liquidity provider on the platform in these products, then the decision is pretty straightforward for the investors. And that's a message that we're continually reminding our clients about.

Operator:

Your next question comes from the line of Michael Cyprys from Morgan Stanley. Please go ahead.

Chris Concannon:

Sure. First of all, we're seeing growing demand for portfolio trading. It's such a convenient workflow solution particularly when our clients are getting large inflows, it's obviously a very easy way to get exposure quite quickly. The other method that we have seen clients use are just using outright fixed income ETFs to get that exposure and then unwinding the ETF and going into the underlying. We do see portfolio trading globally. As I mentioned, we're seeing some of our global clients using portfolio trading. And many times, they're trading a global list, not just a U.S. high-grade or U.S. high-yield credit list. So we do see that offering growing over time. And obviously, the tools that our clients are using, remember this -- when this portfolio trading was born, it was born on Excel spreadsheet. So we've come a long way. The real -- we think the real solution that our clients now are looking for is once they think they have a portfolio trade, so either they're buying a very large portfolio where they're selling a portfolio or their switching, they need to optimize that portfolio if they construct it, meaning they can truly impact the price of the portfolio by picking certain bonds in the portfolio deselecting or adding bonds. And our tool helps them with that portfolio construction and it does, in fact, optimize their pricing, which is quite helpful. And it's really the pre-trade analytics that drives that portfolio construction and that bond selection once you load the overall portfolio trade that you intend on using. But to answer your question, the PT volumes, it's largely weighted towards investment grade with about 70% in investment grade and only about 15% in high yield. And many times, we see portfolios across both high-grade and high-yield. We would expect to see growing portfolios in Europe and in Asia as well, again, using EM or across global bond less as well. And that's an offering that we recently put out our global PT offering. Traders were asking for really a global list of bonds to trade as a portfolio.

Operator:

Your next question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead.

Chris Concannon:

Yes. So Alex, as you know, we've made a lot of investments over the last three years. Chris alluded to the number of M&A activity, which contributed to the elevated levels of acquired intangibles amortization expense. So that provides for a little bit of noise, and we've built the teams out where it's all come together this year from a core perspective where we're rolling out X-Pro, we're rolling out the final suite of our automation tools with the Adaptive Auto-X solution. So where we stand today, we're thinking of -- the future is that high single-digit expense growth rate for the core business, recognizing that roughly 17% to 18% of our operating expenses are variable. And we've experienced some savings due to the underperformance that we have seen this year, where our variable expenses were more or less down roughly $12 million to $13 million from what we were planning for in the beginning of the year, and that more or less was offset by the $12.5 million of M&A-related expenses. So I would say that the levers are built into the model through the variable expenses. But as we think about our expense philosophy internally, we're redirecting and reallocating resources to the top priorities where we think we're going to get near-term revenue growth prospects.

Alexander Blostein:

Got it. Thanks for that.

Patrick O’Shaughnessy:

Good morning. The innovations that you've been speaking to today potentially allow MarketAxess to [Technical Difficulty] block trade market?

Patrick O’Shaughnessy:

What's the [Technical Difficulty] about help you better penetrate the block trade market?

Richard Schiffman:

Hey, Patrick. It's Rich. And one other thing, we're talking about adaptive and Adaptive Auto-X and it's, again, still early days just coming out of the pilot phase, but even from the small number of clients that we have in this initial phase, we're seeing larger orders coming from it. So remember, it gives the ability to tap into the different protocols that we have available. So a common type of operation in the algo is to leave part of a block order resting in the order book. And then when other parties engage being able to then work that order up to a larger size that gets completed, we call that multiparty workup. And we've seen some encouraging early examples of that being used where the initial trade starts out at $500 million or $1 million or a couple of million and we've had cases where it gets worked up to $15 million or $20 million. And that's all done quietly without showing full size initially. People are concerned about that information leakage, and then quietly working that up to a larger size without the information leakage. So we expect to see greater adoption of that as the Adaptive Auto-X rollout expands.

Operator:

Your next question comes from the line of Chris Allen from Citi. Please go ahead.

Operator:

Chris, your line is open.

Chris Concannon:

Sure. Obviously, the hiring cycle was quite high over the last few years, quite a competitive market that we entered in '22 and into the first quarter of '23. With the layoffs among the large investment banks and across the technology companies that market dynamic has reduced. So it's a much more friendly hiring environment. We are obviously focused on rolling out products and rolling out solutions and Pragma brings with us probably around 50 technologists, which is a great add to the overall footprint of MarketAxess. And we just see going into 2024, we're quite comfortable with the hiring marketplace. And obviously, the addition of heads that we've already added to the overall footprint of MarketAxess. And then more importantly, we have a number of things that we're doing on the tech side of re-platforming our platform, rolling out X-Pro and continuing to grow the overall automation solutions. So we continue to see sizable investments in all of those tech plants and all of those opportunities.

Operator:

And we have no further questions in the queue at this time. Chris Concannon, I will turn the call to you for closing remarks.

Operator:

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded on July 20, 2023. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Chris Concannon:

Good morning. I’m very pleased to update you on the significant progress we made in the second quarter to enhance our franchise and drive our long-term growth. First, in terms of the quarter, we generated revenue of $180 million and year-to-date we generated $383 million, 4% above prior year levels. Earnings per share was $1.59 on net income of $60 million. We were not immune to the impact of dramatically lower volatility in the quarter, which impacted trading platforms across fixed income and other asset classes after a very strong first quarter. While our quarterly results will ebb and flow with volatility, we are confident that we have the right long-term strategy and we have made substantial progress this quarter in creating the most comprehensive global fixed income market for the future. Turning to my strategic update, as you can see on Slide 3, we will now be providing quarterly updates based on 3 new focus areas, which is the framework through which we are managing our growth and how we will communicate our results going forward. First, in terms of innovation, we have now developed and launched unique proprietary data solutions and embedded them in our platform that we believe will help our clients make better trading decisions that achieve better outcomes. We have also launched the first client algorithm, Adaptive Auto-X in the U.S. credit markets with 8 live pilot clients and plans to increase the numbers significantly in the coming months. Next, in terms of integration, we successfully launched our new trading platform last quarter, which integrates our unique data products and our various trading protocols in a single platform. Contained in that new trading platform is our enhanced portfolio trading functionality with increased capacity for large portfolios and accompanied by our proprietary data analytics that help our clients optimize their portfolios and protocol selections. And last, in terms of execution, we continue to expand our client franchise with record active clients, record traders and record active clients trading three or more products. We continue to grow and set records across various products and new initiatives, and we delivered on our new trading platform, an enhanced portfolio trading solution, and we processed a record single day of trading activity on May 31. In summary, we continued to execute in the quarter, despite the decrease in volatility which dampened activity on our platform. The initiatives we launched this quarter will be critical in addressing the recent challenges we have faced in growing our estimated market share in U.S. high-grade. While we recognize that our high grade market share can be uniquely impacted by volume and volatility in the ETF markets, we also have felt the impact of new protocols like portfolio trading slowing our market share growth. Slide 4 illustrates how we are innovating with unique proprietary data that powers our new platform and our automation suite. We sit in a privileged position as a leader of the electronic global credit market that generates powerful proprietary data. This proprietary data helps inform our clients on what to trade to achieve their portfolio construction objectives by leveraging our Liquidity Scores, Tradability data and our new Matchability data. Our unique data like CP Inquiry, CP+ Responder and Tradability, also informs clients how to trade and when to trade by recommending the right protocol to get their best price, how to size their trade, how to reduce their market impact, and informing them what to expect in terms of price outcome. And last, our newly released AI Dealer Direct Data helps inform our clients, who to trade with by leveraging artificial intelligence to determine the best counterparty for a specific trade. On Slide 5, our new trading platform will drive the gathering and directing of client orders to achieve better trading outcomes for clients. We are delivering a high-touch and low-touch trading solutions through our new order centric trading platform powered by our proprietary data and analytics. We started our broad rollout in the first quarter of this year, and early client feedback has been overwhelmingly positive. We have transitioned over 30 of our top investor clients, who are now using the platform daily. Turning to Slide 6, our unique data and insights are also powering the first client algorithm, Adaptive Auto-X, designed to better link our liquidity pools. Our Adaptive Auto-X algorithms allow clients to build customized trading algorithms and enhance workflows to handle larger sized trades. Adaptive Auto-X also leverages smart order routing, so we can seamlessly link our liquidity pools and help our clients achieve unique execution outcomes. Slide 7 highlights the expanded addressable market that we have established compared to 2018. The product set that we had in 2018 gave us access to a total addressable market of approximately $4 billion in revenue. The investments that we have made over the last several years have expanded our total addressable market by $3 billion, for a total addressable market today of $7 billion. We are continuing to invest to capture the tremendous opportunity before us, while integrating the new initiatives we have acquired or built. Slide 8 provides an update on market conditions and U.S. credit. As shown in the upper half of this slide, volatility in the second quarter was down significantly from the prior year impacting activity by select client segments on our platform. ETF market maker activity in the second quarter was down 47% from the first quarter, reflecting decreased opportunities to deploy arbitrage strategies. In the second quarter, notional volumes and high grade and high yield ETFs decreased 19% and 33%, respectively, compared to the prior year reflecting the impact of reduced volatility on U.S. credit. The decrease in volatility was not unique to fixed income, with realized volatility on the S&P 500 down 52%, FX volatility down 12%, and commodities down 28%. Before I turn the call over to Rich Schiffman, I wanted to provide an update on market trends in July. With 8 important trading days remaining in the month, U.S. high grade estimated market share is running consistent with mid-June levels. U.S. high yield estimated market share, however, has rebounded and is now running above June levels and slightly below prior year July levels. Now, let me turn the call over to Rich Schiffman to provide you with an update on our market.

Christopher Gerosa:

Thank you, Rich. On Slide 15, we provide a summary of our quarterly financials. For the quarter, we delivered revenue of $180 million, down slightly from the prior year. Record information services revenue of $12 million, was up 24%. This strong performance was driven by the healthy pipeline of new contracts signed, as we continue to experience strong adoption across our data product suite. Based on the year-to-date progression of information services revenue, we expect to achieve full year revenue growth in the mid-teens. The effective tax rate was 24.2%, slightly lower than prior year, and we reported diluted EPS of $1.59 per share. Excluding the impact of foreign exchange losses and unrealized losses on U.S. Treasury investments in the quarter and the impact of foreign exchange gains in the prior year quarter, all of which are included in other come, diluted EPS would have been down 3% versus the reported 11% decline. On Slide 16, we provide more detail on our commission revenue and fee capture. Total commission revenue decreased 3% in the quarter and year-to-date is running 3% above prior year levels. Total credit commission revenue was impacted by the dramatically low levels of volatility in the quarter, which reduced trading activity, negatively impacting our trading volumes and estimated U.S. credit market share. This was partially offset by the revenue generated from strong market share gains in Eurobonds, Emerging Markets and Munis. The reduction in total credit fee capture from prior year was driven principally by the lower duration of U.S. high grade bonds traded over our platform. Product mix shift in other credit products, primarily in U.S. high yield and client crossing activity in Eurobonds, which is executed at a lower fee capture rate. While U.S. high grade fee capture declined year-over-year, duration has remained relatively stable over the last several months, as reflected in the corporate bond duration index. On Slide 17, we provide a summary of our operating expenses. Second quarter expenses increased 7%, driven principally by continued investments to enhance the trading system and our data product offering. Employee compensation and benefits increased $3 million on a 17% increase in headcount, as we continue to add technology and customer facing roles to support revenue growth initiatives. Tech and communications expenses increased $3 million due to higher SaaS, data center and cloud hosting expenses. On Slide 18, we provide an update on our balance sheet, cash flow and capital management. Our balance sheet continues to be solid with cash and investments totaling $506 million and we had no outstanding debt as of June 30. We are actively investing our cash to take advantage of the favorable interest rate environment to continue to deliver strong net interest income in the coming quarters. During the past 12 months, we paid out approximately $107 million in quarterly dividends to our shareholders. Our Board of Directors declared a regularly quarterly cash dividend of $0.72 based on the financial performance of the company. Now, let me turn the call back to Chris for his closing comments.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Chris Allen with Citi. Please go ahead.

Chris Concannon:

Great. Good morning, Chris. Thanks for that question. Obviously, Adaptive Auto-X is in early stages, as we mentioned, it’s still in pilot. It will remain in pilot through the remainder of the summer. And based on early indications, performance is quite attractive. And as expected, the key thing about Adaptive is it allows a client to submit a larger parent order, which then breaks into what we call child orders, and those orders can be placed across various different protocols. The other unique thing about Adaptive Auto-X, it is pegged to the market, meaning, you can choose your relative price and it will remain pegged to the market and reprice as the market moves throughout the morning or the day. As we mentioned, we have 8 clients in pilot with probably another 3 or 4 in the queue. All of various shapes and sizes. Some of them are quite large clients, traditional asset managers and some are a number of smaller hedge funds. So we’re trying to do a broad cross section just to complete your question around the performance of Adaptive Auto-X and the goals it’s really to allow clients to outsource their trading strategies into really a very sophisticated AI-driven algorithm. And the unique thing about Adaptive Auto-X and end MarketAxess is that it takes advantage of our Open Trading solutions, both our live markets order book as well as our all-to-all Open Trading solution in RFQ. So it allows clients to actually not cross spread for some portion of their order, which is a substantial improvement in price given the size of spreads in our market. So it’s a very unique offering that leverages our competitive position in all-to-all trading, that huge liquidity pool that we always talk about Open Trading. Adaptive Auto-X is uniquely designed around that solution. And then, obviously, we plan to roll that out over the course of the fall and into next year. The client feedback thus far has been very positive. We have a number of clients begging to be in the pilot, but we’re trying to keep the pilot at this point small. The other important thing and we rolled out a number of new data products. There’s one product in particular, when combined with Adaptive Auto-X makes it a much more interesting opportunity and that’s called matchability. And matchability predicts the opportunity of a specific bond to find a matching buyer or seller on our platform. So that combined with Adaptive Auto-X’s increases a client’s likelihood of not crossing spread by being very careful about their bond selection when they’re building their portfolio.

Christopher Allen:

Thanks, guys. I hop back in the queue.

