Tradeweb Markets Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 15 speakers on the call.

Operator

Good morning, and welcome to Tradeweb's Second Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback. To begin, I'll turn the call over to Head of Treasury, FP and A and Investor Relations, Ashley Sarrau. Please go ahead.

Speaker 1

Thank you, and good morning. Joining me today for the call are our CEO, Billy Holt, who will review our business results and key growth initiatives and our CFO, Sarah Ferber, who will review our financial results. We intend to use the website as a means of disclosing material non public information and complying with our disclosure obligations under Regulation FD. I'd like to remind you that certain statements in this presentation and during the Q and A may relate to future events and expectations and as such constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements related to, among other things, our guidance and the ICD acquisition are forward looking statements.

Speaker 1

Actual results may differ materially from these forward looking statements. Information concerning factors that could cause actual results to differ from forward looking statements is contained in our earnings release, earnings presentation and periodic reports filed with the SEC. In addition, on today's call, will reference certain non GAAP measures as well as certain market and industry data. Information regarding these non GAAP measures, including reconciliations to GAAP measures, is in our earnings release and earnings presentation. Information regarding market and industry data, including sources, is in our earnings presentation.

Speaker 1

Now let me turn the call over to Billy.

Speaker 2

Thanks, Ashley. Good morning, everyone, and thank you for joining our Q2 earnings call. This was another outstanding quarter. As Central Bank stepped back, private sector intermediation continues to be in vogue. From evolving inflation prints to snap elections across Europe and the UK, the macro debate continues to flourish globally and our one stop solution is resonating with our clients.

Speaker 2

At our core, we are a technology company that caters to the financial service industry. We have a simple job. How can we continue to save our clients time and money and provide them with more efficient means of trading in the financial markets? Change is constant and we are focused on being on the forefront of that change, be it technological, market structure or behavioral. As the markets and our clients evolve, we continue to position Tradeweb for the future.

Speaker 2

After closing our acquisitions of Yieldbroker and Ratefin, we are pleased to have announced the signing of an agreement to acquire ICD in April. We are on track to close ICD shortly, which will add corporates as our 4th client channel. Diving into the Q2, we achieved our best second quarter in our history, Specifically, strong client activity, share gains and risk on environment drove 30.4% year over year revenue growth on a reported basis. We continue to balance investing for growth and profitability as adjusted EBITDA margins expanded by 98 basis points relative to the Q2 of 2023. Turning to Slide 5, rates and credit led the way accounting for 61% 29% of our revenue growth respectively.

Speaker 2

Specifically, the rates business was driven by continued organic growth across global government bonds, swaps and mortgages and was also supplemented by the addition of Ratefin and Yieldbroker. Credit was led by strong U. S. And European corporate credit with record quarterly market share in electronic U. S.

Speaker 2

Investment grade and aided by strong growth across municipal bonds, China bonds and credit derivatives. Money markets was led by continued growth in institutional repos, equities posted low single digit revenue growth despite challenging industry volumes in our core ETF business. Finally, market data revenues were driven by growth in our LSEG market data contract and proprietary data products. Turning to Slide 6, I will provide a brief update on 2 of our focus areas, U. S.

Speaker 2

Treasuries and ETFs, and then I will dig deeper into U. S. Credit and global interest rate swaps. Starting with U. S.

Speaker 2

Treasuries, record second quarter revenues increased by 28 percent year over year, led by records across all our client channels. Our institutional business saw record adoption of our streaming protocol and growing usage of our RFQ plus offering. The leading indicators of the institutional business remain strong. We gained share and achieved record quarterly market share of U. S.

Speaker 2

Treasuries versus Bloomberg crossing the 50% threshold for the first time, which we have maintained. Client engagement was healthy with institutional average daily trades up 45% year over year. Automation continues to be an important theme with institutional U. S. Treasury AIX average daily trades increasing by nearly 100% year over year.

Speaker 2

Our wholesale business produced record volumes led by our streaming offering. Our other protocols also saw strong growth, particularly our club, which has begun to trend higher. Our recent acquisition of Ratefin is off to a strong start, contributing approximately 2.3% to our overall U. S. Treasury market share complementing our clob and streaming protocols.

Speaker 2

The team remains focused on onboarding more club liquidity providers over the coming quarters as they deliver on a holistic strategy across our wholesale protocols. Within equities, our ETF revenues grew mid single digits, but faced a tougher industry backdrop given lower equity market volatility. Other initiatives to expand our equity brand beyond our flagship ETF franchise continue to bear fruit with 2nd quarter convertible bond revenues increasing by 10% year over year. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well positioned to capitalize on the long term secular ETF growth story, not just in equities, but across our fixed income business.

Speaker 2

Turning to Slide 7 for a closer look at another strong quarter for credit. Strong double digit revenue growth was driven by 33% and 29% year over year revenue growth across U. S. And European credit respectively. We also achieved strong double digit growth across munis, China bonds and credit derivatives.

Speaker 2

Automation continued to surge with Global Credit AIX average daily trades increasing by about 45% year over year. We set another fully electronic quarterly market share record in U. S. IG helped to buy a record IG block market share of 9%. We also achieved our 2nd highest fully electronic market share in U.

Speaker 2

S. High yield. Our institutional business continues to scale as clients adopt our diverse set of protocols to improve liquidity, price transparency and efficiency. Our primary focus on growing institutional RFQ continues to pay off with average daily volume growing 30% year over year with strong double digit growth across both IG and high yield. Moreover, portfolio trading average daily volume rose 100% year over year with IG portfolio trading reaching record levels.

Speaker 2

We continue to focus on leading with innovation and this is resonating with our clients. We saw portfolio trading users grow by over 20% year over year, a record number of line items traded in the quarter and our largest ever portfolio trade in excess of 3,000,000,000 dollars Retail credit revenues were up over 20% year over year as financial advisors continue to allocate investments towards credit to complement their buying of U. S. Treasuries and retail certificate of deposits. All trade produced a solid quarter with nearly $190,000,000,000 in volume, up over 45% year over year.

