MarketAxess Holdings Inc. (MKTX) Earnings Call Transcript & Summary

Welcome back, everyone, to Piper Sandler's Global Exchange & Financial Technology Conference, we're in our second session of the fixed income electronics. It's my pleasure to introduce and welcome MarketAxess' Chairman and CEO and Founder, Rick McVey. Rick just communicated to me that they're celebrating their 20th anniversary, so he's been there, like his peer, through some ups and downs and seen good times and difficult times, and navigated MarketAxess through this recent -- thus far through it. Hopefully we're coming out the other road, Rick.

So first, welcome, Rick. I guess the first question is, again, there was this -- not only was there global volatility, but there was this stay at home sort of transition the company made. I guess just briefly, how -- what do you think are the things that you definitely saw a benefit, and how sustainable do you think the benefits that you see, the incremental increase say in Open Trading -- in automated trading and algorithmic trading, et cetera.

Great. Thanks, Rich, and thanks to you and your colleagues at Piper Sandler for having us again this year. This is our favorite conference of the year for the fintech industry and we're so happy you stuck with it and have done it virtually, and certainly a real service to all of your clients and ours, so thanks so much for doing it, for having us. It's been quite a 3 months, I can tell you that. And none of us would have chosen the reasons that we're in this market environment and a lot of suffering around the world that we wish had not happened. But you are right with respect to our little world and our business. The volatility in the market and the necessity of traders that are now working from home to connect efficiently with the market has led to one of our best growth periods ever over the last 3 months. And we always do well, as you know, having followed us as long as you have, when volatility is up in credit markets. It's certainly been up the last 3 months. We tend to do better when spreads are widening, which they certainly were for the first couple of months with a credit event. And I think that the growth has also been aided by the fact that we helped to move 10,000 trading users in the institutional market from their main headquarters, whether it's dealers or investors, to their work-from-home environment. So getting all the security certificates, getting everybody set up properly to trade in a controlled way, and it's just proven to be a much better way for people to connect to liquidity from home around the world in this particular environment. I do think that some of these changes are permanent. I think most people feel that financial companies, in particular, have been able to prove that we can run our businesses remotely. Some employees will choose to work from home more regularly going forward. Most of us will be more comfortable with that happening. And as a result, some of the trading behavioral changes that we see over the last 3 months, we believe, are here to stay. And the other thing that this environment has really brought out is the importance of Open Trading, our all-to-all marketplace, and it's very difficult for banks, when you have a credit event like this when they're managing distress in their loan books. They've got volatility all over the place to be the only providers of liquidity to all the clients that need it at a time like this. And we feel so good about our contribution to market liquidity and the functioning of the secondary market through this credit event because of Open Trading, which grew during this period to about 1/3 of our total trading volume. So really important additive liquidity in the market to help us get through this credit event.

I think the Open Trading is a big issue. We'll get to that in one sec. But I did want to talk about even just your -- well, your market share probably reflects that Open Trading. But I guess my point is you had good market share in the 20%, 21%. But we just -- fair to say it was likely understated because of the issuance was, say, double and your market share is single digits, that your actual market share of the -- if there was a, we call it, normalized environment might have, I calculate, 3 to 4 points higher. Is that...

Well, the underlying trend in our share is better than what we're reporting, if you look at the normal patterns for what happens to our share in the short-term periods when new issue volumes are elevated. And to the credit of the U.S. credit markets, the capital markets have been wide open, and clearly, the Fed helped us to get through the credit event. But we have never seen an issuance period like the last 3 months where we had $800 billion in new high-grade issuance over that period. That is what people would normally expect over 9 months. We got that debt issued in the last 3 months. But you're absolutely right. When we see elevated new issue activity, where a lot of that new issue trading is conducted with the underwriters and velocity is very high bid offerings, those new issues tend to be very tight. Those are short-term periods where our share normally comes down. And what you saw in this period was that we had higher new issue activity than ever before, and the share trends were very positive. And there are 2 things going on there. We were getting a higher share of new issue trading than we've seen in the past, but the underlying trend of share gains in seasoned bonds is higher than what you see in the reported volumes.

