MarketAxess Q3 2022 Earnings Call Transcript

Participants

Corporate Executives

• Steve Davidson, Head of Investor Relations
• Richard M. McVey, Chairman and Chief Executive Officer
• Chris Concannon, President and Chief Operating Officer
• Christopher N. Gerosa, Chief Financial Officer

Analysts

• Richard Repetto, Piper Sandler Companies
• Christopher Allen, Smith Barney Citigroup
• Gautam Sawant, Credit Suisse Group AG
• Michael Graham, The Goldman Sachs Group, Inc.
• Dan Fannon, Jefferies Financial Group Inc.
• Michael Cyprys, Morgan Stanley
• Simon Clinch, Atlantic Equity
• Kyle Voigt, KBW

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Later, we will conduct a question and answer session. [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.

[Steve Davidson, Head of Investor Relations at MarketAxess]

Thank you, Brendan. Good morning, and welcome to the MarketAxess third quarter 2022 earnings conference call. For the call, Rick McVey, Chairman and Chief Executive Officer will provide a strategic update for the Company. Chris Concannon, President and COO, will review the progress we are making on our growth initiatives, and then Chris Gerosa, Chief Financial Officer, will walk you through the financial results for the quarter.

Before I turn the call over to Rick, let me remind you that today's call may include forward-looking statements. These statements represent the Company's belief regarding future events that by their nature, are uncertain. The Company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the Company's future results, please see the description of risk factors in our Annual Report on Form 10-K for the year ended December 31, 2021. I would also direct you to read the forward-looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning, and is now available on our website.

Now let me turn the call over to Rick.

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

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 US high grade with record estimated market share in high yield and municipal bonds in the US, 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 US 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. US 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 maintain 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 US 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 Concannon, President and Chief Operating Officer at MarketAxess]

Thanks, Rick. Slide 8 provides an update on Open Trading. The benefits of Open Trading are coming through in the form of significant increases in execution cost savings for our clients. The importance of all-to-all trading is clearly shown in the record percentage of our global trade volumes benefiting from price improvement.

Open Trading price improvement generated $260 million in estimated transaction cost savings delivered to our clients in Q3, double the savings levels from one year ago. We believe that the market is moving in our direction because of the benefits of all-to-all trading. We are also innovating and bringing this model to the US Treasury and municipal bond space. One of the largest fixed income asset managers in the world, PIMCO, recently released a viewpoint piece suggesting that the entire US Treasury market would benefit from a shift to all-to-all trading. We agree with their view. A record 1,800 unique firms or over 90% of our active client base executed at least one trade through our Open Trading network during the quarter. This dynamic is clearly shown by the data with record overall Open Trading penetration of 37% and record high-yield Open Trading penetration of 53%.

Slide 9 highlights the increasing momentum we are seeing with automation in credit trading. Automated trading increased to $52 billion in volume and over 290,000 trades in Q3, reflecting continued strong adoption during a period of heightened volatility. This speaks to the increasing comfort that dealers and investor clients have using our tools and their confidence in our CP+ data fee. Today, Auto-X represents 18% of total trade count and 7% of our credit trading volume.

We are also seeing record Auto-Responder trading volume where our clients are optimizing their execution quality. Additionally, the use of dealer algorithms is continuing to grow on the platform with approximately 6 million algo responses in the third quarter, up 33% from the same period last year. The impressive three-year CAGR shown on this slide reflect the strong long-term growth of our trade automation suite. As the use of automation tools increases, we believe we will see an impact on trading velocity over time.

Slide 10 illustrates our growth in portfolio trading. The third quarter was another record for portfolio trading with total volume of $25 billion. We delivered this strong performance through continued international diversification. Eurobond's portfolio trading volume doubled in the quarter and EM portfolio trading volume was up over 20% sequentially. EMEA-based clients executed approximately 30% of our portfolio trading volume in the quarter. Estimated high-grade and high-yield portfolio trading market volumes have remained relatively flat at around 5% to 6% of secondary trading over the last several quarters.

Slide 11 is an update on emerging markets, where we continue to see strong growth in local markets and market share. We achieved 8% growth in emerging markets trading volume during the quarter, 12% growth on a constant currency basis. Local markets trading volume of $60 billion increased 33% on a reported basis and 47% on a constant currency basis. We continue to onboard new clients with record 1,376 active clients trading EM on the platform, and we traded in 28 of our 30 local markets. 80% of the emerging market opportunity is in local markets, which is a huge and growing market for us.

Now let me turn the call over to Chris Gerosa to provide an update on our financials.