Speaker 2

Specifically, our all to all volumes grew over 20% year over year and our dealer RFQ offering grew over 10% year over year. The team continues to be focused on broadening out our network and increasing the number of responders on the Alltrade platform. In the Q2, the average number of responses for All to All Inquiry rose by 35% year over year. We also continue to increase our engagement and wallet share with ETF market makers. Finally, our sessions average daily volume grew over 60% year over year and produced the 2nd highest quarterly average daily volume ever.

Speaker 2

Looking ahead, U. S. Credit remains our biggest focus area and we like the way we are positioned across our 3 client channels. We believe we have a long runway for growth with ample opportunity to innovate alongside our clients. Our strategy is focused on expanding our network, increasing our wallet share, enhancing our pre and post trade analytics and continuously improving our protocols and client experience.

Speaker 2

In the Q2, we enhanced our RFQ offering with our rollout of RFQ Edge, where we're already seeing over 25% of our RFQ users utilizing RFQ Edge. RFQ Edge takes the traditional RFQ list ticket and incorporates real time trading data, charting functionality and execution cost analysis. We also remain very focused on chipping away at high yield and we believe we are well positioned to replicate the success we've had in IG. Specifically, we're making progress in our Aladdin integration with the goal of improving the client experience and increasing electronification in these markets. We're still on Phase 2, which is focused on all trade and RFQ, but our teams are already out on the road meeting with respective clients and walking them through all the enhancements made to date.

Speaker 2

With our Aladdin integration closing a gap and providing a foundation for growth, we expect high yield growth from here to be driven by the expansion of our client network led by strategic sales hires, functionality enhancements and stronger penetration with ETF market makers. Beyond U. S. Credit, our EM expansion efforts continue with growing adoption of our portfolio trading and RFQ offerings, an early positive signs across wholesale EM. On the product side, we are focused on leveraging our diverse product expertise, enhancing our integration with FX All and continuing to build out functionality for multi asset package trading.

Speaker 2

Moving to Slide 8, Global swaps produced record revenues driven by a combination of strong client engagement in response to the macro environment and continued market share gains. Strength year was partially offset by a 3% reduction in duration and elevated quarterly compression activity. All in, Global Swaps revenues grew 56% year over year and market share rose to 23.6% with record share across dollar, G11 and EM denominated currencies. Central to our ethos is our focus on helping clients by connecting the dots across fixed income products. Given the heightened market volatility across money markets, our repo clients have been increasingly referencing swap curves when evaluating fixed rate repo trades.

Speaker 2

Yet their process was cumbersome and our clients asked for a better solution. During the quarter, we became the 1st electronic trading platform to make overnight index swap curves available during the repo trade negotiation process, helping institutional clients assess the price competitiveness of different repo rates across different currencies and maturities. Finally, we continue to make progress across emerging market swaps and our rapidly growing RFM protocol. Our 2nd quarter EM swaps revenues more than doubled year over year, and we believe there is still significant room to grow given the low levels of electronification. Our RFM protocol saw average daily volume rise over 115% year over year with adoption picking up.

Speaker 2

Looking ahead, we believe the long term swaps revenue growth potential is meaningful. With the market still about 30% electronified, we believe there remains a lot we can do to help digitize our clients' manual workflows, while the global fixed income markets and broader swaps market grow. And with that, let me turn it over to Sarah to discuss our financials in more detail.

Speaker 3

Thanks, Billy, and good morning. As I go through the numbers, all comparisons will be to the prior year period unless otherwise noted. Slide 9 provides a summary of our quarterly earnings performance. As Billy recapped earlier, this quarter we saw record 2nd quarter revenues of $405,000,000 that were up 30.4% year over year on a reported basis and 30.8% on a constant currency basis. We derived approximately 38% of our 2nd quarter revenues from international clients and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros.

Speaker 3

Our variable revenues increased by 40% and total trading revenues increased by 31%. Total fixed revenues related to our 4 major asset classes were up 4.2% on a reported and 4.5% on a constant currency basis. Fixed revenue growth was primarily driven by previously disclosed dealer fee increases in credit that were instituted at the start of the Q3 of 2023. And other trading revenues were up 9%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients.

Speaker 3

Year to date adjusted EBITDA margin of 53.6 percent increased by 117 basis points on a reported basis when compared to the 2023 full year margins. Moving on to fees per million on Slide 10 and a highlight of the key trends for the quarter. You can see on Slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter. For cash rates products, fees per million were up 4%, primarily due to an increase in European and Australian government bond fees per million. For long tenure swaps, fees per million were down 2%, primarily due to a slight increase in compression as well as a 3% decline in duration.

Speaker 3

For cash credit, average fees per million decreased 12% due to a mix shift away from munis and sessions trading. For cash equities, average fees per million were flat due to lower U. S. ETF fees per million given an increase in notional per share traded. Recall in the U.

Speaker 3

S, we charge per share and not for notional value traded. This was offset by a mix shift towards higher fee per million EU ETFs. And finally, within money markets, average fees per million decreased 8% driven by a mix shift away from higher fee per million U. S. CDs and towards our growing institutional repo business.

Speaker 3

Slide 11 details our adjusted expenses. At a high level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. We have maintained a consistent philosophy here. Adjusted expenses for the 2nd quarter increased 25.8% on a reported basis and 27% on a constant currency basis. Adjusted compensation cost increased 32.2% due to increases primarily in performance related compensation, headcount and severance.

Speaker 3

Excluding $2,900,000 related to severance, compensation costs increased 29.4%. Technology and communication costs increased 29.6%, primarily due to our previously communicated investments in data strategy and infrastructure. Adjusted professional fees increased 6%, mainly due to an increase in consulting costs. We expect professional fees to continue to grow over time as we spend more on technology consulting to support our organic growth. General and administrative costs increased due to a pickup in travel and entertainment, which on a reported basis was partially offset by FX gains year on year.