Exactly. And that's what I was trying to quantify some as an estimate. But the Open Trading is a fantastic story here. And I guess, everybody's asked all kinds of questions about it. Your peer has acknowledged it. The platform is significantly built out to offer liquidity during illiquid times. But I guess my question, if you look at issues of illiquidity, where you serve liquidity as well as a stay-at-home sort of phenomena, they both likely contributed, I would suspect, to...

No question about it, and this is a period where secondary liquidity was at a premium and the big differentiator for MarketAxess versus all other fixed income platforms in the world is the very significant investment we have made in all-to-all or Open Trading over the last 7 years or so. So we run a marketplace that's just fundamentally different than everyone else. We have over 35,000 Open Trading orders available to all in our marketplace each day so -- and over $16 billion in notional value in bond trading opportunities that are coming through in global credit on MarketAxess each day. So when the market was fragmented with people leaving headquarters and going to home and they really needed a central marketplace with broad-based liquidity, MarketAxess was that answer. And during the last 3 months, we've had over 800 firms providing liquidity on MarketAxess. So you think about how different that model is than the one that we had in the last crisis, where everybody was trying to go through the narrow funnel of 7 or 8 banks. At the same time, they were trying to delever their balance sheet, and the market didn't function. Trading volumes went down. E-trading share went down. This time, the secondary market did function. Trace volumes are much higher, 35%, 40%, 50% if you look at high yield. And the electronic volumes on our platform are up even higher because of the share gains. And I do think you're absolutely right, Rich. It's that broad base of liquidity that we have developed through open trading combined with the necessity of people working from home and having the venues be the most efficient way that they have to connect with the markets.

Yes. I mean, when I -- we've seen other markets -- I don't -- and you just mentioned it, Rick, I don't -- at least me personally, doesn't think it's a cardinal rule just because of high volatility. People go to electronic markets like -- in the last crisis they didn't because they weren't built up enough to handle it. So would you say that the liquidity, the number of participants that allowed the volatility and the illiquidity to reach you, the same that it does for equity exchanges, but you got to be able to have a platform that allows people to interact.

That's right. So if you look at the successfully trading venues in fixed income, they're the ones that have been around for 20 years or more because it takes so long to develop critical mass in the client network to have the audience where you can really facilitate broad-based trading at, especially in an environment like this. And we've got over 2,000 buy-side firms on the platform. We've got over 250 dealers. So those networks actually really do provide an important role in allowing markets to function during times like this. And thank goodness, the trading venues are just at a much different stage now in fixed income than where we were in the last crisis.

So from what I've learned is you're continuing to roll out new enhancements like auto response, Auto-X as far as your algorithmic trading and portfolio trading. So I guess the question and maybe this applies, but the use of market data, it seems like what we've learned in other markets, it's a critical link, a driver to the -- we're seeing that, at least from what I understand, the increase of auto trading. But how critical is it for you to build out market data and make that available to your customers?

Quality real-time data is the essential ingredient to Auto-Execution or dealer algos. And it was interesting to see that this was a test for the dealer algos. And in many cases, they were, out of necessity, widening out bid offers, but many of them kept their algos going through the crisis and provided liquidity to their clients. But the real-time data that we generate through tools like CP+ is absolutely essential to give dealers the real-time data flow that they need to continue to have algos available, especially during volatile times and also to make investors comfortable with Auto-Execution. And trading efficiency is the name of the game right now. Dealers and investors are both trying to get their costs of trading down. And the more we can do to drive high quality, real-time data into them to allow them to trade confidently on an automated basis, the higher our share will be. So this is a huge area of investment for us and something that we're excited about carrying the levels of electronic trading even higher in the quarters and years ahead.

And the amount of investment that you continue -- that [Audio Gap] that you will continue to make, from what I understand, and still continue to be at levels, double-digit levels that, because you see the opportunity. Is there any time in the foreseeable future where that might level off? Or is it representative of the opportunity?