[Christopher N. Gerosa, Chief Financial Officer at MarketAxess]

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 US high-grade bonds traded and a strengthening US 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 US 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 US 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 US 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 US 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.

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

Thank you, Chris. In summary, we continue to execute very well against our growth strategy and are pulling all the levers within our control. We delivered record levels of market share and enhanced our competitive position in the institutional client e-trading space, both in the US 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 and the market opportunity before us continues to expand.

Now I would be happy to open the line for your questions.

Questions and Answers

[Operator]

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

[Richard Repetto, Analyst at Piper Sandler Companies]

Yes good morning, Rick and Chris and Chris. I guess the first question is on the market share gains and US high yields, some significant gains, you know, really starting probably last quarter. But I guess Rick, the question is, can you characterize what's driving that and is it similar to the US high grade market volatility and market share gains you saw it like early in the pandemic? Is it the similar situation of liquidity demand?

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

It certainly is Rich. If you look at our high grade, and high yield bid-ask indices they are near -- they're approximately double where we were a year ago, and already at about 80% to 85% of where they were in March of 2020. So the 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 Repetto, Analyst at Piper Sandler Companies]

Got it and one follow-up, Rick. This is on the, you know, the treasury market and regulatory proposed changes to clearing, central clearing. So if I had to sum up and you correct me if I'm wrong, but the proposed rules from the SEC would require central clearing of treasuries from a wider audience, including proprietary traders, and hedge funds. And what do you see as the impact on the -- I guess, the treasury marketplace you know, if that was to occur? And do I have it correct, I guess to sum up the proposal?

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

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

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

Sure, Rich and I have to say you're reading the proposal like a like a lawyer that was an accurate summary. The way we view the SEC's proposal is, the policy goals of the proposal are sound. The market will benefit from centralizing, clearing at DTC of treasury activity, because of the net settlement benefits that DTC provides and the guaranteed settlement that DTC provides. So organizing the market to have more centralized clearing is favorable to the overall market. I think the key piece of the proposal is how we get there. And there are steps, the way that proposal is structured, because it's really a rule change to that supports that the clearing agencies proposed rule changes.

There are some benefits embedded in the customer protection rules that the SEC are proposing for clearing firms to allow them to have more favorable capital treatment if they're clearing on behalf of other broker dealers, particularly the proprietary trading firms. So I do think we're at least a year or two away from the final implementation of the clearing agency rules. Remember, the SEC has to approve the rules, and then the clearing agencies have to file their own rules to comply with the proposed rule. So a few steps away.

There's still obviously some discussion around the repo proposal that the SEC incorporated into the overall clearing proposal. Again, the policy benefits are sound, it's really the steps that that we get -- that we used to get for the final outcome. So there are some impacts, but I do think we are ways away from the final implementation of the other goals of the proposal.

[Richard Repetto, Analyst at Piper Sandler Companies]

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

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

I always think highly of lawyers, just try not to be around them as much.

[Operator]

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

[Christopher Allen, Analyst at Smith Barney Citigroup]

Good morning guys, thanks for taking my question. Wanted to talk a little bit about fee per million, which has been obviously a bit of an overhang on the stock? Wonder if you could maybe give us some color just in terms of how fee per million progressed over the course of the quarter, specifically around high grade, you start to see some stability there? Any other dynamics, whether it's an EM that's going on local versus hard currencies? And also what was the thought process on pulling back on the disclosure there until it breaking it up between the different products?

[Christopher N. Gerosa, Chief Financial Officer at MarketAxess]

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 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 -- 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.

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

And on the second half of your question Chris, a couple of thoughts and responses there. One, in one way, we've increased transparency on fee capture, because we have started to provide the total credit fee capture on monthly basis, rather than quarterly. So we think that will be well received by investors. Secondly, it's one of many examples where we were providing a lot more granularity on fee capture than the rest of the market. So we think by going to total credit fee capture, we've aligned ourselves with what we see elsewhere in the industry.

And thirdly as we've said, the vast majority of the high grade fee capture change was all due to the increase in rates and duration. And there is a publicly available data point that I would point all of you to that will show you what's going on with duration and corporate bonds. And that's the corporate bond index duration. So anyone that wants to follow it more than monthly or try to dissect high grade versus other products, there is a way to do that, with the public date on the corporate bond index. So all, three of those factors drove the decision to shift to monthly and go to a full credit fee capture per million.

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

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 volumes continue to grow. And we're super excited about that local market piece because it's up so large, year-over-year.