Speaker 3

Favorable movements in FX resulted in a $1,700,000 gain in the Q2 of 2024 versus $150,000 loss in the Q2 of 2020 3. Slide 12 details capital management and our guidance. On our cash position and capital return policy, we ended 2nd quarter in a strong position with a $1,720,000,000 in cash and cash equivalents and free cash flow reached approximately $722,000,000 for the trailing 12 months. Recall, we intend to pay $785,000,000 in cash consideration for ICD once it closes. Our net interest income of $21,000,000 increased due to a combination of higher cash balances and interest yields.

Speaker 3

This was primarily driven by the higher interest rate environment and more efficient management of our cash. With this quarter's earnings, the Board declared a quarterly dividend of $0.10 per Class A and Class B shares. Turning to updated guidance for 2024. In light of strong business momentum and the anticipated closing of ICD shortly, we are increasing our adjusted expense guidance from $805,000,000 We now expect to be in the $830,000,000 to $860,000,000 range for 2024. Including the anticipated closing of ICD, we are currently trending towards the midpoint of this range, which would represent an approximate 22% increase versus our 2023 adjusted expenses.

Speaker 3

Focusing on organic growth, the midpoint of this range would represent an approximately 16% increase. Bridging the gap from $805,000,000 to the midpoint of our new range, 63% of this increase is coming from the inclusion of ICD with 30% 7% coming from better business momentum and the recently announced management changes respectively. Provided that ICD closes shortly, revenue from ICD is expected to be approximately $40,000,000 over the next 5 months. Recall, we plan to invest in technology and marketing during the 1st 12 months post closing, which we expect may temporarily push ICD's adjusted EBITDA margin down to 47% to 49%. All in, primarily factoring in the better business momentum, we now expect our 2024 adjusted EBITDA margin expansion to slightly exceed 2023 levels.

Speaker 3

At the same time, we expect to capitalize on the anticipated healthy revenue environment by accelerating investments to support our current and future organic growth. This includes infrastructure related investments such as further enhancements to our global credit tech stack, expanding our integration capabilities to allow for cloud based Python integration and retail platform enhancements to support the growth in trading activity we've seen in recent years. We are also selectively making small investments in emerging digital technology such as blockchain and digital assets in order to leverage and benefit from their technical expertise without having to make significant investment to experiment in house. We now expect our CapEx and capitalized software development to be about $77,000,000 to $85,000,000 for 2024. Acquisition and Refinitiv transaction related D and A, which we adjust out due to the increase associated with pushdown accounting, is now expected to be $158,000,000 We continue to expect 2024 2025 revenues generated under the new master data agreement with LSEG to be approximately $80,000,000 $90,000,000 respectively.

Speaker 3

Now I'll turn it back to Billy for concluding remarks.

Speaker 2

Thanks, Sarah. Tradeweb thrives on change, and we look forward to solving complex problems. Change can happen very fast or very slowly, but we want to be that trusted partner that our clients look towards to drive innovation in the market. It's a great time to be in the risk intermediation business. I feel good about our future growth outlook.

Speaker 2

With a couple of important month end trading days left in July, which tend to be our strongest revenue days, average daily revenue growth is trending at a high teens growth rate relative to July 2023. The diversity of our growth remains a theme. We are seeing strong volume growth across global government bonds, mortgages, interest rate swaps, corporate credit and repos. Our IG and high yield share are trending above 18% 7%, respectively, in July. I would also like to welcome Amy Klack to the team, who will be joining Tradeweb in August as Chief Administrative Officer and as a member of the Executive Committee.

Speaker 2

Amy brings more than 25 years of experience and will oversee operations, business integration risk and corporate services. Finally, I would like to conclude my remarks by thanking our clients for their business partnership in the quarter, and I want to thank my colleagues for their efforts that contributed to the best second quarter revenues and volumes at Tradeweb.

Speaker 4

With that, I will turn it back

Speaker 2

to Ashley for your questions.

Speaker 1

Thanks, Billy. As a reminder, please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q and A will end at 10:30 am Eastern Time. Operator, you can now take our first question.

Speaker 5

Thank you. At this time, we'll conduct a question and answer session. Our first question comes from the line of Greg Siegenthaler of Bank of America. Your line is now open.

Speaker 6

Good morning, Billy. Hope everyone is doing well.

Speaker 7

How are you?

Speaker 6

I'm good. So, we had a question on a key competitive advantage, Tradeweb's ability to provide a one stop shop platform across multiple asset classes. So how important is the wide asset class offering to your sales pitch and ability to penetrate traders on the buy side? And also to what degree has multi asset trading become more or less common over time?

Speaker 7

Yes. Craig, good to hear your voice. Hear you on the question. I've been saying this like pretty clearly for a while that technology is making the markets more connected than ever and Tradeweb is really well positioned because of our product depth as being this kind of like one stop shop. I said it on CNBC.

Speaker 7

And Ashley was like, that sounds amazing. Maybe just don't say shop, say platform because this isn't like the 90s. You're not going to go home and watch signs all the night. But the thesis, I think you understand really well. So when we think about this for a moment, I would say kind of part of the company's history forever.

Speaker 7

So let me just say this very clearly, like for sure, being in government bonds way back when helped us get into, for example, TBA Mortgage as being in European government bonds helped us get into European swaps. Then there's these sort of like more kind of seismic moments where we wanted to get into interest rate swaps at a point in time where the Fed was cutting rates and mortgage originators became this like massive consumer of interest rate swaps and kind of kind of put us on the map. So you can kind of feel the history in terms of what I'm describing in terms of our commitment to multi asset class trading. When we think about like today for a moment, from our perspective, the stats are basically 16% of global AUM is now sitting in multi asset funds. That's up from about 10% in 2018.

Speaker 7

We think that's going to kind of trend continually higher. From our perspective, Craig, for a second, on a firm level, I think the stats are around 60% of our clients trade at least 2 products and about 1 in 5 trade at least 5 products. So those are pretty kind of interesting numbers. On a trader level, it's even a little bit more interesting. 30% of our traders are now trading 3 products with us.