Kyle Voigt:

Hi, good morning. Just wondering if I could ask a question on recent trends in the high grade business, it seemed that really from 4Q 2021 through May of this year, you had stabilized market share trends versus your largest U.S. competitor, especially as you had fully rolled out a PT offering of your own. However, in June specifically, we’ve again seen some share loss in U.S. high grade versus that peer. Just wondering what has driven that recently in high grade and are you hearing anything from clients that would suggest there is any pure customer switching occurring of kind of standard RFQ or even OT activity?

Richard Schiffman:

Yeah, Kyle, it’s Rich. I was just going to add a couple of things about it. Also, the current environment, which is pretty low volatility, as Chris pointed out earlier, there’s not a big premium being paid to get the PTs done that way. So there’s no question there’s been a bit of shift in some of that activity. We’re picking up PT business also, although, maybe not growing as fast as the overall amount taking place, we are fully invested in it and making sure that we’ve got the most competitive product out there in the market, particularly around the usability in terms of the workflow, making sure it’s very easy. The work in our new trading platform is very much geared around the PT workflow and making sure that that goes smoothly. And, in particular, longer term, this is one thing we’re quite focused on, is looking for ways to morph PTs and traditional in comp list business, so that we give traders at the point of execution when they’re going out, which is the better way to execute this trade. Should I go in comp list? Should I go PT? It’s going to vary depending upon what they’re trading, what’s going on in the market at that time. But PT, it’s a pretty concentrated business in terms of liquidity provision. I think, there’s maybe half a dozen, or eight, or so firms that are active in it and it’s quite concentrated with half that number, if that. And to forego all of the broad liquidity in the market from over 1,000 liquidity providers that we have seems an unfortunate thing to do. So that’s kind of on our long-term roadmap with PT is look for ways how we can bring that broad liquidity together with the benefits of the portfolio trading workflow.

Operator:

Your next question comes from the line of Benjamin Budish with Barclays. Please go ahead.

Richard Schiffman:

Yeah. Thanks, Benjamin, for the question. I think, we’re going to see larger volumes coming through on it, but it might not necessarily be reflected in larger tickets, because part of what the benefit of Adaptive Auto-X is, this ability to really easily breakup a large inquiry or order into smaller pieces and get quality execution at an average price across those executions. So, I think, it will be a tool for attracting these larger orders into the system, although the actual executions of them might happen in relatively smaller pieces.

Patrick Moley:

Yeah, good morning. Thanks for taking my question. Chris, earlier this month, maybe late last month, there was a large liquidity provider market maker out there that was talking about wanting to become more involved in the U.S. credit market. So just wondering what your thoughts are on some of these larger players leaning into credit, maybe what it means for automation and maybe what it means for your Adaptive Auto-X tool more specifically. Thanks.

Patrick Moley:

Excellent. So I hop back in the queue.

Operator:

Your next question comes from the line of Simon Clinch with Atlantic Equities. Please go ahead.

Chris Concannon:

Sure. Great question. And we love to talk about our data here at MarketAxess. Just to put it in perspective, the addressable market that I spoke about, about $1 billion of that addressable market is data revenue. So we are very bullish on the opportunity in the data space. Our data revenues have been consistently growing as a result of the demand for CP+, our real time data. It’s a strong data product in the U.S. for U.S. corporate bonds. Obviously, we think it’s the benchmark for real time trading of U.S. corporate bonds. But, more importantly, in Eurobonds and EM, we’re seeing high demand, particularly in EM, which is a much more difficult market to trade. We see high demand for CP+ across those international markets. And as we grow our trading footprint, and we did grow our trading footprint both in Eurobonds and EM, that data product becomes that much more valuable. So we’re certainly projecting very attractive growth rates for CP+ internationally as well as here. With regard to the proprietary data products and I named a number of them that are newly into production and being launched over the coming months and quarters. They are all designed to really attract trading volume at this point. What we intend to do is embed them in our new trading platform, and so our clients can only see that data when they load an order on our platform and engage our platform for trading. And we believe it’s a very careful curated way of attracting more orders on the platform, but also helping our clients determine how best to trade their orders given the size and given the unique liquidity in the market. So things like tradability will predict the number of responses that you should get back on a given bond. CP Responder will actually predict the likelihood of winning an inquiry based on your unique price and size. And CP Inquiry predicts the best price of an inquiry based on the client type and the size inside of your bond. So these are very unique, very proprietary data products that we’re rolling out. And our latest AI Dealer Direct will actually help you select your dealer counterparty, which is very important when you’re trading larger size orders in our market, so all of these at the outset will be offered exclusively on the platform with lots of restrictions for use. But we do believe over time, we’ll be able to monetize them into pure data feeds for our clients to use in their own proprietary platforms. So, over time, we’re excited about the opportunity. But, right now, the focus of these data products is growing our market share across all our products.

Daniel Fannon:

Thanks. Good morning. Chris, first, I just wanted to clarify your comments around July. I think you said market share consistent with July comments, which I think you said were consistent with mid-June. Just curious if that’s different than how the end of June ended up. And then as you think about the current environment, maybe it’d be helpful to think about just given how many macro factors have been impacting both market activity as well as client behavior. What is maybe kind of the ideal backdrop for your products, your platforms and protocols to perform?

Richard Schiffman:

I’m just going to add to that, Chris. Daniel, it’s also worth looking at the refunding calendar and I don’t have the exact number offhand, but I thought I heard something like next year. It’s over $1 trillion of paper that needs to be refunded and that’s going to create a lot of activity in the market, which is definitely favorable for our platform.

Operator:

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Please go ahead.

Chris Concannon:

Sure. From the regulatory side, obviously we have a global footprint, so we are mindful of regulations across the globe here in the U.S., obviously, we’re still tracking the SEC’s proposals around the treasury market. They’re obviously very favorable towards all-to-all and we continue to hear support for all-to-all and treasuries by regulators. T1 is another proposal that we’re tracking quite closely, obviously the requirement to move settlement to T1 does have an impact on institutional straight through processing and many times that can be favorable to electronic trading more broadly and electronic processing. So T1 is one we look out for, and while it’s a lot of work for everybody, it’s slightly favorable to the electronic solutions over the long-term. The TRACE proposal moving to a 1-minute reporting time, if you look at the market, the majority of the market is near that reporting time today, obviously, manual reports take a little bit longer. But we would expect that to improve, again, similar to T+1 straight through processing and electronic trading more broadly. In Europe, we continue to hear from the regulators around, what is an MTF, the perimeters of an MTF, and what needs to be in an MTF? And it’s certainly having an impact on the regulatory environment, where we see potential new entrants in alternative platforms that try to aggregate trading. It’s very clear in Europe that MTF regulation is becoming more restrictive based on those trading perimeters. We operate in MTFs throughout Europe, so we’re quite comfortable in that environment, where you need to be an MTF to step into our space. But, more broadly, we don’t see any regulatory wins that have material detriment really much more positive to support electronic trading across the globe.

Richard Schiffman:

One thing I would just add to that, Michael, if there’s any change in bank capital requirements to the tighter side that’s going to be a tailwind for electronic trading, certainly for all-to-all trading, because that liquidity has to get made up somewhere else and if it becomes harder for the banks to be providing it, it’s going to open the door for a lot more activity in Open Trading.

Operator:

[Operator Instructions] Your next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Chris Concannon:

Sure. First, obviously, we continue to grow share, as I mentioned, across a number of our key products in the face of competition and high grade in particular, we are generally impacted by a lower volatility, particularly around the ETF market, given how important we are to the ETF market makers and some of the systematic hedge funds that trade that ETF arb. So we typically are more impacted than any competitors in that market. With regard to high grade portfolio trading, while we did grow our portfolio trading in high grade somewhere around 13% year-over-year, it’s really not as fast as the market has been growing. So the competitive impact in high grade is largely around the growth of portfolio trading in high grade. We do feel very comfortable about the launch of our enhanced portfolio trading platform and our embedded unique data attributes, and that’s what clients are asking us for. We’ve been out talking to clients that are portfolio traders and, obviously, as Rich mentioned, it’s a very concentrated dealer market in the portfolio space, but it’s certainly also concentrated among the number of traders that trade portfolio trades at the various client desks. I will tell you we are protocol agnostic, while we obviously have different rates for different protocols. We are delivering protocols that our clients are asking for and we’re delivering unique data to help them decide the appropriate protocol at the appropriate time. I do think the other patterns that we have recognized that is lower vol, we do see higher levels of portfolio trading in the market, because it’s just easier to price a portfolio when the market isn’t moving or gyrating. So we’ve also identified that in the second quarter, given the lower volatility.

Operator:

Your next question comes from the line of Patrick O’Shaughnessy with Raymond James. Please go ahead.

Chris Concannon:

So, yeah, there’s a number of leading sizable order management systems across the globe that we interact with. We certainly work closely with our partners at those order management systems to ensure that our various protocols, our various APIs and our data is available. And we’ve certainly worked closely with some of the largest. The nice thing about our design is when the OMS connects to us; they can move orders into our environment. And then within our environment, clients can move those orders across various different protocols, so they become available instantly in our environment to move them from protocol to protocol. As we mentioned, the new platform that we’ve launched allows clients to load those orders directly from the OMS. And we’re integrated to really all of the OMS that are material in our market. And once they’ve load those orders onto our platform, they can manage them as high-touch, low-touch, and no-touch, which is really delivering them into our automation suite. So it allows a client to really have a centralized cockpit to decide how to trade their various order sizes, and then from that cockpit, they can deliver those orders into each of our protocols. All those protocols are instantly available. But more importantly, we embed that data that I spoke about earlier, that proprietary data side-by-side with their orders, so they can make logical decisions based on data that they’ve never seen before, on what protocol, what dealers, and what automation solutions are available to them. And that’s really had an impact. In fact, as we were rolling out our new platform, we embedded it with a number of what we call power users. And we’ve seen those power users increase their overall activity levels moving from migrating from the old platform to the new platform. To go back to your original question, the integration with the OMS is quite complete, and the new platform is showing early signs of higher levels of activity, given the seamless interactions that clients now have and the number of line items they can manage on a single platform. The other piece of good news with regard to the OMS is our Adaptive Auto-X solution has a number of unique characters in it, when it actually fills a larger size trade, it can fill it in a series of smaller sized trades, as Rich mentioned earlier. Those interactions have all been integrated with all the leading OMS providers. And so, we’re able to access the clients on those platforms can have easy access and seamless access to Adaptive Auto-X. And right now we have within our pilot, a number of clients that are spread out across the various OMS’ that we interact with.

Operator:

Your next question is a follow-up from Michael Cyprys of Morgan Stanley. Please go ahead.

Chris Concannon:

Sure. Great question. And, obviously, we have seen retail re-enter the fixed income market and it’s quite exciting to see fixed income assets as an attractive investment for retail. And you see that in the TRACE numbers as the average trade size and TRACE has dropped dramatically over the last 2 quarters and continues to thrive. We touch retail in a number of different ways, we recently launched our Axess IQ platform, which is designed specifically for private wealth firms, and we’re seeing a great deal of success on that as we continue to onboard new clients on a regular basis each quarter. And it’s hitting record volumes and tapping into a very important part of the retail private wealth sector. The other area that we see retail coming into our market is through the growth of SMA, separately managed accounts. To remind you, these managed accounts are managed by large institutional investors that are using our platform every day. Their tickets come in much smaller size. And so part of the growth of our automation solution that you see quarter-over-quarter is really a reflection of the growth of SMA and the burden of managing small tickets within a large institutional player. Their demand for our automation is growing as the SMA assets are growing. And, certainly, the forecast by industry experts on SMA growth, particularly around the fixed income arena is quite high for the years to come, given where yields are. So we think we’re well positioned for supporting the retail market and quite excited about the potential growth of that SMA part of the industry.

Operator:

Your final question comes from the line of Rich Repetto. Please go ahead.

Unidentified Analyst:

Yeah, I’m a personal investor. And I’d like to ask, what are your mid-June volumes, because you’re comparing your July volumes to a number that’s fictitious and non-disclosed? So just trying to figure out what your mid-June volumes were?

Unidentified Analyst:

That’s exactly it, yes.

Unidentified Analyst:

Very helpful. Thank you.

Operator:

There are no further questions at this time. I will turn the call to Chris Concannon.

Operator:

This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.