[Christopher Allen, Analyst at Smith Barney Citigroup]

Got it, appreciate the color there. And then I guess, I just wanted to follow-up a little bit kind of on the environment, you gave some colors on high yield, just in terms of some liquidity challenges there. But maybe more so on high grade with the commentary we've kind of heard is spreads are widening up. Why isn't trading activity better? This is a function of clients waiting for -- from a picture of the economy. Are there other factors involved are there outflows impacting activity? I'm just trying to think about what's the potential catalysts ahead to improve the environment from -- specifically on the high-grade side?

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

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.

[Christopher Allen, Analyst at Smith Barney Citigroup]

Thanks guys.

[Operator]

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

[Gautam Sawant, Analyst at Credit Suisse Group]

Hey, 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?

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

Sure. So on the data front, obviously, we have our premier product, CP+ and Axess All, two products that are obviously used by a large community of both dealers and clients. We continue to see high demand for both products but particularly in CP+ because we've rolled out additional product for CP+. So not only do we have CP+ for US corporates, but we also have it for Eurobonds, EM. We've now launched a CP+ for treasuries and EGBs as well. So we see growing demand as we -- as we grow market share as well as we roll out additional products. We're looking at future launches in municipals as an opportunity as well, and working on that.

The other area that has been growing interest from a data perspective by our clients are what I'll call portfolio construction data. And that's really how we help our clients to select the right bonds based on liquidity and activity in the market, when they're constructing their portfolio. An example of this is used in our MarketAxess 400 Index where we select bonds -- 400 bonds in the investment grade space that are the most liquid bonds across our platform. So we use that data to construct the investment-grade index, the MarketAxess 400. It's now been launched into an ETF LQIG in partnership with State Street. So we're super excited about being able to take our data on our platform and to convert it into portfolio construction. And we're seeing higher and higher demand from our clients around that unique data that they can use on a daily basis to help construct the most liquid portfolio, particularly given the liquidity challenges that we're seeing in the market in this time.

[Gautam Sawant, Analyst at Credit Suisse Group]

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?

[Christopher N. Gerosa, Chief Financial Officer at MarketAxess]

Yeah. The rationale behind tightening the range was really driven by the FX impact. And we provide good disclosure in our 10-Qs on the market risk liquidity section, where every 10% move in exchange rates, particularly around the sterling and the euro is going to be around a $10 million impact on operating expenses. So it's not as if we've pulled back the investment strategy. We're continuing to invest in the platform and changing our investment philosophy from leasing as compared to purchasing. But all that's doing is just shifting our spend across the income statement. But the FX was a headwind for us, and we just felt it was appropriate to tighten the range for the investment community.

[Gautam Sawant, Analyst at Credit Suisse Group]

Got it. Thank you very much.

[Operator]

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

[Michael Graham, Analyst at The Goldman Sachs Group]

Hi guys, this is Michael on for Alex. Maybe just following up on that. There was a meaningful step up in tech and communication spend this quarter. And I think the press release referenced enhancements of trading systems as well as higher subscription and licensing costs. Where are you guys making incremental investments? And should we still think about 10% to 12% over the next few years? Or -- and what extra investment are required to support that growth range? Thanks.

[Christopher N. Gerosa, Chief Financial Officer at MarketAxess]

Yes. So we called it out. It's around our cloud investing, licensing for our platforms that support our US 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.

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

Yeah I would just say in terms of our -- what's driving our desire to continue investing is the -- what we see in client behavior and adoption of all the new products and protocols that we're delivering to the market. And in addition to our core business market share gains being well above average, we're really encouraged with the progress that we're making in municipal bonds and government bonds, and clearly now have a competitive offering in portfolio trading as well. And we're super excited about the share gains that we see internationally, and how big the emerging markets and euro opportunity is. So our view is that we're getting all the right signals that our clients want to automate more of their fixed income trading around the world. And we have an opportunity to continue to do more with existing products and also add additional products in the years ahead.

[Michael Graham, Analyst at The Goldman Sachs Group]

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.

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

So obviously, ETF market makers are an important part of our overall market across all of our products, not just high yield. Our Open Trading -- record Open Trading market share of penetration of 53% is certainly reflective of seeing alternative liquidity providers stepping up and filling the gaps of liquidity in the market as other traditional liquidity providers are more challenged from a balance sheet perspective. We don't give out overall statistics on any one segment, particularly our ETF market makers, but they are a strong partner to us and strong partners in the liquidity that they provide to our clients. So I would expect ETF market makers to continue to grow on the platform. If you look at the growth of the ETF market and the new product offerings being delivered to that market, we would expect higher correlations as more products come into market, we would expect higher correlations of ETF market makers being part of our market.