Speaker 7

We can understand that if you think about like the macro businesses, that makes a lot of sense. And over 10% of our traders trade over 5 products, right? I think, it was Sameer that gave me a stat that we actually have 1 trader, who's now trading like like there's 11 different markets with us. Like I think that guy needs like at least 5, fleece vests from Tradeweb. But those are the stats.

Speaker 7

And I would say just very straightforward from me, the stats matter and then there is the kind of the ethos piece of this, which is part of how we build and grow businesses here. So when we wanted to get into credit and when we saw that there was a door opener for us to compete in credit, if the question is, when you walk into PIMCO and you're a partner to them in terms of building a mortgage business, does it help us make a sale into credit 100%, because I think that there is a reality that credibility leads to opportunity. I think that's a straightforward comment. Credibility leads to opportunity. And then in the balance of the world, when we think about the firm's relationships with the sell side and you think about the big banks and we think about how the firm interfaces with the Jim DeMars of the world or the Troy at JPMorgan or Ashok at Goldman, I can't leave out Andy Morton.

Speaker 7

Look, we interface really well. I think we're partly that's because we have a very strategic resonance with them when you think about the businesses that we are in and when you think about how those businesses kind of touch their P and L. And so that's been a big advantage for us in a certain way forever. And you kind of even heard what we're doing, for example, if you think about the money market business and how it sort of funnels through all of the markets that we are in, the ability for us to connect kind of our repo world into interest rate swaps, you're talking about 2 worlds that have been kind of historically pretty sleepy. And now we're showing like massive innovation in terms of how those markets are operating.

Speaker 7

So my instinct is it's been a big advantage for us and the very strong instinct is given the trend of technology and the way these markets are sort of more connected than ever, it's a further advantage for us as we continue to grow our market share and build ourselves into new markets. So that's the view. Appreciate the question, Craig. Thank you. Thank you, Billy.

Speaker 5

Thank you. One moment for our next question. Our next question comes from the line of Ben Budish of Barclays. Your line is now open.

Speaker 8

Hi, good morning and thanks for taking the question. Billy, in your prepared remarks, you called out a number of stats on portfolio trading, the growth in ADV, increasing number of line items, the largest portfolio trade ever on your platform. I was wondering if you could talk about kind of your medium to longer term outlook for the protocol. How is usage changing? What are these new types of firms engaging with portfolio trades that weren't before?

Speaker 8

And how are some of the newer market makers, the large trading firms that are are joining the platform recently, how are they engaging with the protocol? Thank you. Yes.

Speaker 7

So it's a good question, Ben. How are you? So we're positive on portfolio trading, right? And because the thesis is and you guys have kind of heard me say this very clearly, we stand for balance, right? So we love the concept of ultimately the buy side acting like the buy side and the banks acting as market makers.

Speaker 7

We think that there's going to be significant volume that goes through in that basic direction. And so from our perspective, portfolio trading now represents a little bit less than 10% of trace in the Q2 of 2024. That's up from 5% in the Q2 of 2023. We're getting a lot of sort of opinions that that can land in that sort of like 20% to 25% zone of total trace volume. I have an instinct that it can be higher, again, thinking about the concept of balance, the banks coming back into the equation from an electronic perspective.

Speaker 7

And then the concept of kind of risk trading really kind of entering into that protocol is a big deal, right? So when we think about the progression of it all, right, originally, if you remember the protocol was sort of built for asset managers for kind of month or quarter end rebalancing kind of period. It's shifted and changed a lot from there, right? So now you have hedge fund clients using the protocol for how we think about risk on trades, tactical trades. More recently, we've seen insurance firm using it for asset liability management.

Speaker 7

These are like pretty big kind of progressions in terms of behavior. Your second part of the question is quite interesting, right? Because now we're seeing and we're talking about the emergence of how we think about sort of the alternative market makers. I think that's still the right way to describe them, but the alternative market makers kind of entering the space with a lot of emphasis around technology, we think about sort of the citadels of the world, the chains of the world that are doing an excellent job in terms of warehousing risk. Virtu has been very clear about their plans.

Speaker 7

I think Doug used the word Switzerland to describe himself in terms of his relationship between Tradeweb and MarketAxess. I'm going to I always thought we were kind of Switzerland, but I'll have that conversation with him offline. But they're very, very important players in the space, right? You have these kind of firms filling a void. You do not have the sort of legacy kind of traditional way of doing business kind of issues.

Speaker 7

And then you have companies that have significant DNA and expertise and experience on the anonymous side of the trading world getting into disclosed trading, and the wall around disclosed trading and that's a big deal. So my instinct is they're going to take the concept and the premise of portfolio trading very seriously. And that's a big deal for us in terms of how we partner with them going forward. So feeling quite good about directionally where we're going with portfolio trading and thanks for the question. Great, Billy.

Speaker 7

Thanks for the detailed response.

Speaker 5

Thank you. One moment for our next question. Our next question comes from the line of Tyler Mueller of William Blair. Your line is now open.

Speaker 9

Good morning. This is Tyler Mueller on for Jeff Schmitt.

Speaker 10

We were curious what is

Speaker 9

the client response been to the rollout of RFQ Edge? With the additional functionality and analytics helping penetration of

Speaker 10

larger block trades? Thank you.

Speaker 7

Sure. Hey Tyler, good question. Well, by the way, love the sort of name RFQ Edge. I think that's a great kind of marketing protocol for the company. It's early days and it's a good question.

Speaker 7

The initial feedback has been quite positive. From our perspective, the enhancements are all about kind of adding analytics real time charting into the RF ticket. We think that like directionally investing in clients more upstream is important. That's a very kind of strong kind of strategic move for us. RFQ Edge Enhancements, they basically reflect similar analytics to what we provide to our clients across portfolio trading.