Operator:

Ladies and gentlemen, thanks for standing by. Welcome to the MarketAxess First Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, this conference call is being recorded on April 26, 2023. I would now like to turn the call over to Mr. Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Chris Concannon:

Good morning. I'm very pleased to share with you our strong first quarter results on my first earnings call as CEO of MarketAxess. We continue to execute our growth strategy during the quarter and delivered record revenues which increased 9% or 11% on a constant currency basis. Earnings per share grew 15%, reflecting the continued improvement in our underlying revenue and earnings growth trends, as shown on Slide 3. These strong results were broad-based across products, protocols and geographies, reflecting the powerful diversification of our model driven by the investments we have made over the past several years. Specifically, we delivered record levels of average daily trading volumes across nearly all products. The fourth consecutive quarter of strong estimated market share gains, record levels of commission revenue across U.S. high yield, emerging markets and eurobonds, record levels of revenue and trading volume contribution from our international businesses and record levels of volume from newer client segments, new initiatives and record levels of automation. In summary, we had a very strong quarter with records across key products and protocols. The impact of the rapid rate rise in 2022 has now filtered into the broader market, resulting in the banking sector market dislocation in March. While we have seen a retracement in industry volumes over the last several weeks, we believe this is a temporary pause as the markets digest the events of March and their impact on the trajectory of rate hikes for the Federal Reserve. Lastly, I could not be more pleased to have Nancy Altobello as our new Lead Independent Director of the Board, which was announced earlier this week. Nancy brings a wealth of audit, talent management, diversity and corporate culture experience to the role, and I'm looking forward to our continued collaboration and partnership. Slide 4 highlights the strength of our unique all-to-all solution, Open Trading. We were very pleased with the performance of Open Trading in March. As liquidity became more challenging in March, we saw daily highs of Open Trading share grow to 57% in high grade and 61% in high yield. For the quarter, we registered record Open Trading average daily volume of $4.5 billion, up 21%, with record U.S. high-grade share of 34%. We are executing approximately 13,000 trades per day in Open Trading and approximately 32,000 trades per day across total credit. Open Trading also delivered total price improvement of $252 million, well in excess of our quarterly revenue. Slide 5 highlights our multi-dimensional growth across new products, new initiatives, new client segments and geographies. First in new products, we grew estimated municipal market share to a record 6.4% in the quarter with 376 active client firms trading. We have also recently integrated the muni broker system with the MarketAxess pool of liquidity to provide clients with more trading options. In U.S. treasuries, we continue to see client growth in our treasury offering with 250 active participants on the platform up from 145 in the prior year. We have established a very strong pipeline of future growth cylinders with record volume across dealer RFQ, portfolio trading, our diversity dealer initiative and Axess IQ, our front end for private banks in Europe. We are also seeing strong contributions to our growth from newer client segments, including hedge funds, systematic funds, dealer initiated flow, and private banks. We generated a record 216 billion in trading volume from these important client segments, which now represent 25% of our total credit trading volume. Our estimated share of U.S. high grade can fluctuate given various market factors including the banking crisis, block trading activity, new issuance, and growth in client segments outside of our focus on institutional client flow. For example, we estimate that the dealer-to-dealer retail segments of TRACE grew 31% year-over-year and now represent a combined 28% of high grade TRACE up from 25% in the prior year. Lastly, in emerging markets, we had record ADV, this quarter with local market volume growing 10% year-over-year to a record $71 billion in the quarter. Slide 6 shows the continued strong adoption of automation tools by our clients, powered by CP+. Automated trading increased to a record $69 billion in volume and a record 398,000 trades. Importantly, our automation tools have continued to grow through periods of significant market dislocation, which is a testament to the quality and accuracy of our CP+ data. Today, Auto-X represents 20% of total credit trade count and 8% of our total credit trading volume. At the core of our automation tools and workflow is CP+, our world-class algorithmic pricing engine, which was a key driver of our record data revenue in the quarter. With the recent launch of Adaptive Auto-X, which is currently in pilot, we are delivering an algo trading solution that automates trading across protocol and liquidity pool while seeking to greatly improve their execution quality. Before I turn the call over to Chris Gerosa, I wanted to provide an update on market trends with three important trading days remaining in the month. Market volumes are weaker in April, but U.S. high grade estimated market share is improved from March and is running above first quarter levels. Now let me turn the call over to Chris for a review of our strong financial results.

Rick McVey:

Thank you, Chris. Slide 13 provides an update on market conditions and U.S. credit. As we have noted over the last several quarters, last year’s rapid rate increases dramatically impacted investment grade index returns, and the higher rate environment is now beginning to flow through to the investment portfolios of banks. The distress trading conditions in some parts of the bank and finance sector in March led to a short-term increase in TRACE volumes with transactions and distressed bank names moving back to the phone, due to the extreme volatility. We believe that the recent softness in corporate bond volumes reported to TRACE is likely to be temporary due to the uncertainty in the banking sector and the upcoming May Fed meeting. The overriding theme in my view is the highest yield environment we have seen in over 13 years and the opportunity for global investors to reallocate assets back into fixed income. That trend was apparent in the record, high grade TRACE volumes in Q1 reflecting higher trading velocity. Market volumes in credit normally fall in April from March due to the holiday calendars. So part of what we are seeing currently is seasonal. Investment grade TRACE ticket count in Q1 grew 59% and average trade sizes declined 25% as fixed income becomes an investible asset class again, and investors reenter the market. Both retail and institutional investors are seeing a higher ticket count leading to an essential need to embrace trading automation for efficiency. Lastly, all these positive market drivers are manifesting themselves in increased velocity of trading. Turnover was an annualized 74% in the first quarter in U.S. high grade up from 64% in the first quarter of 2022. Yields are at their highest level since 2009, and at that time, high grade annual trading turnover was around 80%. Trading velocity is benefiting from higher yields, greater market participation and the technology benefits of improved trading efficiency. Slide 14 illustrates the total revenue opportunity we have before us, which has expanded significantly in the last few years as we have invested to expand our product offering. The product set that we had in 2018 gave us access to a total addressable market of approximately $4 billion in revenue. Since 2018, we have diversified our products and protocols and expanded geographically. For example, we acquired unique capabilities in the U.S. treasury market. We complemented our organic growth and municipal bonds with mini brokers. We have expanded into ETF share trading with our investment in RFQ hub, and we accelerate our growth in post-trade data with the acquisition of regulatory reporting hub. We have also increased our investment in data products, including our comprehensive real time data product CP-plus, and our entry into the index space with both high grade and high yield indices. The investments that we have made over the last several years have expanded our total addressable market by $3 billion to a current estimate of $7 billion. We are in early stages of executing in many of these areas, and we feel more confident than ever in the long runway of growth opportunities still in front of us. In summary, on Slide 15, we continue to execute well across against our growth strategy. We delivered the fourth consecutive quarter of accelerating revenue growth driven by a combination of strong market share gains and improved market volumes. Our global footprint continues to broaden and deepen as we diversify our product offering. We have a strong pipeline of new products and new trading protocols and increase client diversification driven by growth with hedge funds, private banks, and dealer initiated order flow. Now, we would be happy to open the line for your questions.

RichRepetto:

Yes. Good morning, Chris and Rick and Chris. First congrats Chris for taking over the helm. I guess the first question is, you come from a long background of automation or other experience in other asset classes and you talked about a lot of metrics here that smaller trade sizes, increased velocity, that point to this electronification. So I guess, one question is this Adaptive Auto-X, what kind of impact do you think is that a key to further along the automation trend or what other – what tools do you see besides Auto-X that are going to really spur that conversion?

RichRepetto:

Got it. Got it. And Chris, I think you guys addressed some of this, but we are seeing volumes now lighten up from mid-March and you talked about seasonality of April and sort of reallocation I think is still going on. But can you just make investors a little bit, has the outlook for 2023, I thought super strong. Is that still a case or is this just a momentary pause or has anything changed the outlook for volumes – credit volumes for the year I would say?

RichRepetto:

Got it. Got it. Lastly, most of the top level managers and fixed income trading platforms are skilled golfers. So I guess my question, Chris, what have you done to improve your golf skills?

RichRepetto:

Got it. Thank you.

Chris Allen:

Yes. Good morning, guys. I won’t comment on your golf game. I know, how challenge it is. Just on the CP-plus uptake showing up in the market data. Is that just a longer-term ongoing trend or is that maybe an anticipation of Adaptive Auto-X launch? And then maybe you could just give us some color just on what the feedback has been on the pilot phase there and kind of expectations around when that’ll be formally launched to the broader marketplace?

Chris Allen:

Just how that’s kind of flowing through into market data, like what’s driving that?

Chris Allen:

Thanks, guys. I’ll get back in the queue.

Kyle Voigt:

Hey, good morning. I like the addition of that chart on flat five that shows the volume growth from some of these newer user segments. I guess the one that I wanted to hone in on that’s all record volume in the quarter was this hedge fund clients and growth there. Just wondering if you could provide a bit more color as to how that’s ramped over the last couple years and where you’re seeing a lot of the growth from – is that from systematic funds or is it from credit hedge funds? And also if you could comment on whether you’re continuing to see growth in the number of those hedge fund clients being onboarded on to the platform as we can – try to think about whether this growth from this segment has momentum and is sustainable as we look ahead?

Kyle Voigt:

That's really helpful. And if I can ask just a follow-up on the muni business. Just wondering if you could talk about the transition of the MuniBrokers business and what that means for revenues and revenue captures – revenue captures rates as we go through that transition. And then maybe you provide some updated thoughts on kind of the long-term potential revenue capture that you see for that muni bond business. I think it was just under maybe $200 per million in the quarter. But I recall that when you launched into the muni space, I think the opportunity at that time felt like the fee capture rates could be closer to $400 or $500 per million. So just wondering maybe if we can get an updated kind of view in terms of long-term, what the fee capture opportunity is and then maybe what the market share opportunity is as you see it today, too.

Chris Gerosa:

Hi, Kyle. And just a reminder, the MuniBroker fee model was a subscription-based model. And it ranged anywhere from $60 to $80 per million. And our plan is to convert that volume into Open Trading, where we'll capture our Open Trading team model. And minding everyone, this is a tax-exempt muni product, which typically ranges between $150 to $200 per million. So we're looking to capture that either fee card as we transition that volume into our platform.

Operator:

Thank you. We'll go next now to Alex Blostein of Goldman Sachs.

Chris Concannon:

Sure. First of all, we obviously saw a record volume and record revenue in our high-yield market in the first quarter. So again, a number of records in the first quarter. As we look at April, obviously, volumes – and TRACE volumes are down substantially across both high grade and high yield. So it's a more challenging market. And then – but overall, the high-yield market, I'm super excited about. We continue to make headway in the high-yield market. Our OT penetration is a key ingredient in high yield. We saw 51% of our high-yield volume be through Open Trading liquidity, which obviously is where we're gaining a great deal of market share. But overall, we see high-yield participants enjoying that alternative liquidity, particularly when the market continues to get stressed. So when there's volatility in the high-yield market, Open Trading does spike, as I mentioned in my opening remarks. So to the extent there's additional volatility, to the extent we see high-grade bonds dropping into the high-yield market, we'll continue to see that volatility throughout the course of the year. And that volatility does -- has historically led to higher market share for our Open Trading.

Chris Concannon:

Well, there was clear volatility in March throughout and more importantly there's a number of distressed bonds that we don't trade in Open Trading during those times. But yes, we saw substantial volatility in March, which also led to some of those spike market shares in our Open Trading solution.

Chris Concannon:

Yes. Well, first, our primary business is the institutional credit business, the institutional fixed income business. That's our distribution channel and has been historically. We have seen a recent rise in retail in the market, an area that we haven't dedicated full resources to. We do see an opportunity in retail, and we've made headway with Axess IQ, our private bank offering in Europe. We're seeing higher demand for that offering. We've launched it to a client in Asia as well. So we do see an opportunity in retail, particularly given where our execution quality sits in terms of the institutional market. If you look at the muni market, even high grade and high yield, the overall market trade size is declining from a historic level. So we're seeing smaller trade sizes across our platform and across the TRACE market. So we do think we have a very viable retail offering given the quality price that we can deliver with an Open Trading trade execution, just higher quality price and being able to deliver at much smaller sizes than historically. So we think there is a wonderful retail opportunity as retail reinvest in the fixed income market given the yields that this market is showing.

Operator:

Thank you. We'll go next now to Brian Bedell at Deutsche Bank.

Chris Concannon:

So first, we thrive in volatile markets. We do – if you look back at 2020, there was obviously records set across 2020. So our platform, our offering does thrive in volatile markets. More importantly, and March was evidence of this, our automation tools ran consistently throughout the disruption and volatility in March so – which is a key differentiator from prior volatile times like 2020. So we feel really good about the offering. We feel exceptionally good about the liquidity that is provided through our all-to-all during more volatile times. As I mentioned, our OT markets or Open Trading all-to-all market share did spike upwards during the most volatile times of March, reflecting alternative liquidity providers stepping into the market when traditional providers are stepping back from that market. So we feel good if there's volatility in the market. We feel really good about our position in the market. And – but particularly around the distressed bonds, that's a market where – and again, they're not frequent, but that's a market that does tend to go to the phone or go to chat when there is a distressed bond situation. But again, we do enjoy the benefits of volatility. So if volatility comes back into the market, we would expect an offering that is quite comfortable for our clients.

Chris Concannon:

Well, first of all, the new entry, particularly the systematic fund complex, I think it actually has a benefit to our market share, but overall turnover in the market. These are new strategies that are being launched into the fixed income market that we haven't seen before. So it's really new turnover and attractive to both us and our clients, our bank clients and our liquidity providers to interact with that kind of liquidity. So the new entry is a positive for not only the liquidity and the bond market, but also overall turnover and velocity of trading in the bond market. Obviously, the new entry takes full advantage of all-to-all, so we're obviously favored given our all-to-all offering across all of our products from high-grade to high-yield to munis, and even our treasury product is another place where we're seeing entry. So super positive for the market, super positive for velocity and turnover in the fixed income market, but particularly positive for MarketAxess and our all-to-all offerings across all the products.

Operator:

Thank you. We'll go next now to Daniel Fannon of Jefferies.

Chris Concannon:

Sure. First, I want to point out that we had first quarter record revenues and record volumes across most of our products. We certainly – and we also had a sizable growth in share in our U.S. corporate products as well, high yield grew over three percentage points in market share. And we had records in open trading ADV across U.S. corporate bonds as well. So overall growth and records across our U.S. corporate products is quite exciting, when we look at, if we want to get granular and look at a market share of high grade, we saw across TRACE higher levels of retail. That's a client segment that we have not chased after or spent resources on, retail clients do have connectivity to us, but the overall retail market did grow in investment grade bonds over the course of the first quarter. And that's explains some of the lower average trade size in the TRACE market as well. But quite frankly, we're quite happy with record revenues and record volumes across our U.S. corporate market and quite happy with our market share growth across the U.S. corporate market.

Chris Concannon:

Yes, Dan, it was really a combination year-over-year and sequentially both upgrades and new dealers signing on for fixed fee plans. But as you point out, it's difficult to anticipate what that number or how it could change going forward. From a modeling perspective, we would recommend, and we're looking at it as Q1 being the run rate, but also recognizing that there is risk to our fixed distribution fees to the extent there's consolidation in the dealer sector, we could see fees dissipate or alternatively we could see new dealers come on board to offset that.

Simon Clinch:

Hi, thanks for taking my question. I recall that I think it was last quarter you mentioned that you were looking at ways to, I guess, share in more of the value creation of open trading with your clients. And I was wondering if you could just update us on your thoughts around that, how you'd expect to, I guess, implement such a strategy over time and how meaningful that could be?

Simon Clinch:

Okay, thanks. And then just secondarily in terms, when we think about the comments about market share so far in April for U.S. high grade being you're back above Q1 levels. I was wondering if you could perhaps put it in terms of the market share. If you adjust out the sort of distress bonds that sort of distorted everything, has the market share been pretty stable after you adjust for that in March through to April? Or has there been a pickup even relative to that sort of adjusted level?

Simon Clinch:

All right. Thank you.

Operator:

Thank you. We go next now to Michael Cyprys of Morgan Stanley.