The other thing to point out is, all of the large investment banks have sizable ETF market-making presence. So there's really no way to discern what is ETF market making anymore and what is separate type of investment banks, traditional client to deal with business. So it's -- everybody is in the ETF space, including some of our hedge fund clients so -- to try and triangulate what that really is, is quite difficult to do.

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

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.

[Michael Graham, Analyst at The Goldman Sachs Group]

All right. Thanks guys.

[Operator]

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

[Dan Fannon, Analyst at Jefferies Financial Group]

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 your platform sees 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?

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

I do think you see fluctuations depending on the liquidity conditions in the market. But the overall trend. And that's actually why we provided a three-year view on share. So you can see even though we went through that extremely volatile period in '20 with the spike up and then some reversion in '21 when market conditions were very stable. When you look at three-year growth, the trend is pretty darn clear. And so I do think the direction of travel on share overall is positive. But in the short term, quarter-to-quarter, we will certainly see impact based on market conditions.

Quite honestly, when I look out to '23, my own expectation is that it's likely that volatility is going to remain high. This is a very delicate balance for central banks around the world to try to control inflation without sending the economy into recession in a significant way. It sure looks to me like they're going to be dealing with that challenge all of next year. So our outlook on volatility is that it's likely to favor our model going into '23.

[Dan Fannon, Analyst at Jefferies Financial Group]

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.

[Christopher N. Gerosa, Chief Financial Officer at MarketAxess]

Yes. So our capital management strategies around share repurchases has been to offset dilution from employee equity grants, and we spent a lot of money this year, almost $90 million repurchasing 280,000 shares, which essentially accomplished two years of offsetting equity dilution from the awards we give to the employees. And what's different today, Dan, is we're in a much more attractive investment-yielding environment. So when we're thinking about deploying cash, returning value to our shareholders through higher returns on our cash balances is something that we think about as we think about our capital management strategy going forward.

[Dan Fannon, Analyst at Jefferies Financial Group]

Okay thank you.

[Operator]

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

[Michael Cyprys, Analyst at Morgan Stanley]

Hey, good morning. Thanks for taking the question. Just wanted to circle back to some of the commentary around trading automation. I think you mentioned the automated trades are about 18% of trades, but 7% of volumes. So I was hoping you could talk a little bit about some of the initiatives to expand automated trading to larger trade sizes and expand usage across your customer base. Maybe you could talk about some of the hurdles, and how you're working to overcome them.

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

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.

[Michael Cyprys, Analyst at Morgan Stanley]

Great. Thanks. And just a follow-up with the -- on the balance sheet side, $325 million cash position. How do you think about deploying that here, prioritizing maybe buybacks, but -- or investing organically in the business, but also M&A? Where might that be helpful in terms of filling any gaps or accelerating growth in certain areas?

[Christopher N. Gerosa, Chief Financial Officer at MarketAxess]

Yes. So 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.

[Michael Cyprys, Analyst at Morgan Stanley]

So if I just follow-up, just really quickly there. Does that imply about $100 million of excess cash then, cash and investments?

[Christopher N. Gerosa, Chief Financial Officer at MarketAxess]

Yeah, as of 9/30.

[Michael Cyprys, Analyst at Morgan Stanley]

Okay thank you.

[Operator]

Your next question is from the line of Simon Clinch with Atlantic Equity. Your line is open.

[Simon Clinch, Analyst at Atlantic Equity]

Hi. I appreciate you taking 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?

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

Yeah. I think if you look at it -- a lot of it is the market shocked at investor clients have gone through this year with a significant drop in corporate bond price values and indices and the outflows that they are experiencing. I do think -- if you still look at the institutional client space, we have a meaningful lead on our competitors there. But we have lots of interesting things going to add to what we've done so successfully around RFQ. The growth in portfolio trading is clearly very relevant to us. We have not historically been competitive in the D2D space that's actually growing as dealers use electronic trading more, to move inventory more quickly through the market.

We have some ideas there that we think could be successful around how to compete more effectively in D2D. And as I said, the automation tools in our mind are likely to increase both usage and velocity for trading on the platform. So it's a strong leadership position in the institutional space today, and we think we have many ideas to continue the market share gains in the years ahead.

[Simon Clinch, Analyst at Atlantic Equity]

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?