Speaker 7

It allows you to trade with multiple dealers and the all to all market all at once. Again, it's all about sort of enhancing and investing into the client experience. We have a few clients who are utilizing it like a portfolio trade where they're going to fewer dealers sending larger size trades, fewer dealers, larger sized trades, that concept of sort of information leakage, minimizing information leakage. These are like very, very important principles and something that we've invested in for a long time, really understanding client flow, I think, in a very straightforward way. That's the ultimate edge for us.

Speaker 7

So we're feeling good about that protocol early days, more to come on it and appreciate the question.

Speaker 5

Thank you. One moment for our next question. Our next question comes from the line of Chris Allen of Citi. Your line is now open.

Speaker 11

Morning, everyone. Thanks for taking the question. I want to talk about the 3rd party market data business a little bit. I'm wondering what the kind of key growth drivers are here. Any new products you may be able to introduce?

Speaker 11

Now how you may be able to expand the penetration of existing products? And also can you kind of remind us of the mix today between different data offerings and how much they contribute?

Speaker 3

Sure. Hey, Chris, it's Sarah. Thank you for the question. Market data has been a great business for us. And I think as we always talk about, 1st and foremost, our top priority with utilizing market data is to improve the execution for our clients.

Speaker 3

But obviously, we have direct monetization of market data as well. In the Q2, we had about $29,000,000 of revenue overall from market data. The bulk of that about $20,000,000 coming from LSEK and $9,000,000 in the quarter from the 3rd party data line that you're asking about. That line obviously a much smaller base, but it's grown really nicely for us about 17% over the last 5 years on average. If you think about what's in that bucket, there are a few components.

Speaker 3

The biggest element driving that 3rd party line is really pricing products. So pricing would constitute about 60% of that $9,000,000 And it's really things like benchmark and reference products. So think about our ability to have a closing price on U. K. Guilt or U.

Speaker 3

S. Treasuries. Newer products like INAVE, our intraday ETF type of pricing, Uni AI pricing. This concept of creating benchmarks and then ultimately in terms of a growth strategy as they get further adopted, it adds growth in 2 ways. 1 directly from licensing fees as you create indices, as people consume closing and reference prices, but also increased trading flow, which obviously is great for our other lines.

Speaker 3

That's the biggest bucket. That's the biggest growth driver, the thing we're most excited about, obviously partnered with FTSE, which is owned by LSAG to do a lot of that. The other components in that line are really around analytics and some post trade regulatory type products, things like TCA. So I think overall, we're quite bullish in our ability to grow the opportunity here. There's new types of licensing reference data that we can create.

Speaker 3

In some ways, it's limitless. Any asset class that we're trading, we can help create a closing price or benchmark for. It doesn't happen overnight, but you can see in terms of that model, you can create more products and then as it gets further and further entrenched in the network, more adoption then there's inherent growth. And we're seeing the benefit of both of those things in that line today. Thanks for the question.

Speaker 12

Thanks.

Speaker 5

Thank you. We'll move on for our next question. Our next question comes from the line of Alex Blostein of Goldman Sachs. Your line is now open.

Speaker 4

Hey, good morning. Hello, Billy and everybody else. So I wanted to talk a little bit more about the interest rate swap business. I know it's a topic that come up a bunch in the past and I've asked you guys this numerous times in the past as well. But it seems like this business just kind of continues to set new record and Q2 was an exception to that.

Speaker 4

So what drove the strength in the Q2? That's 1. And maybe you can just kind of zoom out and talk broadly, how you're thinking about the revenue growth algorithm in this business over the next couple of years because it seems like it continues to do much better than what the baseline should be.

Speaker 7

Yes. It's been a great kind of environment for us, obviously, Alex, and it's a very good question. It's almost kind of like the second quarter is almost like a perfect microcosm of like what our clients care about the most. There's geopolitical uncertainty, varying inflation prints, changing election odds, all of that stuff in our business has really been kind of clicking in. It's primarily been a market share story for us, I would say.

Speaker 7

As you know very well, our swaps business, we think about it as sort of almost like a complementary to our global government bond business and our mortgage franchise. I made the point and I want us to kind of keep thinking about this when the Fed gets into rate cut mood, our instinct is those sort of mortgage originators are really going to kind of step into the equation around swaps. But we've gained market share and grown revenue really kind of in 3 ways. It's first and foremost by adding new customers and migrating them from voice to e. That's like Tradeweb kind of 101 stuff and that's been a big driver of our market share.

Speaker 7

I would say second, it's always by kind of building new products and that from our perspective would be EM. And then I think very, very importantly and I've used the expression before, micro trading protocols. So the example of that would be like request for market. We call it RFM. There's something like CodeWords or Tradeweb or request for market, where a buy side client can go to one dealer, ask for a 2 sided market and then trade on one side of the marketplace.

Speaker 7

It really ultimately replicates the exact behavior that large kind of macro funds trade big size in the market on. And those kind of trades would happen on the phone or through Bluebird messaging and now they're happening through Tradeweb. As we kind of plot the future a little bit, it's going to be about continued sort of success around EM swaps. We feel bullish on inflation swaps. I think swaptions is a very kind of interesting nut to crack for us.

Speaker 7

And then there's going to be again, we talked about sort of technology and this kind of concept of multi asset pack swaps. So a lot more for us to do in the area, and feeling really, really good about how we've continued to perform, gain market share in swaps. As you know, Alex, very well, and I sometimes feel like a little bit like the Tradeweb. I've made the joke for Tradeweb Historian. This was the sort of back alley of all the rates markets of all the macro markets for a long time.

Speaker 7

And to see this business flourish in volatile and interesting environments has been quite rewarding for the company and feeling really good about where it's going from here. So thanks for the question. Thank you, Alex.

Speaker 5

Thank you. One moment for our next question. Our next question comes from the line of Patrick Mollie of Piper Sandler. Your line is now open.

Speaker 9

Yes, good morning. Thanks for taking the question. So I had a question. FMX is launching in September. I understand that a lot of the conversation with FMX has been around the futures business, but they do have a club treasury business that you compete with currently.