Chris Concannon:

Yes, I'll take this one. I made comments in my prepared remarks that with respect to the high grade fee capture, we've seen stability and it's very indicative of the Bloomberg Duration index that's out there for everybody to monitor. And there's a lot of factors that contribute to our fee capture. You have the product mix, you have the protocol mix across our Q1 open trading, and so it really depends month to month on what mix of product is coming through. And I'll point to where we saw upside in historical quarters was we saw a heavier mix of high yield, which is our highest fee product in the product set. And in this month we're seeing elevated volumes with Eurobonds relative to the market volumes that we're seeing sequentially, which is one of the lower fee capture products. So really goes down to what's the product mix because we're not seeing the same impact that we saw with the high grade duration compressing our fee capture year-over-year.

Chris Concannon:

Yes, so in a peak of March, we had enough capital residing within our two clearing broker dealers to support the elevated trading volumes that we were seeing in light of it contributing to increased fails and increased deposit requirements. So of the $330 million of cash that you saw at the end of March, roughly $200 million of that was residing within the two clearing entities to support open trading. So as we think about our balance sheet today, we feel very comfortable with the amount of capital residing in the company to support our business and not seen on the balance sheet. We didn't have any outstanding debt at quarter end, but we do have access to $750 million of borrowing facilities, a secured facility at the holding company and $250 million unsecured facility at the holding company and $250 million of secured to broker dealers, which we have not had to borrow on late, but we do have the ability to secure additional funds if we need to.

Michael Cyprys:

Great. Thank you.

Patrick O'Shaughnessy:

Hey, good morning. Can you provide an update on the current competitive dynamics in the recently issued component of the corporate bond market and how much a total market volume does that segment represent?

Patrick O'Shaughnessy:

The recently issued component,

Patrick O'Shaughnessy:

Got it. Thank you. And then can you provide an update on what you're seeing in terms of client interest in your portfolio trading solution?

Patrick O'Shaughnessy:

Great. Thank you.

Chris Concannon:

Thank you all for your time today and we look forward to talking to you in the next quarter.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded on January 25th, 2023. I'd now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Richard McVey:

Good morning and thank you for joining us to review our fourth quarter and full year results. We continued to execute our growth strategy and delivered the third consecutive quarter of record market share gains across nearly all our product areas. Strong increases in trading volumes and significant price improvement for clients through our unique all-to-all trading protocol, Open Trading. Our underlying revenue growth trends improved materially in the quarter despite near-term bond duration and FX revenue headwinds. We delivered 8% revenue growth, 10% adjusted for currency, EBITDA growth of 10% and EPS growth of 15%. With this strong finish to the year, we delivered our 14 straight year of record annual revenue. Slide four highlights the key areas of our growth strategy. Our leadership position in global credit continues to expand beyond just U.S. high-grade with record estimated market share in high-yield in municipals, record share in Eurobonds and accelerating share gains of almost 300 basis points in emerging markets, reflecting our increasing global diversification. The deep pool of liquidity on our platform continues to expand with a record of nearly 2,100 active client firms and a record number of active traders. We have seen especially strong growth in our international business with over 1000 active client firms and nearly 6,000 active traders. As traditional sources of liquidity have become scarce, the importance of our all-to-all liquidity increases and a record 38% of our credit volume was executed through Open Trading. This has been a key driver of our estimated market share gains and a source of valuable price improvement for our clients. For the full year 2022, an astonishing 1,300 client firms provided liquidity on the MarketAxess platform. In summary, the foundation of our business has never been better with accelerating growth in trading volume, new market share records, increasing momentum in new product areas, and a substantial addressable market opportunity. With this strong financial performance as backdrop, earlier this month we announced that Chris Concannon, a proven leader, deeply experienced in electronic markets will assume the CEO role in April and I will take on the new role of Executive Chairman. I would like to congratulate Chris on the promotion as CEO. It is well deserved and given his strengths in automation, e-trading protocols, data product delivery, and ETFs, Chris is the right person to lead the company. And now is the right time to make this transition because we have never been in a better position. I am excited about my new role as Executive Chairman where I will continue to work with Chris and our Board of Directors on long-term strategy, key client relationships, regulatory affairs and investor communications. We will continue to invest actively in our business by developing new trading and data capabilities, adding new product areas and expanding internationally. We believe we have an outstanding opportunity set for the next decade and beyond, and many reasons to believe the fixed income market environment will be favorable for e-trading and data revenue growth. Slide five provides an update on market conditions and U.S. credit. In 2022, the Fed raised the Fed funds rate a total of 425 basis points, making it the fastest rate hike cycle since 1980 to 1981. This shock to the fixed income markets, especially with the initial moves in the first half of the year, drove an unprecedented 14% decline in investment grade indices for the year, the largest negative return I have seen in my career. Along with these price declines duration declined approximately 20% from year end 2021 levels to the lows in October, directly impacting high-grade fee capture for institutional client e-trading activity.

Chris Concannon:

Thank you, Rick, and thank you for the kind remarks. The last several years have been an incredible experience leveraging your deep fixed income market knowledge and working with you as a trusted partner and executive. The track record that you have established is unparalleled and I am deeply grateful to you and the Board for having their confidence to pass the CEO reins to me for the next phase of the growth trajectory for MarketAxess. This is truly an honor, so thank you for all your support and I'm looking forward to working with our clients, with you and with the Board on our many strategic initiatives that we will continue to unlock shareholder value for years to come. The team that we have assembled here is world-class and we are well positioned to capitalize on the growth opportunities ahead. Slide eight illustrates some of those tremendous growth opportunities. As we begin 2020, the strength of our franchise in terms of product and geographic breadth has never been stronger. Our leadership in global credit is expanding reflected in the strong market share gains that we achieved over the last several quarters. These gains only serve to reinforce the sizable revenue opportunity that we have ahead of us. We believe the product opportunities that we have are further enhanced by the current market conditions. Higher yields typically lead to higher velocity of trading, which will increase the demand for electronic trading solutions. January month-to-date has seen strong new issue activity, which reduces market share in the short-term, but increases outstanding debt. Our total credit ADV month-to-date is showing solid double digit growth year-over-year and sequentially. Slide nine provides an update on Open Trading. The diversity of our liquidity pool has made a significant difference in the quality of execution for our clients. We delivered price improvement of $945 million in Open Trading for the full year well in excess of our annual revenue of $718 million. We believe that the price improvement opportunity we deliver to clients provides us with additional flexibility to fine tune our pricing over time particularly when we are delivering such high levels of execution quality to the client transactions. Open Trading is able to deliver these levels of price improvement because it increases market participation by bringing a multitude of investment banks, systematic and alternative funds, ETF market makers and institutional investor clients into one unique pool of liquidity. This unique liquidity pool is good for market participants and more recently regulators have become more focused on these types of protocols that support liquidity and market resiliency. This is a particular focus in the rate space where we believe our all-to-all solution in U.S. treasuries is very well positioned with a record 244 active client firms now on the treasury platform up from 192 in the prior year. Slide 10 highlights the increasing momentum we are seeing with automation and credit trading. Automation tools are critical to solving for the pain points facing our clients. Clients are facing increasing cost constraints and need to find more efficient workflow solutions. Our automation suite of tools will be critical to helping our clients solve for these cost pressures while delivering high quality execution. Automated trading increased to a record $62 billion in volume and a record 383,000 no-touch trades reflecting continued strong adoption. Today, Auto-X represents 20% of total trade count and 8% of our credit trading volume. We also saw increased adoption of our Auto-X Responder solution during the fourth quarter. Additionally, the use of dealer algorithms continues to grow across our platform. Clients are increasingly facing higher ticket counts and smaller trade sizes while trying to manage their technology costs. Our automation tools are increasingly in demand to help address these growing challenges. Lastly, in the first half of this year, we will have an initial launch of our Adaptive Auto-X solution, which will provide algorithmic workflows for clients to systematically access broader liquidity across multiple trading protocols. This new service is expected to unlock additional cost savings for clients while simplifying client workflow. Slide 11 illustrates the growth we are continuing to drive in portfolio trading. The fourth quarter was another record for portfolio trading with total volume of $31 billion up 135% year-over-year. Estimated high-grade and high-yield portfolio trading market volumes have remained relatively flat at around 5% to 6% of secondary TRACE volume over the last several quarters. We believe approximately 65% to 70% of our portfolio trading activity is currently using electronic trading venues. And based on that, we estimate that we had an estimated 31% share of the electronic portfolio trading market up from 17% in the prior year. Now let me turn the call over to Chris Gerosa to provide an update on our financials.

Richard McVey:

Thank you, Chris. In summary, we continue to execute very well against our growth strategy. We delivered record levels of market share and enhanced our competitive position in the institutional client e-trading space, both in the U.S. and on the international front. Our global footprint continues to broaden and deepen as we diversify our product offering and achieve record growth in active clients. The market is increasingly turning to our unique Open Trading solution for liquidity and significant price improvement. Market volumes have improved and we are currently seeing positive trends in fee capture and FX. And lastly the improved macro backdrop for fixed income markets is creating a very attractive operating environment for MarketAxess in 2023. Now I would be happy to open the line for your questions.

Richard Repetto:

Yes. Good morning Rick and Chris and Chris. First Rick, congratulations on the transition to the Chairman role. It's very well deserved and we thank you very much for mentoring that proven leader in the new asset class, Mr. Concannon.

Chris Concannon:

Yes, I needed some extra mentoring Rich.

Richard McVey:

Not currently. But of course it's a full year ahead and markets are full of surprises. I will say it's encouraging to see that the mutual fund outflows that took place most of 2022 have started to turn into inflows, which is opening up the new issue calendar for the high-grade market as we start the year. And who knows that the expectation right now is that we could have a soft landing and the inflation numbers will continue to come down, but nothing is certain and there is the possibility that we get a negative surprise on inflation and the Fed has to continue to move rates higher in the near-term, but that's not the expectation right now. And I will say, while the high-grade market is wide open, we are still not seeing anywhere near normal levels of activity in markets like high-yield and emerging markets in even euros. So it's a good sign that high-grade is leading the way and we're having robust levels of new issue activity this month. But what I would expect to happen is this improving environment will work its way into the high-yield in emerging markets as well. And EM in particular volumes were greatly depressed in 2022 with some of the market challenges and FX challenges throughout the course of last year. So there's a huge opportunity there that is the market environment does continue to improve and we have China reopening that EM market volumes may follow the path of high-grade and improved. They have not done that yet, but that would be something to watch, I think, in the quarters ahead.

Christopher Gerosa:

Yes, Rich, it's a seasonality effect with our clearing operations. We have to put capital into DTC to support our failed activity. So at the end of September, you have elevated fails, which takes on some of the cash and the seasonality impact as you get into December, there's less trading volume lower fails, which reduces in more cash on the balance sheet that we don't have to hold at DTC.

Richard McVey:

That is the norm. That is, you're exactly right, Rich. That is the normal month-to-month seasonal pattern because new issue is at the lowest level in December and often the highest in January. But we're taking a holistic view of our credit market opportunity and the guidance that Chris gave in credit ADV month-to-date in January puts us at or around record credit ADV levels. So we see robust trading activity when we look more broadly across all products that we're involved in credit.

Operator:

The next question is from Chris Allen with Citi. Your line is open.

Christopher Gerosa:

Yes, Chris, I'm happy to take that one. And I think the way to think about high-grade is, we are seeing record levels of activity even in the fourth quarter in our Open Trading all-to-all solution. So we are seeing gains in terms of Open Trading hit 33% of our total volume in Q4, so we are seeing gains there. We are also seeing gains in our portfolio trading solution in high-grade. We had record volume in PT in high-grade of $17 billion up close to over 90%. So we're making gains. Obviously direct dealer RFQ has been running flat for us. We also made gains in our dealer RFQ, sorry, was up 23%. But when I look at high-grade and high-yield full U.S. corporate credit, the overall activity from our clients is still positive and you're obviously seeing those big gains in high-yield. But again the high-yield gains are driven by our Open Trading volume which ADV grew by 43% in the Q4. So, overall credit activity on the platform is showing signs of substantial growth, particularly driven by Open Trading.

Christopher Gerosa:

Sure. Automation continues to be a driver of activity on the platform. It had nothing but records across the Board in Q4, record volume of $62 billion in our Auto-X solution and then overall trades on the platform was automation accounted for 20% of total trades on our platform. So we -- not only did we see heightened growth in Q4, but overall the year of 2022 sort of record volumes of total of $220 billion in automated volumes. As we look forward in 2023, we continue to hear from our largest clients around their cost controls that they are facing, particularly given the AUM performance of 2022. So they are facing bigger and bigger tech challenges and looking to us to help outsource some of those challenges in workflow solutions like our automation tools. As I mentioned in our open remarks, we are launching in the first half of this year what we're calling Adaptive Auto-X, which is a true client algorithm which adapts to market conditions as it trades. So it's a unique solution that's being rolled out for the first time in credit trading in the U.S.

Christopher Allen:

Thanks guys.

Kyle Voigt:

Hi. Good morning. Chris Concannon, yes. You mentioned a comment about flexibility to fine tune your pricing over time in relation to Open Trading, right now where you're adding the most value to clients. I guess, how much room do you think there might be to fine tune that pricing over time and how do you kind of balance potentially making pricing changes with maintaining pricing and trying to incentivize as much flow as possible to move in that direction?

Kyle Voigt:

And to be clear, were pricing adjustments made already or are they planned for 2023?

Kyle Voigt:

Okay. and just for a followup, just taking a step back, if we were going to kind of rewind maybe five years ago and think about the opportunity that you had in high-grade and high-yield from a market share standpoint, I don't think anyone would have guessed that you would have effectively had the same market share in both as we sit here today. So I guess the first part of the question is, just given the different liquidity dynamics in these two markets, do you still think that high-grade total electronic share will ultimately settle at a higher level than high-yield over the long-term? And just to follow up on Chris Allen's earlier question, is there some level of market share where it just gets harder for a single player to gain incremental share? Is that playing into anything that's happening in high-grade at all, because obviously the high-yield dynamics seem much different right now with the momentum there?