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

You know creeping higher is, I think, a good explanation of the trends in portfolio trading this year. And the growth rates in the prior two years were significantly higher. So some of the analyst expectations on growth were much higher than what we've observed this year. So yes, we think it's going to be used selectively for situations where large portfolios can be moved mostly through the dealer community. But I think you will see that volatility does impact pricing and portfolio trading, and it's becoming more concentrated too, and there was no volatility in the market. We observed more dealer market makers winning portfolio trades on MarketAxess a year ago than we do today where that liquidity has become concentrated around three or four dealers that do portfolio trading very well.

So yes, our expectation would be exactly that, that it will probably creep higher in the years ahead. And we think we have continued opportunities to continue to take share.

[Simon Clinch, Analyst at Atlantic Equity]

That's great. Thank you very much.

[Operator]

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

[Richard Repetto, Analyst at Piper Sandler Companies]

Yeah, I just have a follow-up on -- two follow-ups on questions that were asked earlier. Chris, on this treasury regulation, central clearing is good for a number of reasons, but it also requires margin. And I know it's not going to be until whenever you said it was another year plus down the road. But could it impact trading of these proprietary traders or hedge funds, if they're required to put up margin in a centrally cleared environment?

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

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 clearing house. 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 Repetto, Analyst at Piper Sandler Companies]

Got it, thank you Chris. And then Rick, I guess the last question is, I understand the pros and cons of the disclosure and compared to what your peers and what you've done. But I guess the question surrounds like as market share in US high grade has been more stagnant lately as well as the pressure on the fee capture that -- is U.S. high grade the more mature market? Is that any proxy for way other credit markets can go over time? And therefore, investors don't have the disclosure or -- like I think you're still pretty positive on the opportunities in US high grade as well that you spoke about on the call. So I guess...

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

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.

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

And Rich, I would just add, if you really think about the growth of MarketAxess today and in the years to come, it is breadth of product that we are growing. There's not one product we're putting up records across our product categories. And we want our disclosure, which is, as Rick mentioned, far more than most of the platforms in the space. And we want that disclosure to recognize the breadth of product that we're offering, not just in investment grade capture rate. And so, we've made this adjustment. We've actually become more transparent on a monthly basis than most platforms in the space. But if you look at the overall records across the product categories, we want to make sure our disclosure reflects that breadth of products, not just one category.

[Richard Repetto, Analyst at Piper Sandler Companies]

Got it. Thank you very much.

[Operator]

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

[Kyle Voigt, Analyst at KBW]

Hi, good morning. Maybe if I could just ask a question on the Eurobond business and the significant share gains there. Can you just give us an update on how much of that total market you estimate to be electronic? And from a competitive perspective, we can obviously see your share and Tradeweb share. I guess the question is, do you believe that Bloomberg is still seeing significant share in that market? And how much electronic share is left on their platform?

And then I'll ask my follow-up with this one is, are you seeing Bloomberg do anything strategically to catch up in terms of investing in their offering or developing protocols in that market or should this kind of continuation of ceding share should investors expect that to kind of continue near term? Thank you.

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

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.

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

I would just mention there's a sizable opportunity in the Eurobond market in terms of electronic block trading. We continue to see, obviously, our record share average trade sizes are still small relative to the block market. But we are gaining block market share as well. So I think there's a huge opportunity in the Eurobond market to increase the electronic trading of blocks. Obviously, the dealers are quite comfortable of providing price for large-sized trades. And we think that opportunity is quite sizable in the Eurobond market.

[Kyle Voigt, Analyst at KBW]

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 US 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 US, and maybe just kind of an update on the uptake there.

[Chris Concannon, President and Chief Operating Officer at MarketAxess]

Yeah, I think, the way we approach the dealer-to-dealer business -- and Mid-X is really a dealer-to-dealer offering. We have that offering live in Europe, and we continue to see demand for it. In the US, we're seeing higher demand for our dealer RFQ platform where dealers can come in and use Open Trading anonymously and request price from other dealers. And we continue to see growth in the dealer-to-dealer business, both globally in terms of Mid-X as well as the dealer-to-dealer RFQ business across US and Eurobond market.

So I think the offerings, that we are certainly growing is that dealer-to-dealer business. They look at things like live markets, RFQ as well as a mid-market session-based trading. In this environment with heightened volatility, those mid-market sessions are a little bit more difficult to manage because dealers are typically looking to move out of their inventory more rapidly than waiting around for a mid-market section. So we see heightened demand for dealer RFQ over any of those mid-market solutions.

[Kyle Voigt, Analyst at KBW]

Great, thank you very much.

[Operator]

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

[Richard M. McVey, Chairman and Chief Executive Officer at MarketAxess]

Thank you for joining us this morning, and we look forward to catching up with you again next quarter.

[Operator]

[Operator Closing Remarks]