Speaker 9

So I understand that this it's not a huge part of your business, but was just curious to get your thoughts on FMX broadly and what this new consortium of dealers in the race space means for competition in the industry? And then if I could add a follow on to that. You mentioned in your prepared remarks that the club was starting to trend higher for you. I know that's been a business that you haven't been completely satisfied with since you bought it from NASDAQ a few years ago. So maybe if you could just expand on the strength you're seeing there and your expectations for that business going forward?

Speaker 9

Thanks.

Speaker 7

Yes. Hey, Patrick. Good to hear your voice. Hope you're doing really well. Made the comment about sort of Switzerland before I was watching CNBC yesterday with Mr.

Speaker 7

Duffy kind of talking about this business and thinking to myself there's like there's no Switzerland kind of in this moment. Howard is a big personality, kind of everyone knows that. I think we've known him well and we have a very respectful relationship both with him and with the CME. My instinct is the kind of clear goal is to from FMX's perspective is to take on the incumbent in the futures market. And that's their business model, and we'll see how all of that will play out.

Speaker 7

I think it's going to play out a bit on TV and it'll be an interesting kind of story to watch. We feel to make an obvious point and it's a good question. We feel really, really good about the strength of our treasury business, both on the client side and on the wholesale side. I have a very strong message that I deliver to the company, which is be super conscious and super aware of the competitive landscape. And so to make an obvious point, very well aware of everything that Howard has done in this space and continues to try to do in this space.

Speaker 7

Be super aware of the competitive landscape, but live and breathe with your clients, and always make that the most straightforward focus. So our wholesale business on the treasury side continues to do extremely well. From your question about the club versus the streaming business, we continue to do exceptionally well in terms of growing our streaming business. The Ratefin acquisition has been helpful to us, not surprisingly in all of that. I think we do still have work to do on the club.

Speaker 7

I think that is an important piece of the market. There have been market share shifts in the cloud world, and this company sort of executes. And from our perspective, we want the company to continue to kind of click on all cylinders. And that's an area where we tend to roll up our sleeves a little bit and make sure that we're pressing the right buttons in the club and investing there correctly and hiring the right people and moving that business forward. As you know very well, this is a company that stays quite focused and there's enough news out there is the good piece of it.

Speaker 7

We're going to stay very, very focused. We're going to kind of sit back and see what happens around the kind of futures market in terms of all of that and then stick to our knitting, stay close with our clients and continue to do really well in our wholesale business. Thanks for the question. Good to hear your voice.

Speaker 5

Thank you. One moment for next question. Our next question comes from the line of Brian Bedell of Deutsche Bank. Your

Speaker 13

Great. Thanks. Good morning folks. Maybe just not

Speaker 2

to focus too much on the short term

Speaker 13

here, but just your comments for July, Billy, on investment grade and high yields, market share looks like a little lower than June. Maybe just if you can comment on what you think maybe driving that? Is it more of a shift in the business mix, either environmental or due to portfolio trading or in within the client base dealer to institutional?

Speaker 7

Yes. Good question and fully get you. Don't read too much into that into those numbers yet. I mean, generally speaking, we tend to kind of wind up outperforming from a market share perspective in that arena around some of those portfolio trading protocols towards the end of the month, I think we're going to wind up in a very good place when you see our all in July numbers. I think you're going to see continued sort of growth of portfolio trading, which is from our perspective, our kind of go to protocol and something that we kind of thrive in.

Speaker 7

So I don't think you're going to see a big kind of disconnect when all is said and done. Feeling really good about where we are in credit. And I think that's important to say that the Aladdin integration remains a high priority for us as a company, on boarding the right market makers in high yield when we get into the open trading environment. That's an important concept for us. We've talked about that a lot.

Speaker 7

And we're going to continue to thrive in that portfolio trading world where we talk about the balance of it all, the big buy side clients acting like the buy side and the dealers investing in market makers, the alternative market makers arriving on the scene. From our perspective, these are quite good forward trends for our credit business and that's where our focus is going to stay. Good question and thank you. Thank you.

Speaker 5

Thank you. One moment for next question. Our next question comes from the line of Ken Worthington from JPMorgan. Your line is now open.

Speaker 14

Hi, good morning. Thanks for taking the question. I wanted to focus on business environment, maybe part 1, as you mentioned to Alex' question, it's been election season globally. How is the election season impacted activity levels given some changes in Europe already? And are there any clear takeaways from a Harris or Trump presidency for Tradeweb in U.

Speaker 14

S. Markets? And then maybe part 2 is we've seen bond issuance in net sales into fixed income funds increase substantially in 2024 versus 2023 levels. How should we expect higher issuance in sales to translate into investment grade or high yield trading volume from Tradeweb from a timing and magnitude perspective?

Speaker 7

Yes. Here you've got it. It's been just like, Chad, like an incredible kind of 6 weeks. And I feel like the story is changing constantly. As we said before, I think healthy debate in the market is good for our business.

Speaker 7

And so obviously, we saw some record revenue days in June. We talked about the concept of geopolitical uncertainty, the different bearing inflation prints. I think and look, you always get the straight answer from me to start with, I'm not an economist. I think the Fed is going to cut no matter who the President is. I'll say that.

Speaker 7

I think that's going to wind up being quite good for our business. I think you're going to get sort of different policy obviously, but my instinct is global debt is rising. And I talk about the concept of, I think very importantly, the Fed playing a lesser role in the markets that Tradeweb lives and breathes in. And so that leaves us with this feeling sort of no matter the election results that private sector risk intermediation is back in vogue. I do think you're going to see continued strong levels of issuance of debt issuance going forward.

Speaker 7

And my instinct is markets like high yield are going to have a pickup in volume, a pickup of activity as we get into 2025. Not to make you laugh that those are my thoughts. I feel like I've had 10 different thoughts about what was going to happen over the last month. And I'm sure kind of everyone on this call has too. So it's been a little bit in a human way, I can say this, it's been a little bit of a challenging time with all the things happening in the world.