Richard McVey:

Just one, add on too, Kyle. I think with high-yield in particular, the liquidity challenges in the U.S. credit markets were most pronounced in high-yield and that plays right to our favor. And what I think it's showing you is that when liquidity is challenging, Open Trading is significantly differentiated from any other way of conducting trades in the high-yield market or elsewhere. And anecdotally, you'll hear stories of challenges in inventory, in the leverage loan market, in the high-yield market that creates constraints around balance sheet for secondary trading and the high-yield market, I just think is another data point that shows that we have a unique solution for liquidity through Open Trading that people are not able to find elsewhere. And I think that just positions us great for market share gains for many years to come because of the investments that we have made there.

Operator:

The next question is from Gautam Sawant with Credit Suisse. Your line is open.

Richard McVey:

Sure. Happy to take that one. So RFQ-hub, just a reminder, it is owned and operated by Virtu and I don't want to jump ahead of their earnings call on activity levels for RFQ-hub. We are excited about what we've seen thus far from RFQ-hub and our investment in RFQ-hub and the year that it had in 2022 just in terms of client activity, client engagement, and the work we've been doing with the partners in RFQ-hub, both our dealer partners and obviously BlackRock as a key partner as well. We do think the demand for fixed income ETFs by our institutional clients is climbing. It's a wonderful vehicle for dealing with capital flows to get exposure to the overall credit market quickly and through a liquid instrument. So we're seeing heightened levels and heightened demand from our client base on fixed income ETFs and expect that to continue, particularly given the activities in 2023 and the attractiveness of the fixed income market as an investment vehicle going forward. So we're very happy about the overall opportunity that the ETF market provides us through our investment in RFQ-hub.

Chris Concannon:

No, the index itself has been relatively stable to the exit rate that we saw in December.

Chris Concannon:

Yep.

Alex Blostein:

Hey everybody, good morning and thanks for taking the question. I had a bit of a market structure question for you guys. So as you look at the accelerating shift from active bond mutual funds into ETFs which again continues to accelerate here, even year-to-date, I think over 70% flows into fixed income are going ETFs. How do you think that impacts turnover rates for the credit markets? And the reason why I ask is, naturally that creates secondary degree of liquidity in the kind of the ETF wrapper, but I wonder if that also impacts positively or negatively turnover in the underlying bonds, especially when the flows are so concentrated with the handful of players, particularly with BlackRock?

Richard McVey:

And Alex, I'll just add onto that too, is that while standalone the turnover of an ETF portfolio is likely to be lower than an actively managed portfolio, that's only really part of the story because the ETF share liquidity is adding to the overall liquidity of the fixed income market and giving dealers and investors another way to transfer risk quickly. So I view it as very positive for overall liquidity and activity because of that tool as a way to quickly transfer risk. And don't forget, there are a whole group of industry participants that are now actively trading the shares versus the underlying bonds, which is additive to velocity. So I think you have to take a holistic view as how that, how the growth in ETFs is adding to the fixed income ecosystem in order to get a valid outlook in terms of what it means for velocity.

Christopher Gerosa:

Yes, no, I think it's the latter. It's really the high-grade fee capture is directly impacted by the market conditions. And when we talk about the developments were going back to October when Rick pointed out that the Corporate Bond Index duration was a low, and we've seen a strong recovery going through November and December. And I sized up the math of a year-over-year comparison. But when you look at the bond yield movement and years to maturity so far in January that we put on a chart relative to December, the high-grade fee capture was more or less at the same level. We saw the exit rate as of December.

Operator:

The next question is from Dan Fannon with Jefferies. Your line is open.

Richard McVey:

Yes, Dan great question. I'm glad you asked it, because we mentioned in our prepared remarks that some of the data contracts that we signed were towards the back end of Q4. And I mentioned in the last call that our target was to hit an FX adjusted growth rate of 10%. We fell just short of that, and a lot of that was due to the timing of when we signed those contracts. But the good news for the 2023 outlook, we think that the growth rates will be in the 10% to 12% range for information services on a constant currency basis and we hope to do better than that. And with respect to the post-trade, that continues to be a mid-single-digit growth rate. We're not expecting any significant upside, as you've seen in the past due to the acquisition of Reg Reporting Hub.

Daniel Fannon:

Great. That's helpful. And then just on the expense guidance in the context of what you guys are characterizing as certainly an improving environment from a revenue perspective. So the midpoint at 10% maybe dissect that a little bit in terms of where those incremental dollars are going and if we're going to, if revenues come in, maybe above what your base case is, is that just flow through to compensation or are there other areas where you would spend more if the environment is constructive from a revenue perspective?

Daniel Fannon:

Yes, that's helpful. Thank you.

Chris Concannon:

Sure, thanks Michael. And I would say nothing meaningful in terms of what has come out from the SEC so far. I think I'm right in saying that a lot of the best execution revisions were focused on dealer obligations as fiduciary and agency trading. So not quite as relevant around the world of fixed income, but we do expect something much more material at some point during 2023, which is what I would view as long overdue revisions to the fixed income electronic trading and ATS rules, and something that I was directly involved in promoting and supporting as part of FIMSAC at the SEC when the industry participants were helping the commission think through that. So what I'm looking forward to is really a level playing field with standardized e-trading rules across the ATS community. The staff continues to do their work on that. So we're not exactly sure what the timing will be but, I would expect that those fixed income ATS rules will be out sometime during calendar year 2023.

Christopher Gerosa:

So we obviously look at the coming 2023 as an opportunity given the re-pricing of many financial assets a number of small companies. When we look at the marketplace, there is what I call scarcity of assets. So we're really talking about an M&A strategy that involves much smaller size bolt-on type of product offerings. The FinTech space has clearly been repriced. So there's an opportunity and there are a number of FinTech providers in the market that will start facing capital challenges in the year ahead. So with a very strong balance sheet, we feel well positioned to take advantage of a re-priced market with a number of FinTech players that may be in need of capital. So excited about what's ahead, but again, there's nothing material out there given the scarcity of assets that we look at.

Operator:

The next question is from Brian Bedell with Deutsche Bank. Your line is open.

Richard McVey:

So it's a great question, Brian. I view portfolio trading as really a demand for liquidity and capital because these are very sizable trades that our clients are in need of, so they're demanding higher levels of capital commitment from our dealer partners. And so I do think that portfolio trading done in comp or in dealer competition, which is what our electronic solution offers our clients does result in a better execution quality across the full portfolio. We also rolled out analytics and will continue to roll out analytics that help our clients judge how portfolios are being priced relative to either an individual or a list trade, however you want to call it. So we think clients are being given all the proper tools to evaluate portfolio trading as a large block trade or as an individual or list trade, where they get the participation of additional market participants. So right now, portfolio trading, we see it, it has grown. It has grown over the last couple of years. We do see that growth rate flattening at some point depending on market dynamics. More importantly, what we're seeing in the first quarter is obviously smaller trade sizes. So the demand for more trading activity at smaller size is probably going to be a theme that we see in 2023, and that's where many of the other list trading and other alternative protocols that we offer come into demand. So while we do see strength in portfolio trading as inflows come in, many times our clients are using the portfolio trade as a way to get instant exposure, and they pay for that capital utilization from very large dealers.

Chris Concannon:

If I could just add, we're one, we're really pleased with the growth in PT we've seen on MarketAxess and the ability to give clients their choice depending on the, the risk that they're trying to move. I will say, and we previewed this a year ago that as volatility has picked up, don't forget the dealer side, it's become much more difficult to manage the risk of large portfolios from the dealer side and I think there have been two outcomes of that in 2022. One is that the growth rate of portfolio trading volume has slowed dramatically. And if you look at the last 12 months, it's been right around 5.5% of secondary TRACE volume over the last year. And it's been even slower than that in high yield, where the liquidity challenges are more severe. So the growth rates of PT volume are down, but also, we see greater concentration in terms of the dealers that are printing portfolio traits than we did a year ago. And I think that's just it, the level of sophistication that's required to manage that risk is way up because of volatility. So all those factors weigh in terms of the quality of the pricing that comes through in PT, and as a result of client behavior on where they think they're going to get best execution.

Christopher Gerosa:

Well, I'll start by thinking about the velocity first. I mean when you think about ETF activities on the equity markets, fixed income ETF activities on the equity markets, there is a direct correlation to activity in open trading, but across the overall fixed income market. And so, as you mentioned, velocity does increase with the level of inflows into fixed income ETFs. The other important point is, and it goes back to the levels of electronic trading in the fixed income market, as ETFs become a dominant product of choice by investors, the demand for electronic trading goes up because those ETF market makers need to hedge in an electronic capacity. They are executing electronically in the equity market, the transfer of that risk is best done in electronic form in the fixed income or the underlying market. So we do see a very strong connection between velocity and ETFs and velocity in electronic trading in the fixed income market. We also see a number of new participants in the ETF market that are leveraging our Open Trading solution from systematic hedge funds, alternative hedge funds, and the ETF market makers see huge benefits of leveraging a broader network in the fixed income market, a broader network than they are they typically have access to. So again, Open Trading is certainly a wonderful tool for the average ETF market maker and any systematic hedge fund that's using ETFs as an investment vehicle.

Christopher Gerosa:

Thanks.

Richard McVey:

Thanks for joining us this morning and we look forward to updating you on business trends next quarter.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on October 19, 2022. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Richard McVey:

Good morning, and thank you for joining us to review our third quarter results. We continue to execute our growth strategy and delivered the second consecutive quarter of record market share gains across nearly all of our products, strong increases in trading volumes, and significant execution cost savings for clients through our unique all-to-all trading protocol Open Trading. Our dealer and institutional investor clients are facing very challenging credit market trading conditions and our focus is delivering value for them to help navigate through elevated market volatility. And through these challenging markets, our leadership position in global credit continues to expand beyond just U.S. high grade with record estimated market share in high yield and municipal bonds in the U.S., record share in Eurobonds and accelerating share gains in emerging markets. The breadth of our global market share gains continues to expand in this volatile market. Engagement of institutional investors and dealers on our platform continues to increase with a record of nearly 2,000 active client firms and a record number of active traders. We have seen especially strong growth in our international business with nearly 1,000 client firms now active including strong growth in Asia. As traditional sources of liquidity have become scarce, the importance of our diversified liquidity pool increases, and further enhances our leading market position. It is encouraging to see institutional clients and dealers leaning into MarketAxess across so many products during a period of challenging liquidity. We are also making excellent strides in developing new growth cylinders with another record quarter in municipal bond trading volume and a record quarter in portfolio trading volume. In U.S. Treasuries, there were 226 active client firms trading on the platform, up from 122 in the prior year as we continue to gain traction with investors in our unique all-to-all treasury solution. U.S. corporate and emerging markets debt outstanding in the market has been growing at three-year compound growth rates of approximately 4% and 9%, respectively, which, when combined with higher rates, sets a strong foundation for trading growth in the institutional client e-trading space. In summary, the breadth of our business has never been stronger with accelerating growth in trading volume, new market share records, increasing momentum in new product areas and a growing addressable market opportunity. Slide 4 provides an update on market conditions. Just one year ago on our earnings call, we stated that Central Bank tapering would lead to a more normalized yield levels and volatility in the bond markets around the world, and that is exactly what has happened. In a very short 10-month period, we have moved from massive Central Bank quantitative easing to the current state of Central Bank quantitative tightening due to the elevated levels of inflation. We have seen a rapid increase in yields around the world and investment-grade bond indices are down a remarkable 22% year-to-date. While current trading conditions are extremely volatile, we believe higher bond yields create a better investing and trading environment. We maintained our view that bond trading velocity will grow in the years ahead due to growing bond market participation and increased adoption of trading automation. What we did not predict was historically rapid rise in interest rates, driving one of the steepest declines in corporate bond duration dropping 18% year-over-year. This reduction in duration has had a negative impact on our high-grade fee capture which is the only bond product that institutional investors trade in yield instead of price. At the same time, the U.S. dollar index moved to 20-year highs in a short period of time. Despite these short-term revenue headwinds, our overall revenue growth trends have improved materially in the last few quarters and we would expect both the duration and FX revenue headwinds to diminish in the future as market conditions stabilize. In the very early weeks of Q4, total credit and rates, average daily volume is running similar to September levels and well above last October. Slide 5 shows the strong year-over-year increases in estimated market share and the magnitude of our share gains since the pre-pandemic period. This is the second consecutive quarter of top quartile market share gains as compared to our long-term average year-over-year share gains. All but one of our primary products were in the top quartile of historical data for year-over-year quarterly growth versus the past 10 years. We focus on the longer-term trends, and as illustrated on this slide, we have grown market share by almost 550 basis points per product since the third quarter of 2019, which equates to an annual increase of approximately 180 basis points across products. These growth rates reflect the strength of our franchise and underpin our confidence in our ability to capture the market opportunity in front of us. Slide 6 illustrates the tremendous growth opportunity that is driving our approach to investing. The strong market share gains we delivered this quarter only served to reinforce the sizable revenue and earnings opportunity that we have ahead of us. We have a unique position in large and growing global debt markets. We are leveraging our global client network and technology to grow share in existing products and add new product areas to the platform. And as we grow market share, our data and content become even more valuable which makes us even more excited about the many ways that we are pursuing the data and ETF opportunity. We believe we can capture this opportunity and deliver superior returns to our shareholders. Now let me turn the call over to Chris Concannon to provide more detail on the significant progress we are making with our investments in new initiatives.