Speaker 7

And so we remind ourselves how lucky we are sometimes, but it's been a tough couple of months just in terms of all the events in the world. Great. That's a great question. Thank you. Yes.

Speaker 7

Appreciate your perspective. Yes.

Speaker 5

Thank you. One moment for next question. Our next question comes from the line of Daniel Fannon of Jefferies. Your line is now open.

Speaker 4

Good morning. Thanks for taking my question. Within high yield, you mentioned in your prepared remarks expanding your client network is kind of key to growth. Can you unpack where your current strengths are today and what client segments you're targeting to actually get that future growth? And maybe how does the Aladdin partnership accelerate that?

Speaker 7

Yes. So that's a good question, Den. Straightforward strengths probably not surprising to you at all, we would say, are like the long only asset managers. I'm going to push the team with Sarah around continuing to form kind of deeper relationships with the ETF market makers. They're obviously extremely important in the high yield business.

Speaker 7

I think we've done very well with them. They're critical. So we're going to keep kind of extremely focused there. Hedge funds and private banks in terms of like liquidity taking, very important kind of institutions in the space. We're focused on Aladdin because we think it's going to help kind of round out that responder network in a way that's going to work for us.

Speaker 7

And the perception around making sure that we have best in class liquidity in high yield. And I say this to you, because it's always sort of a 2 pronged approach. As we do that, there's going to be a continued message around the benefits of portfolio trading, which we think we're going to see continued growth, particularly in the high yield area around portfolio trading. So we want to make sure we're kind of thinking about that marketplace from 2 different protocols the right way. Then we're going to be very focused always on the client base.

Speaker 7

So deeper relationships inside of that ETF money market, ETF market maker world, and make sure we have the right responders in which is partly why that Aladdin integration means so much to us.

Speaker 3

And Billy, maybe just one other area we've talked about in the past as well. When we think about the client base, we've spent a lot of time and energy and continue to focus on building out our EM platform. That's another area I think we see some benefit in terms of high yield expansion. There's a big overlap there in some of those traders.

Speaker 7

Yes. Thank you, sir. Thanks for the question. Thank you.

Speaker 5

Thank you. One moment for next question. Our next question comes from the line of Kyle Voigt of KBW. Your line is now open.

Speaker 10

Hi, good morning, everyone. So with ICD likely to close within the next week or so, just wondering if you can update us on your appetite for incremental M and A from here, especially given that you still have a significant amount of balance sheet flexibility post close. And with respect to ICD, can you just remind us of the integration timeline there? It sounds like there may be some incremental investment upfront. So how should we think about the margin trajectory after that?

Speaker 3

Yes, that's great. So I was laughing thinking of Billy's answer to this M and A question last quarter. Look, M and A let me start with the first part of your question. We think M and A is a tool just like organic growth is a tool, partnerships, investments are tools to implement our strategic objectives. We've done 3 acquisitions if you include ICD in the last 18 months and we're focused on doing those well, which means executing and integrating.

Speaker 3

So it's obviously like top of mind and I'll talk a little bit more specifically around the plans of ICD. That said, while we do that, we constantly are focused on achieving our strategic objectives. So we're going to be disciplined about looking at other opportunities, but we're going to continue to look at that tool and balance executing well with continuing to be opportunistic and grow our company. We think we're on our foot. Have a great balance sheet.

Speaker 3

We have a great stock. But we're going to be very disciplined about it. Hopefully, you've seen that in the few ones that we've pursued so far. ICD specifically, we expect to close shortly. In terms of where we are, I think we've talked a little bit about the margin expectation for ICD out of the gate is probably a little bit lower than where ours is right now, 47% to 49%, I think is the range that we've talked about.

Speaker 3

That's really reflecting our increased investment, in that platform. Strategically, the business is performing very well. And in the client dialogues that we've had, we've been really pleased that our thesis around their desire for our types of products, really that receptivity and that strength of the client relationship, the ICD, client managers have has been really strong. So in terms of where we're headed, I think the opportunity for us in the near term and medium term is really around driving those revenue synergies, really taking our international footprint, introducing ICD into that client base. And then obviously, it was going to take a little bit longer, but certainly on our 12 to 18 month technology roadmap and some of it will happen sooner, it's not a big bang, is introducing connectivity to our platform.

Speaker 3

So those corporate treasurers can buy our products. They've had interest. We will likely start with U. S. Treasuries, which we think we're very well placed to do.

Speaker 3

But you can see how once you're in a mode on that portal of actually transacting and these corporate treasuries are transacting today in our products, U. S. Treasuries can go to CDs, can go to CP, can go to corporate bonds. There's a whole range of outcomes that we see over the medium term and we're quite excited about that opportunity.

Speaker 7

And Sarah, we talk a lot about sort of the importance of sort of the management team, the cultural fit. Maybe just a minute from you just on how impressed we've been with that management team starting with Tori.

Speaker 3

Yes. I mean the management team starting with Tori, who's CEO of ICD, we have been able as a broader team to spend a great deal of time with not only in the diligence process, but, one of the benefits I joke because it's obviously time consuming, but one of the benefits of having done these three acquisitions in a short time period is we've really honed our playbook and been able to connect with the management teams, ICD and Trebo at every level. So Billy mentioned Tori, but it goes from the heads of product, the CTOs, CMOs and obviously through the finance and broader parts of the organization. So the talent that we are bringing on board as partners to grow our platform, we are really excited about. And I think having been on and part of a number of acquisitions, that cultural fit, the mindset that focus on clients, that's one of the things that makes acquisitions even more successful.

Speaker 3

So I think Billy is right to point out the talent is high, but the cultural fit and the way that we approach serving our clients is actually a tremendous fit, that makes us even more enthusiastic than we were, when we announced deal.

Speaker 10

That's great. Thank you very much.

Speaker 3

You're welcome.