Chris Gerosa:

Thank you, Chris. On Slide 13, we provide a summary of our quarterly financials. Third quarter revenue was $172 million, up 6% driven by strong growth in trading volume and record market share gains, but was negatively impacted by the lower duration of U.S. high-grade bonds traded and a strengthening U.S. dollar. Excluding the impact of foreign currency fluctuations, revenues would have increased approximately 9%. All else equal, and assuming the same level of trading volume, we estimate that the change in U.S. high-grade duration lowered our third quarter revenue by approximately $8 million. Information Services revenue was up 1% or 10% excluding the impact of FX. We continue to expect our full year 2022 information services revenue growth rate to hit our historical growth levels of around 10% on a constant currency basis. Third quarter post-trade revenue included the negative impact of approximately $1.7 million on a strengthening U.S. dollar compared to the prior year quarter. Excluding the impact of FX and onetime revenue activity in the quarter, the year-over-year growth rate would have been approximately 8%. The increase in other income was principally due to higher investment income of $1.3 million as we are benefiting from a more attractive interest rate environment and a $900,000 gain on our equity investment. We expect other income in the next few quarters to increase slightly as we plan to benefit from higher investment yields on our cash and deposit balances. The effective tax rate was 24.8%, and we are reconfirming that we expect the full year effective tax rate to be at the upper end of the previously stated range of 24% to 26%. On Slide 14, we provide more detail on our commission revenue and our fees per million. Total commission revenue increased 7%. Our growth in total credit and total rates commission revenue was driven by healthy increases in our trading volume and estimated market share, but was partially offset by lower average fee capture across U.S. high grade. The lower high-grade fee capture was driven principally by higher bond yields. The weighted average years to maturity of bonds traded in U.S. high grade has remained stable year-over-year on the platform. On Slide 15, we provide you with our expense detail. Third quarter expenses increased 9% driven principally by investments to enhance the trading system and our data product offering. Excluding the impact of FX, expenses would have increased 13%. Employee compensation and benefits increased $4 million on an increase in head count mainly in technology and customer-facing roles to support revenue growth initiatives. Technology and communications expense increased $4 million on higher software subscriptions, cloud hosting expense and technology licensing fees. Professional and consulting expenses decreased $3 million driven by lower acquisition-related consulting expenses and lower recruiting fees. Given the progression of operating expenses and the impact of FX fluctuations year-to-date, we are refining our full year 2022 expense guidance range to $390 million to $398 million from the previously stated range of $385 million to $415 million. The new midpoint would imply 9% growth year-over-year. On Slide 16, we provide an update on cash flow and capital management. As of September 30, our cash and investments were $352 million, and our trailing 12-month free cash flow was $239 million. We are refining our full year 2022 CapEx guidance range of $58 million to $62 million to a range of $48 million to $52 million mainly due to a transition from purchasing to leasing fixed assets and the FX impact on our international investments. During the third quarter, we paid out $26 million in quarterly dividends to our shareholders. And year-to-date, we have repurchased 280,000 shares for a total of $88 million, $100 million remains on the outstanding repurchase authorization. Our Board of Directors declared a record quarterly cash dividend of $0.70, which was based on the financial performance of the company. Now let me turn the call back to Rick.

Operator:

[Operator Instructions] Your first question comes from the line of Rich Repetto with Piper Sandler. Your line is open.

Richard McVey:

It certainly is Rich - if you look at our high grade and high yield bid-ask indices, they are near - they are approximately double where we were a year ago and already at about 80% to 85% of where they were in March of 2020. So liquidity conditions are incredibly challenging. And as a result, clients are leaning on the all-to-all trading model that we have developed in high yield for diversified sources of liquidity and price improvement. So I'd say it's obviously a completely different model that we run in all-to-all trading. And the consistency of delivering price improvement is what's driving high yield clients and dealers to execute more of their volume with us on the platform.

Richard McVey:

Chris, do you want to take the first cut at that?

Richard Repetto:

Got it. I'll take that lawyer comment as a positive. I'm usually suspect of any lawyers of those of lawyer degrees, Chris.

Operator:

Your next question is from the line of Chris Allen. Your line is open.

Chris Gerosa:

Hey, Chris, so I'll get into the technical discussion of the sequential decline - or I should say we're stable, relatively speaking for total credit. And then the charts that we provide in the deck, I mean, we provide the view of what the years to maturity and bond yields look like from a 3Q perspective and - on Slide 4 of the deck, there was some pressure on high grade fee capture giving the movement in the years to maturity was down slightly and bond yields were up slightly. But just to remind you that the technical merits of that is every 100 basis point move in bond yields is around a $4 impact on fee capture and every one year to maturity is around $14 to $15. So there were movements and there was slight pressure on high grade fee capture. But relatively speaking, it was stable to the Q2 exit levels. And what we're seeing so far in October is around the same. Of the $16 decline in total credit fee capture, roughly 60% of that was due to the duration impact from high grade and the balance of the 40% was due to product and protocol mix. So high grade was a bigger impact, but there were other variables that were contributing to that as well. And that was a year-over-year comparison, Chris, I know you asked about the sequential, but I just wanted to hit the year-over-year decline.

Chris Concannon:

And Chris, you mentioned EM, so I have to obviously, answer that question as well. Our EM volume in the quarter is up about - 7.7% over Q3 last year. And that's in the face of market volumes being down. But as you mentioned, local market ADB is up 32% year-over-year. So obviously, super exciting for us to tap into that local market, it obviously has a slight impact on capture, as you notice. But overall, EM our volumes continue to grow. And we're super excited about that local market piece because it's up so large, year-over-year.

Richard McVey:

Yes, the high-grade market volumes are actually holding up reasonably well year-to-date given the extreme volatility in the market and the challenges with liquidity. You actually see the market volume challenges more clearly in the international products, and a huge part of that is just the FX translation back into dollars in our reporting. But there - in EM, in particular, you have a risk-off environment you clearly have had outflows in bond funds. I don't think most investors are used to these kind of price changes in corporate bond mutual funds and ETFs. It's not anything I've ever seen in my career. And in fact, in the last 20 years, if you look at the high-grade index, the worst year we've had was down about 4%, and here we are down 22% year-to-date. So it has driven some outflows as well. So I think all of those factors are at work. We still feel very strongly that debt in the world is going to continue to grow as it has been. And we really feel that the increase in participation in automation over time will increase velocity, but there are a number of factors that are contributing to some challenges in the very near term on market volume growth.

Gautam Sawant:

Hi, good morning. One of the key differentiators of the MarketAxess platform is value-added data. Can you speak to recent enhancements to your data and analytics capabilities? And if there's been any pricing changes to your offering?

Gautam Sawant:

Got it. And just as a follow-up, as you consider the narrowed expense range, excluding some of the FX benefits, where are expenses coming in below your initial estimates? And could you expect to see any of those expense benefits carry into next year?

Operator:

Your next question is from the line of Alex Blostein with Goldman Sachs. Your line is open.

Chris Gerosa:

Yes. So we called it out. It's around our cloud investing, licensing for our platforms that support our U.S. Treasury business. IT security is a big investment area for us. And as we think about the 2023 expense guidance, we're in the early days of our budget planning, but the preliminary outlook is that we're going to see around 10% year-over-year growth in operating expenses. And that's assuming, of course, that we're looking at an exchange rate around today's levels. So that's subject to change depending on where the foreign currency markets take us.

Unidentified Analyst:

Great. That's helpful. Maybe shifting gears a little bit. Can you help us understand how much of the high-yield revenue might be coming from ETF market makers, specifically in the quarter, and maybe how that's changed versus 2021? Thanks.

Richard McVey:

And I just would remind you -- and you see in high yield that over half the volume is going through open trading. There are three main sources of that liquidity, and they are all growing. One is what we call the alternative market-making community, and a lot of those are ETF market-making participants. The second is just allowing more dealers to compete for order flow efficiently. And those are dealers anywhere in the world that have market-making businesses that may not have counterparty relationships with clients that are utilizing our platform, but they can compete for order flow here. The third, and I think the most interesting long term is that in environments like this, when liquidity is challenging, we're seeing more opportunistic investors leading with price and being the price and liquidity provider. And all three of those different segments are contributing to the diversification of liquidity that we see. And the best example of that, as you point out, is in our high-yield marketplace. .

Daniel Fannon:

Thanks. Appreciate the time. Just wanted to follow up again on high yield. Just thinking about sustainability of some of the share gains and what you were just talking about with some of the momentum. But looking at the comparison to the beginning of the pandemic with high grade and the benefits of your platform seas and that it normalizes as spreads come back to a more normal territory. Would you anticipate some normalization in your market share, if and when kind of activity in the high yield kind of slows down and spreads tighten a bit?

Daniel Fannon:

Okay. I appreciate that. And then just a follow-up on capital return, it looks like buybacks were kind of halted this quarter after three quarters of relatively stable levels. Just curious on your outlook for share repurchases here.

Operator:

Your next question is from the line of Michael Cyprys with Morgan Stanley. Your line is open.

Chris Concannon:

Sure. I'm happy to answer that. So obviously, as we mentioned, automation continues to grow across the platform. If you take a step back and look at the macro challenges of our clients, particularly in '22 with falling AUM, which obviously cuts their revenue, there's a need to outsource trading solutions. And so there -- we're feeling that demand from our clients to help them solve automation solutions that they need for their trading, and we're seeing that obviously in the growth with -- seeing record automation at $52 billion in the quarter, up 36% over the year. So the demand continues. The areas where we're seeing heightened interest, it's really two areas. It's the basic workflow, small execution sizes continue to grow and then also the no-touch region, which is really an API solution where there is no trader involved, the orders come in directly and they're processed. I would say Auto-Responder -- and I mentioned this in my remarks, Auto-Responder where clients are able to capture spread through an automated solution and be working in order in the market. That's where we're seeing heightened demand, particularly given the spread levels in this current market. They're all very comfortable with our data feed. It's controlled by CP+. And obviously, the adoption rates even in this volatile market has been high. The other exciting area of growth for us is in the muni space. In the quarter, we executed our first Auto-X in municipal bonds, and we see heightened demand in that area. Again, very small ticket sizes in munis, and a lot of workflow associated with the muni market. So we're super excited about what we can do not only in high-grade, high-yield Eurobonds and EM, but also in the muni space.

Chris Gerosa:

Yes. So the -- I'll just repeat the investment priorities, invest in the platform, potentially some opportunistic M&A and return capital to the shareholders. And of that $350 million, when we think about cash, we also think about the investment line item. So round numbers, it's $350 million. And roughly $250 million is supporting our Open Trading business and $100 million is balanced for our working capital investment needs. But that $350 million today is earning around 3%, which is representative of Fed funds. So as we are working through our capital management strategy for 2023 in connection with our budget, we're recognizing the opportunities we have on the investment yield front and balancing that with how we're going to return capital to our shareholders through dividend and repurchase programs.

Chris Gerosa:

Yes, as of 9/30.

Simon Clinch:

Hi. I appreciate you pick my question here. I was wondering if you could circle back to the high-grade market. And just help me understand sort of the market share trends. I mean this is the one area where, obviously, the market share trends haven't been as robust as other segments for you. And just wondering how to think about why that should be the case, given the volatility we've seen of late? What's it going to take for that to really accelerate?

Simon Clinch:

Okay. Thanks for that. And just as a follow-up on the portfolio trading side. I know you said that the share of portfolio trading is sort of flatlined at about 5% to 6%. But actually, if you look at the numbers, it's still creeping higher. And I was kind of expecting portfolio trading to maybe retract a bit from share of volumes in a higher volatility environment given that it just becomes much harder and much riskier price for participants there. So should we just expect that figure to keep creeping high regardless of the volatility environment?

Operator:

Your next question is from the line of Rich Repetto with Piper Sandler. Your line is open.

Chris Concannon:

So the way - obviously, they're trading today, they have favorable margin treatment as they're clearing outside of the central clearing house. Two things I would think would happen as you organize more volume in the central clearinghouse. Obviously, margin offsets to get created as you're netting down more of the activity that's cleared away. But also the fees that are charged, if you grow that clearing volume dramatically, and there's a sizable portion that clears outside the central clearing house. I would expect fees to be reflective of the overall volume coming into the central clearing. But it's not clear that the margin impact will be dramatic for all of the proprietary traders. There's -- one of the key elements, as I mentioned, is that we've seen a number of clearing firms, firms that clear on behalf of others step out of the market over the years because of the challenges around capital treatment for that clearing of treasury business. They're really trying to create a benefit for those clearing firms. So we'd see more clearing firms step in to clear on behalf of others, clear on behalf of those proprietary trading firms that you mentioned. So there are solutions. And the SEC is well aware of some of the capital impacts for bringing that volume back into central clearing. Again, there's a lot more detail that has to be worked out, both at the - on the proposed rules as well as when we see the clearing agencies actually draft their rules that comply with the SEC's rules. So it's a complicated step-by-step process, and there's, a number of opportunities to create favorable capital treatment for the proprietary trading firms.

Richard McVey:

So positive on the market environment, the market opportunity and our transparency and I haven't had anyone challenged our view that we're the most transparent e-trading platform in the space in terms of the granularity of detail that we provide to analysts and investors. And we think we've added some important information with the monthly disclosures, and we're happy to point you to the duration factors that you need to see shifts in duration that are impacting fee capture in that product. But I - we continue to have a view that fixed income is going to follow other asset classes. I think the demand for automation with investors Rich, are noticeably higher today than they were a year ago because of the drop in asset values across asset classes. And so, our expectation is that our investment in automation and the clients' need, for it will continue to drive the share levels across all fixed income product areas in electronic trading higher in the years ahead. And I think when it's - when we look back five to 10 years from now, we're going to see, it's landed in a similar place to other asset classes with 70% to 80% of the volume taking place electronically.

Operator:

Your next question comes from the line of Kyle Voigt with KBW. Your line is open.

Richard McVey:

Yes, I'd happy to comment. And - of course, I think the environment has been favorable for us given the all-to-all trading benefits that we drive to Eurobonds and also EM for CEMEA market participants in a very challenging market environment. So I think that is the core competitive advantage that we have that you see coming through in our Eurobond and EM market share. Unfortunately, Kyle, it's hard to get at the number of what the true electronic share is in Europe today because I believe I'm correct in saying that both of our competitors include pure processing volume in their e-trading numbers. And so, when dealers get their reports, they're seeing the processing volume mixed in, and that's the way we see the public reports coming out. And we've decided to stay true to providing only our fully electronic volume in Europe and elsewhere around the world. But when we look at it, we think that the electronic share in Eurobonds is probably around 45% of the total market. So there's plenty of room yet to grow. And I think when you look closely at the trends, and you include just the fully electronic volume, you'll see that we're not only gaining share on an absolute basis, we're gaining share from competitors.

Kyle Voigt:

Thanks and if I could just squeeze in one more question. Now the call is running a little bit long here. But just in terms of the Mid-X protocol, I think it launched at the end of last year in the U.S. And there was some enthusiasm, I think, around what that uptake would be throughout this year given the kind of pure all-to-all nature of that protocol. I guess are you still seeing good levels or high levels of client interest around utilizing that in the U.S., and maybe just kind of an update on the uptake there.

Operator:

[Operator Instructions] There are no further questions at this time. I will turn the call back over to Mr. Rick McVey.