Speaker 5

Thank you. One moment for next question. Our next question comes from the line of Michael Cyprys of Morgan Stanley. Your line is now open.

Speaker 10

Great. Thanks so much for squeezing me in here. Just wanted to circle back to your earlier comments on the investments you're making in emerging technology. I was hoping you could elaborate a little bit on that. What are your aspirations there?

Speaker 10

And if successful, what does that look like? I think one of the things you were articulating was blockchain. So I guess just related to that, how do you see the potential for blockchain in your markets and your business over the long term?

Speaker 3

Sure. Thanks for the question. I think digital assets and emerging technologies are a really interesting point in the cycle. We've spent years really looking at the space and being very disciplined about how we spend our capital. But increasingly part of our strategy is to partner and invest.

Speaker 3

Those technologies don't have to be born and created in house for us to really avail ourselves of it. And blockchain is a perfect example. From our seat, leveraging distributed ledger technology like blockchain obviously has a lot of impact in trading businesses in terms of eliminating manual reconciliations, reducing cost of transactions. And we want to be on our front foot about figuring out how that gets leveraged and how we learn. Those things also have ecosystems, just like our markets today in the more traditional space have ecosystems.

Speaker 3

And so 2 investments that we've done recently, one with Canton Network, which is a blockchain network, the other around Alpha Ledger, which is actually blockchain infrastructure, both are giving us different seats at the table in seeing how that technology can be utilized for either issuance or trading of securities in Alpha Ledger's case, it's around brokered CDs and Canton, which is like a much more well understood network really around how that ecosystem scales and creates interoperability for digital assets. So I think it's still early days around these emerging technologies. But certainly, we're positioning ourselves to be an important player as that market evolves, whether it's a digital asset trading on the blockchain or some more traditional

Speaker 7

And Michael, Sarah described that perfectly. I would say like when you build markets, you learn sort of an aspect of pragmatism pretty quickly. And so we're always sort of thinking about like how some of these things pragmatically can live and fit in our marketplace. Sarah and I talk about this all the time. We were going to describe for you sort of 2 markets that feel like they have sort of the type of market or the type of settlement process that could really kind of benefit from some of these technologies that are clearly so important.

Speaker 7

And you specifically mentioned blockchain, we would sort of point out obviously first to start with the repo market. And then the second market that we would probably point out and we think this market is going to become more and more important over the next couple of years is when you think about how the TBA market kind of traditionally settles, I think the feeling is there are going to be sort of blockchain technologies that could create more efficiencies in that market over time. The key and most important kind of words around that would be over time, because I do think it will take time for that kind of technology to get applied pragmatically into our world, but the opportunity in a really interesting way is there. An excellent question, Michael. Thanks.

Speaker 10

Great. Thank you.

Speaker 5

Thank you. One moment for our next question. Our next question comes from the line of Alex Kramm of UBS. Your line is now open.

Speaker 12

Yes. Hello, everyone. Just wanted to come back to portfolio trading and credit one more time. When I talk to some of your largest buyback clients, they totally agree that this sort of protocol is going to get bigger. So that sounds great.

Speaker 12

But at the same time, obviously, you have very dominant market share in that business. And when I talk to those clients, they definitely say like, look, over time, we do like competition. We're going to have to spread our love a little bit more. So considering that that's a very concentrated market right now and I don't think it has as much network effect than maybe RFQ or all to all has, is that something that worries you? And how do you think you can defend that as again maybe it's a little bit more of a workflow than a real network liquidity agreement?

Speaker 12

Thanks.

Speaker 7

That's a really good question. I mean, I think like really in a certain way kind of agree with a lot of your thesis. First of all, with like the way that the buy side clients are embracing that protocol, I think that's like spot on. And I think you hear me loud and clear around the importance of the sort of balance around the ecosystem. We're going to do sort of exactly what you would expect us to do, which is to sort of continue to enhance and innovate and do things around technology to enhance the clients' experience with portfolio trading.

Speaker 7

We're also going to remind our bank partners that it's not that we created this portfolio for you guys, but absolutely we went out of our way in a very straightforward concept to bring the big banks back into the equation and we do think we've gotten a lot of support as we've done that. So I think the forward trend is going to be continued sort of market share growth around portfolio trading. I think we have our ways to sort of defend that fort. It's a big focus for the company to make sure we stay, and we will stay as the leading venue for portfolio trading. So we're focused on it.

Speaker 7

And my general feeling is we're going to show continued market share strength in portfolio trading.

Speaker 12

Fair enough. Thanks

Speaker 5

guys. Thank you. This concludes the question and answer session. I would now like to turn it back to CEO, Billy Holt for closing remarks.

Speaker 7

Thank you all very much for joining us this morning. Great questions as always. Any follow-up, please obviously feel free to reach out to Ashley, Sameer and our great team. Thank you all. Have a great day.

Speaker 7

Bye bye.

Speaker 3

Thank you.

Speaker 5

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Key Takeaways

  • Tradeweb delivered 30.4% year-over-year revenue growth in Q2, driven by strength in rates (61% of growth) and credit (29%), while expanding adjusted EBITDA margins by 98 basis points.
  • The U.S. Treasuries platform generated record quarterly revenues, surpassed 50% market share versus Bloomberg, and saw institutional average daily trades up 45% with AIX automation nearly doubling.
  • Credit revenues rose 33% in the U.S. and 29% in Europe, with record fully electronic U.S. investment-grade market share, double-digit growth in munis, China bonds, and a 100% jump in portfolio trading volume.
  • Global interest rate swaps revenue increased 56% year-over-year as market share climbed to 23.6%, and Tradeweb became the first platform to embed overnight index swap curves into repo negotiations for better pricing.
  • On track to close the ICD acquisition to add corporates as a fourth client channel, Tradeweb is also rolling out RFQ Edge, exploring blockchain partnerships, and remains disciplined in pursuing further M&A.
AI Generated. May Contain Errors.
Earnings Conference Call
Tradeweb Markets Q2 2024
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