Operator:

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.

Operator:

Welcome to the Q2, 2022 MarketAxess Holdings Incorporated Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to your host, Mr. Stephen Davidson. You may begin.

Richard McVey:

Good morning. And thank you for joining us to review our second quarter results. We continue to execute our growth strategy in the second quarter and delivered strong results across our key operating metrics. Importantly, we have increased our leadership position in the global credit institutional e-trading space versus our primary competitors with strong market share momentum in corporate bonds and emerging markets. We are now moving back into a much more favorable trading environment and the investments we have made to expand our foundation for growth are paying off. We achieved record levels of estimated market share across both credit and rates, driving a new quarterly record for global credit trading volume. Specifically, we delivered record quarterly market share in U.S. credit, high yield emerging markets, Euro bonds and U.S. Treasuries. We established a new record for global active clients and traders. The benefits of open trading, our differentiated liquidity pool are coming through with the highest level of transaction cost savings for clients since the pandemic environment in 2020. Beyond our core business and protocols, we are making excellent strides in new product areas. We achieved another record quarter with $23 billion in total portfolio trading volume. Municipal bond trading ADV was a record $371 million with a solid mix of tax exempt and taxable Muni activity and a record 342 active client firms. And U.S. Treasuries achieved record market share this quarter with 160 active clients trading. We also made several key announcements this quarter designed to enhance our data and ETF trading capabilities with the launch of an ETF on our market access investment grade 400 index. Our strategic collaboration with MSCI and our minority investment in virtue financials RFQ-hub for ETF share and equity derivative trading. In summary, strong growth in trading volume, broad based market share gains and increasing momentum in new product areas, including U.S. Treasuries and municipal bonds are driving significantly improved operating performance. Slide 4 provides an update on market conditions. Just eight months ago, we predicted that an end to accommodative central bank policy and quantitative easing would drive a return to wider credit spreads and higher credit spread volatility. That is exactly what is happening today. And we are now in a much more favorable operating environment. The median bid/ask spread in high-grade has moved from two basis points to four basis points in a very short period of time. And this has been accompanied by unusually large price movements in the market, with high-grade and high yield bond indices down approximately 15% year-to-date. When liquidity is at a premium as it is today, more diverse sources of liquidity matter and the price improvement opportunity over open trading becomes a key differentiator in the market. We believe that this is a key contributor to our broad based market share gains across high grade, high yield, emerging markets, dollar corporates and Euro bonds, as reflected in our record composite corporate bond estimated market share of 20.2% which is up from a pre-pandemic share of 15.6% in Q1, 2020. One thing we did not anticipate was the rapid change in the slope of the yield curve, which has inverted in just nine months. Central bank tightening has led to a substantial increase in short maturity yields and a reduction in average maturity is traded, which has created a short term headwind for high-grade institutional fee capture. Over the last 30 years, the yield curve has only been inverted about 5% of the time. As a result, we expect the yield curve to return to normal when the Fed is comfortable, the inflation numbers are trending lower. Slide 5 illustrates our expanding global client network. The depth and diversity of the liquidity on our global platform is clearly shown by the addition of new active clients and traders globally. We set new records with 1,935 total active client firms, with record international active clients increasing to 982 on the platform, driven primarily by strong growth in Asia. Active investor and dealer traders also increased to new records with over 11,000 active traders on the platform, including a record 5,300 total active international traders. Our large and growing institutional client network is our biggest asset and provides the foundation for long term growth as we add more products and trading protocols to our global trading platform. Slide 6 illustrates how the improved macro backdrop and our diverse liquidity is delivering significant cost savings for our clients. Wider spreads have created an environment where the benefits of open trading are coming through in the form of a significant increase in transaction cost savings for our clients. Liquidity conditions and fixed income trading has become challenging once again, reminding all market participants of the importance of all-to-all trading liquidity. The increased activity over our platform is clearly shown in the record levels of total credit and open trading executed trades. In the quarter, we delivered $238 million in estimated cost savings via open trading, which equates to an annual run rate savings of approximately $1 billion well in excess of the total annual commission revenue we currently generate. The combination of transaction cost savings and significant improvements in trading and post trade efficiency creates a strong value proposition for our clients. We believe our substantial first mover advantage in all-to-all trading will continue to differentiate market access from our competitors for many years to come. Slide 7 illustrates the strong year-over-year increases in estimated market share. The share gains that we achieved in the second quarter exceed the long term average gains for the company. We believe this is the most compelling quarter we have ever had for meaningful and comprehensive market share gains across all products and regions and 92% of our volume is conducted with institutional investor clients. According to the major global banks we recently surveyed, the market access lead in institutional client electronic credit trading has widened in all three geographic regions. To give you some historical perspective, although one of our primary products were in the top quartile for year-over-year quarterly growth in estimated market share over the past 10 years and high-grade was in the second quartile. In the long term, market share gains are the strongest contributor to shareholder value in our DCF model. Slide 8 illustrates the tremendous growth opportunity that is driving our approach to investing. The strong market share gains we delivered this quarter only served to reinforce the sizable opportunity that we have before us in terms of top line growth potential. All else equal, one percentage point increase in market share across all our products generates approximately $50 million in incremental revenue annually. And the total revenue opportunity in front of us is substantial with an estimated $9 billion revenue opportunity in the fixed income e-trading sector by 2031 assuming historical market growth rates. If you add some expectation for higher trading velocity in the years ahead, as well as a growing data opportunity, the revenue opportunity is even larger. Importantly, with our financial model, we can capture this opportunity at very attractive returns with our current return on equity of approximately 25% in our current EBITDA margins north of 50%. Now let me turn the call over to Chris to provide more detail on the significant progress we are making with our investments in new initiatives.

Chris Gerosa:

Thank you, Chris. On slide 16 we provided a summary of our quarterly financials. Second quarter revenue was $182 million up 3% from the prior year including the impact of lower U.S. hybrid fee capture and foreign currency fluctuations. Strong growth in trading volume and market share gains across credit and rates was partially offset by a 10% decrease in total credit fee capture and lower information services and post trade revenue. Information services revenue in the quarter were negatively impacted $600,000 from a strengthen U.S. dollar from a year ago, as well as lower data sales due to timing. Considering the new data contract pipeline in the second half of the year, we expect our full year 2022 information services revenue growth rate to hit our historical levels around 10% on a constant currency basis. Second quarter post trade revenue included the negative impact of approximately $1.1 million on the strengthening U.S. dollar compared to the prior year quarter. Adjusting for currency fluctuations, combined information services and post trade revenue would have increased approximately 3% from the second quarter 2021. EBITDA was 105 million and our EBITDA margin was 58%. The increase in other income was due to 5.5 million in foreign currency transaction gains which benefitted EPS by $0.11 per share in the quarter and a small gain from our investment in RFQ-hub. Excluding the impact of foreign currency, we expect other income in the remaining quarters of 2022 to net out to zero due to estimated gains from our RFQ-hub and improved investment yields on our cash balances. The effective tax rate was 25.3% in the quarter compared to 21.8% in the prior year. Due to lower than expected excess tax benefits related to share based compensation we now expect the full year effective tax rate to be at the upper end of previously stated guidance range of 24% to 26%. On slide 17, we provided more detail on our commission revenue and our fees per million. Total commission revenue increased 5%. Our growth in other credit and rates commission revenue was driven by healthy increases in our trading volume and estimated market share, but was partially offset by lower average fee capture across high-grade and other credit. The lower high grade fee capture was driven by a combination of higher bond yields and lower years to maturity, which accounted for approximately 85% of the $31 year-over-year decline. The decrease in other credit fee capture was driven principally by product mix shift as a result of the increase in EM local markets trading volume, which has a lower average fee capture as these are rates focus markets. Higher distribution fees across hybrid and other credit helped offset the impact of lower average fee capture across credit. On slide 18, we provided you with our expense detail. Second quarter expenses increased 9% driven principally by investments to enhance the trading system and our data product offering. Specifically employee compensation and benefits increased 5 million on increase in headcount. Depreciation and amortization expense increased $2 million due to higher software development and acquired intangible amortization expense. Technology and communication expense increased $2 million on higher software subscriptions, market data and technology licensing fees. On slide 19, we provided an update on cash flow and capital management. As of June 30, our cash and investments were $325 million, and our trailing 12 month free cash flow was $274 million. During the second quarter, we paid out $26 million in quarterly dividends to our shareholders and repurchased approximately 179,000 shares for a total cost of $49 million. We have $100 million of capacity remaining on the existing repurchase program. Our board of directors declared a regular quarterly cash dividend of $0.70 based on the financial performance of the company. Now let me turn the call back to Rick.

Operator:

Thank you. We will now begin our question and answer session. [Operator Instructions] And we have our first question from Richard Repetto with Piper Sandler.

Richard McVey:

Well, I think the question is about return to normal curve and what that is likely to do for fee capture. There are two primary factors that go in. this is the nature of institutional client trading in high-grade corporate bonds only. There has been very little movement in our fee capture for other credit because those are price based products. But within high-grade corporate bond, institutional client trading, clients trade on a yield spread to treasuries and our transaction fee is also based on a yield spread which is why duration matters in determining that outcome for high-grade fee capture. So there are two key things that go into that. One is the overall level of yields and the other is the average maturity of bonds traded on the platform. Both of those worked against us in the year-over-year period, because of course, yields are much higher year-over-year, which drives down duration and the curve has inverted. So you had very unattractive yields in the short end of the curve one year ago, you have now have the most attractive yields at the short end of the curve because the yield curve inversion. So both of those have worked against us. So yes, if we get back to the normal shape of the yield curve, which we would expect to over the periods ahead, you should see that the average maturity is also returned to normal, which all else equal will help fee capture. The other question that is what our overall yield levels in that mix to drive the total fee capture. But as you've seen from long periods of time, we're at the lower end of what we've experienced historically in high-grade fee capture and that came off of a period when the curve was relatively steep, and we'd been at the higher end. So we think over time is all neutralizes and averages out. But unfortunately, in this particular period, we've had both drivers of fee capture pointing lower, even though we've had absolutely no changes in our fee model for high grade trading.

Richard Repetto:

Understood. Thanks for answering my question. One follow-up, is it looks like your headcount decline quarter-over-quarter, and just trying to understand that and sort of the picture of the guidance for the OpEx going forward and continued investment. So the client headcount was sort of surprising. I guess any more color on that?

Richard Repetto:

Got it. Understood. It's very helpful. And I know Chris Concannon wants to build out his team further.

Richard Repetto:

Got it. Thank you.

Gautam Sawant:

Good morning, and thank you for taking my question. I wanted to know what technology and protocols the MarketAxess platform has that could increase primary market, corporate bond market share and that marketplace, we're seeing technology becoming increasingly embedded in the new issue processes. And I want to just have you expand on if there's an opportunity for MarketAxess to compete in that primary market the same way you've been able to grow in the secondary market?

Gautam Sawant:

Got it. Thank you. And just as a follow-up question, can you share insights of the type of activity that you're seeing within the fixed income ETF market and how quantitative tightening is impacting the processes that market participants are taking? And does the growth of that fixed income ETF market, how will that affect the velocity of corporate bond trading and I guess the changes of investors holding to maturity versus like trading more?

Chris Concannon:

And Rick, I would just add, as we see rates rise, and fixed income assets become more attractive, particularly for retail investors we would expect fund flows to be quite positive towards fixed income ETFs and rather than managed funds over time. Obviously ETFs provide a more efficient investment strategy given some of the expense ratios. So we would expect ETF flows in the fixed income arena to increase with the more attractive fixed income rate yields that we'll be seeing in the future.

Gautam Sawant:

Got it. That's very helpful. Thank you for taking my questions.

Unidentified Analyst:

Hey, guys, it's Michael on for Alex. So last couple of quarters, we kind of seen on the high yield side, the dealer shifting to distribution payment plans. I was wondering if you could help us kind of understand the potential net revenue impact of those moves and what's been the driver and how much more might still be in the pipeline? Thanks.

Unidentified Analyst:

Great, thank you.

Daniel Fannon:

Thanks, I wanted to talk about the market backdrop a bit more. Obviously, spreads have widened. You've continued to talk about automation. But I guess are you surprised that the overall trace volumes aren't higher, given the backdrop of what some of those factors have created? Or are presenting?

Chris Concannon:

And, Dan, I would just add, we're hearing from our clients about some of the liquidity challenges. And those liquidity challenges aren't just in treasuries, we're also seeing liquidity challenges in credit. So many times, given challenges around liquidity, it could impact overall volumes. But that's why our OT or open trading alternative liquidity solution did actually see some positive yield in the second quarter and gains across many of the different products in terms of overall volumes, but also penetration within those products.

Chris Concannon:

Sure. I'm happy to tackle both. So for info services obviously, we have a very strong pipeline and we saw a number of contracts slipped from Q2 into Q3. So it's really just a timing issue. And also, Q1 last year saw some one time revenue items as well that we didn't see this quarter. We feel very strong about info services and the product offerings that we have. We continue to see progress in our CP+ product, as well as our newly announced Axess All Prints which is part of the Axess All suite of products. We're confident about achieving those double digit annual growth rates. And that is an annual growth rate number that was referenced earlier. With regard to post trade we were obviously impacted by some of the year-over-year currency changes. But the post trade business also saw some expected attrition, as you mentioned, clients from the recent acquisition of Reg Reporting hub, as we migrated that platform. We had some targeted attrition. We were really pushing to transfer clients that were highly profitable. So we saw some expected attrition of clients on that business. That business also has a very strong pipeline of clients, obviously, much more subscription based business. So I suppose that pipeline builds we start to see revenue really show up in the prior quarters for those products. Some of the new products on post trade that we're excited about, we continue to see progress in our repo match service, seeing year-over-year gains and a number of key clients joining that matching service and then a new product called [sonar] which is part of our post trade offering for existing clients. It's a wonderful surveillance tool that allows clients to review their own activity. And that's a product that's newly launched and we would expect to see revenue showing up at the end of the year or early next year.

Operator:

Thank you. Our next question is from Kyle Voigt with KBW.

Richard McVey:

I think we're still in the midst of the transformation of the trading and risk transfer model and global credit. So not terribly surprised that we haven't seen the increase in velocity. But as I mentioned earlier, Kyle, I still see lots of reasons to be optimistic longer term.

Kyle Voigt:

Great, thank you. And then maybe just a follow-up regarding revenue capture. Just wondering if you can provide the average years to maturity for high grade in the quarter. And remind us the historical range that you've seen for that high grade bucket?

Kyle Voigt:

Understood, so it sounds like most of the movement, I guess sequentially in the key captured was mostly related to the yield curve shortening duration rather than a mix in the years to maturity.

Kyle Voigt:

Understood. Thank you very much.

Patrick O'Shaughnessy:

Good morning, to follow-up on the last question there. On your prior quarterly earnings call, you guys had indicated that high-grade fee capture had stabilized in April relative to first quarter levels. And then obviously, it was down $12, quarter-over-quarter for the entirety of the second quarter. Does that imply that peak capture in May and June was then probably in the 130s? And if so, is that what we should be thinking as we enter the third quarter?

Patrick O'Shaughnessy:

Got it. That makes sense. Thank you. And then sticking with the topic of fee per million, as you guys keep growing market share in emerging markets, is it your assumption that you will probably grow faster in local currency rather than hard currency? And if so, should we think about EM fee per million coming down over time?

Patrick O'Shaughnessy:

Great, thank you.

Michael Cyprys:

Hey, good morning, and thanks for taking the question. Want to just circle back to portfolio trading. I think you mentioned it was coming in about 6% of industry trace levels overall. Seems to be holding up a bit better perhaps than feared in a tough market backdrop. So just would be curious to hear your thoughts around that. How do you see that volume value proposition evolving in a tougher market backdrop here? And then more broadly, when you look at your portfolio trading offering and others across the industry, just what sort of enhancements can be made to that offering across the industry that market access to drive more usage and uptick and PT broadly?

Richard McVey:

Yes, I would just add, Michael, the path from zero to 5% share of trace was pretty steep. So a year ago there were a lot of expectations out that it was going to continue along that steep path. And as Chris mentioned earlier, it's been pretty flat for four quarters in a row and 5.5% or so of trace. So that's a change from where we were a year ago. And in our conversations with dealers and clients, it's much more difficult to manage the risk in a large portfolio trade today than it was eight or nine months ago. And that's reflected in the pricing that's coming through on portfolio trade. So the level of enthusiasm to promote portfolio trading is down in the dealer community. In my opinion, and it's reflected in pricing, it's not quite as tight as it might have been when we were in the very low volatility environment last fall, but in terms of enhancements there are lots of different client practices around PT and we're knocking out a lot of enhancements that are important to them every month, very focused on the things that they would like to see added. They're also super excited about what we've done to integrate CP+ in our analytics. So it makes them, it makes it easier for them to track pricing as they're working up a portfolio. And we're benefiting from the large credit trading footprint that we've had for many years around the world that trades bid and offer lists with us all day long. So all of those are working in our favor and pleased to say that our goals for this year around portfolio trading growth are very much on track.

Richard McVey:

Yes, Mike, where we are in a curve right now every 100 basis points is $4 to $5 and every one year to maturity is around 15.

Operator:

Thank you. It seems we have a follow-up question from Gautam Sawant with Credit Suisse.

Richard McVey:

The share trends in July are very similar to what we saw broadly in Q2. The second half of July market volumes are almost always higher than the first half because of the trading days around the 4th of July holiday. So we have eight full days of trading that represent a significant part of monthly volume still in front of us. And on your other question, I don't think that there's anything I could say about the first two weeks of trading in terms of any significant differences in client patterns versus the second quarter results that we went through.

Operator:

Thank you. We have no further questions in queue. I will now turn the call over to our presenters for closing remarks.

Operator:

Thank you. Ladies and gentlemen, this concludes our conference. We thank you for participating. You may now disconnect.

Operator:

Ladies and gentlemen, welcome to the MarketAxess First Quarter 2022 Earnings Conference Call. Thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded on April 20, 2022. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Richard McVey:

Good morning, and thank you for joining us to review our first quarter results. In the first quarter, we continued to execute our long-term growth strategy and total revenue of $186 million was our second highest quarter ever. EBITDA for the quarter was $106 million and EBITDA margin was 57%. Trading volumes rebounded strongly as market conditions improved from prior quarters. Total average daily trading volume reached a record $38 billion. We achieved the second highest level of average daily volume in total credit and we delivered record U.S. Treasury, emerging markets and municipal bond average daily volume. Total active clients trading on the platform also reached a new all time record for the quarter. These strong business results are a clear sign that the investments we are making to expand our foundation for growth are paying off. Importantly, as spreads have widened, the benefits of our unique all-to-all liquidity came through with total Open Trading estimated transaction cost savings rebounding to over $200 million for the quarter. Average transaction cost savings per trade through Open Trading were up approximately 60% from recent quarters. In our unique Live Markets all-to-all order book, we are continuing to gain traction across both rates and credit with a new quarterly record ADV in U.S. Treasuries of $25 billion, up 38% year-over-year and record volumes and active clients in corporate bond Live Markets. Beyond our core business and protocols, we are making excellent strides in new product areas. We registered a record $14 billion in portfolio trading volume, emerging market, local market trading reached a new record of 22%, municipal bond trading ADV was a record $288 million, which benefited from the integration of MuniBrokers and we launched our MarketAxess 400 Index to create a highly tradeable corporate bond index as well as Axess All Prints, a real-time European fixed income trade tape. We believe our growing global product footprint, record numbers of institutional clients and improving market conditions create a strong foundation for long-term growth. Slide 4 provides an update on market conditions. Credit spread and interest rate volatility have both increased over recent months driving record trading activity on the platform. The first quarter saw high levels of investment grade corporate bond issuance, which is likely to slow for the balance of the year. While we are only three weeks into the new quarter, estimated high-grade, high-yield and emerging market share are all tracking well above Q1 levels. Combined U.S. high-grade and high-yield estimated market share is currently above 20%, up from 19.1% in Q1. When combined with share trends in Eurobonds, munis and U.S. Treasuries, the breadth of our market share gains has never been better. Central Bank monetary policy has shifted dramatically with higher rates and the likely reduction of balance sheets to reduce inflationary pressures. We believe that higher bond yields and less Central Bank quantitative easing will support higher market volatility in the periods ahead. Higher bond market volatility is already driving increased demand for Open Trading liquidity in U.S. Treasuries and credit versus prior quarters. This is coming through in market share trends, active client firms and overall trading volumes. Slide 5 illustrates our expanding global client network. The increasing network effect on our platform is clearly illustrated by the addition of new clients globally. During the first quarter, we set new records with 1,913 active client firms globally with over 1,000 firms integrated from their order management systems. Our increased investment internationally is paying off with a new record 975 firms trading actively outside of the U.S. with notable traction in Asia. For the first quarter, a record 32% of our global credit trading volume came from clients outside the U.S. Additionally, the number of active institutional investor and dealer traders set a new record at approximately 11,200 traders. 92% of our trading volume continues to be with institutional investor clients and the remaining 8% represents dealer-to-dealer trading volume. In Europe, we now have nearly 1,000 client firms utilizing our post-trade regulatory reporting services up from 440 firms at the end of 2020. Slide 6 illustrates the tremendous growth opportunity that is driving our approach to investing. We have included this slide again this quarter because it reflects the enormous opportunity we have in front of us and the expanded foundation we have established to diversify our business. Our broader product footprint and growing menu of protocols create multiple options for growth. We are in very early stages of electronification in most of these markets and we estimate they conservatively represent a $9 billion revenue opportunity for our sector. We believe it is also likely that all-to-all trading and trading automation will lead to higher levels of overall bond trading velocity. We are excited about the many ways we are pursuing a larger data opportunity, the launch of our MarketAxess 400 Index and our real-time European fixed income trade tape are both examples of this investment. Finally, we continue to expand our post-trade business with additional clients and post-trade services. Now let me turn the call over to Chris to provide more detail on the significant progress we are making with our investments in new initiatives.

Christopher Gerosa:

Thank you, Chris. On Slide 13, we provide a summary of our quarterly financials. First quarter revenue of $186 million was down 5%, but represented the second highest level of quarterly revenue. The 6% decline in commission revenue was mainly due to lower U.S. high grade fee capture, but was partially offset by higher distribution fees and record U.S. treasury and municipal bond commission revenue. The combination of higher distribution fees and record information and post-trade services revenue increased our recurring revenue in a quarter to a record $51 million. Total expenses increased 7%, driven principally by acquired intangible amortization expense and investments to enhance the trading system and our data product offering. As we continue to invest, we delivered our third highest level of EBITDA of $106 million and in EBITDA margin of 57%. The increase in other net was due to two special items. First, a $1.6 million gain related to the remeasurement of the contingent liability associated with one of our recent acquisitions and a $1.3 million foreign currency transaction gain, which when combined provided for net $0.06 per diluted share benefit in the quarter. For modeling purposes, we expect other net to be a drag of roughly $800,000 per quarter, absent special items like those that flow through this quarter. The effective tax rate was 28.4% in the first quarter compared to 21% in the prior year. The higher effective tax rate in the quarter was due to lower excess tax benefits and the impact of a non-recurring $3.2 million tax charge, or $0.08 per diluted share related to a settlement with New York State tax authorities to resolve the 2010 to 2014 audit cycle. Collectively, the net impact of the tax charge and gains recognized in other net provide for a $0.02 per share negative impact on earnings. We are reconfirming our full-year 2022 effective tax guidance range of 24% to 26% excluding this tax charge. We expect the remaining quarters of 2022 to be around the midpoint of the guidance range. On Slide 14, we provide more detail on our commission revenue and our fees per million. Total variable transaction revenue is down 9%, driven principally by lower fee capture, partially offset by higher U.S. Treasury, municipal bonds, Eurobonds and EM transaction revenue. The lower high-grade fee capture was driven by a larger percentage of shorter duration high-grade bonds traded on the platform, which represented approximately $22 of the $25 year-over-year decline. We have not changed our high-grade fee plan, and we have seen similar volatility in year-over-year high-grade fee capture in the past, such as the third quarter of 2020 when longer duration drove high-grade fees per million, up $26 to $200 per million for the quarter. Based on our high-grade fee model and all else being equal, we expect less variability in our fee capture even if rates continue to rise from these current levels. As we enter the second quarter, we are seeing U.S. high-grade fee capture stabilize around the first quarter 2022 levels. Other credit commissions decreased 4% mainly driven by decline in average fees per million, which decreased 7%. The decrease in other credit fee capture was driven by two dealers migrating through a high-yield distribution fee plan and a mix shift in product trading volume. The increase in EM local markets trading volume had the effect of reducing fee capture as EM local market bonds command lower average fees per million given these are rates focused markets. On Slide 15, we provide you with our expense detail. First quarter expenses increased $6 million or 7%, driven by higher acquired intangible amortization expense and investments to enhance the trading system and our data product offering. If we exclude the impact of acquired intangible amortization expense, expenses would have increased 5%. Compensation and benefits are more or less flat to prior year as we reported higher levels of variable compensation expense during the first quarter of 2021. Depreciation and amortization expense increased $3.4 million due to higher software development and acquired intangible amortization expense. Our technology and communications expense increased $2.2 million on higher software subscription, market data and technology licensing fees. On Slide 16, we provide an update on cash flow and capital management. As of March 31, our cash and investments were $400 million and our trailing 12-month free cash flow was $278 million. During the first quarter, we paid out $26 million in quarterly dividends to our shareholders, repurchased approximately 102,000 shares for a total cost of $39 million and paid out year-end bonuses and related taxes of approximately $45 million. We believe the current stock price level provides an opportunity to utilize excess cash to repurchase shares at a discount for their long-term value, and based on our financial results, our Board of Directors declared a quarterly cash dividend of $0.70 per share. Now let me turn the call back to Rick.

Operator:

Thank you. [Operator Instructions] Your first question is from Rich Repetto with Piper Sandler. Your line is open.

Richard McVey:

Sure. And I certainly gave a piece of that Rich in the prepared remarks, looking at combined high-grade and high-yield estimated share for April month to date at over 20% compared to the first quarter average of 19.1%. But in addition to that, the reason that we're excited is when we look across our new and expanded product suite, we're seeing those share gains come through also in emerging markets, Eurobonds, treasuries, and municipal bonds. So the momentum that we're seeing in share, combined with the market condition improvement, is what gets us more excited about growth in the periods ahead.

Richard McVey:

They're both part of the corporate bond market in the U.S. So given that we're just three weeks into the new quarter, we thought we would just give you a combined market share. And obviously in a week-and-a-half, we'll have all the details out on both high-grade and high-yield. But high-grade is clearly the more important piece given the size of that market relative to high-yield. So I think you can interpret that – the share trends are positive in both.

Christopher Gerosa:

Yes. Each market – this is Chris Gerosa. Each market has a different rate. And as I mentioned in the prepared remarks, the EM local markets are more of a rate focused product offerings. So you'll see those fee capture rates trend below $100 per million, which is one of the reasons why you set a duration in the fee capture quarter-to-quarter.

Richard McVey:

We actually published on our website the standard fee plan. So if you wanted to get a flavor of each individual category, I would refer you to the website of MarketAxess.

Richard McVey:

I think the important takeaway from Q1, Rich, is the point that Chris made earlier that we have made no changes to our fee plans. So in high-grade, you had the combined change of higher rates overall and a flatter yield curve. And that not surprisingly causes reduced duration when duration goes down, high-grade fee capture goes down because institutional investors trade on corporate bond spreads to treasuries and our fee model is on yield, not price. So that is the sole reason that the fee capture dropped in Q1, probably larger than prior some other prior periods because of the extent of the rate increase and the very rapid flattening of the yield curve. But as Chris mentioned earlier, as we look forward, we don't see the same level of volatility in high-grade fee capture and none of this has come from any changes whatsoever in our fee models.

Richard McVey:

The sensitivity on duration is highest when rates are the lowest, which of course they were through the second half of last year. So we've already gone through the most sensitive change in duration with the current interest rate increase that's gone through. And as you know, the curve has completely flattened. So those two things have already occurred, which would suggest to us that we're not likely to see the same level of duration change in the periods ahead.

Operator:

Thank you. And your next question comes from Brian Bedell with Deutsche Bank. Your line is open.