It's totally representative of the opportunity. And we don't waver, when we have a soft month or a soft quarter, on investment. It's such an enormous opportunity, and the dealer and investor demand for electronic trading is growing. So when you look at how vast the fixed income opportunity is around the world and where we are in various products, we've come a long way, but you still see the high-yield market share, 13% electronic; EM market share at 12% or 13%; lots of opportunities in structured products and elsewhere. It's just an enormous opportunity that we're after and as a result, our investment budget is larger than ever. I'll give you a little stat to put it in context, Rich. But if you look at the first quarter, the aggregate FICC revenue of the top 5 banks alone was over $17 billion. And I did a quick back of the envelope on all of the e-trading venues in the world and I couldn't come up with more than 2% of that revenue that's in e-trading currently. So it gives you a sense of how big this pie is and how much opportunity there as dealers and investors embrace electronic trading through a larger part of their business. So our investment is going to continue. It will probably grow because we're getting rewarded from our clients by delivering more technology to them to drive down transaction costs and increase their trading efficiency.

Understood. I think I asked this question on the conference call, and -- but it's about the Fed stimulus package about liquidity and ETFs as well as liquidity in the corporate bond market. And I thought the answer was -- really hasn't taken -- hadn't had a big impact yet. I guess could you update, are you starting to see or feel any of the...

Well, so I know what you do and what's been really announced and made public by the Fed. And there was an article either today or yesterday in the Wall Street Journal that we think was largely accurate, where they've been clear that they have been active in fixed income ETFs. So they've started the program in ETFs. There are signs that they're building the foundation to be able to participate directly in the corporate bond market. The good news is the sense of urgency is undoubtedly lower today than it would have been 6 or 7 weeks ago because credit spreads have recovered 60% or 65% of the move that they made in late February and March, and the capital markets are wide open. So issuers are able to issue whatever they need right now. And I think that's a testament to how strong and how broad the U.S. credit markets are, because if you look at the issuance, it's just wildly higher in the U.S. markets than it is anywhere else in the world. We have broader participation. We have better transparency. We have better market infrastructure. And at a time like this, when issuers need to get to the market, improve their balance sheets, improve liquidity, they come to the U.S. credit market. So I think the Fed is likely to be patient because just them announcing that they're there and prepared to help if they need to has been part of the solution to get credit markets to recover, and they're actually -- they're functioning at full throttle right now.

Understood. That's helpful, Rick. Just switching subject real quickly, I think we have time for a couple more, is LiquidityEdge, again, [ record-blinded ]. I don't know what, I was going to say as you'd expect, we're so often saying now record because of 1Q volatility, but we also -- you started to integrate, I think, the first, the beginning of the integration. I guess has it met where -- I guess you can allow clients to get to the LiquidityEdge platform through -- it's not fully integrated, but the first part is. Has LiquidityEdge or MarketAxess rates, has that lived up to your expectations and has it fulfilled clients? Was it that much demand, and has that met the demand with sort of the rate side of the credit product?

The short answer is yes, in the very short term, it has. But let's be clear. Our entry in race is brand new. This is going to be a multiyear journey. We have great respect for what BrokerTec has done, what Tradeweb's done, what Bloomberg has done in the government bond space, we're not going to change that dynamic overnight. We're the newcomer. But we really like a lot of the things that are different about our rates protocols. We certainly have already benefited from the ability for dealers, in particular, to hedge corporate bond trades through our new rates platform directly. We'll have net hedging out probably in the third quarter, a big opportunity for us to take all of this corporate bond volume and help our clients with hedging. And then the real journey is out on where we'll end up in the client space. But we expect by the end of the year we'll have a client front end, and we really like the liquidity pool. And we think we've got some good ideas on how we can compete in the space. We're off to a good start, but this is going to be a 2- or 3-year journey for us to see how we stack up and how we compete in the rate space. And we're just excited to have that expansion and extra opportunity to work on.

I guess, we got 2 questions. Over the last 20 years, you've been building out this network. And again, it shined through during this period of illiquidity. How much more buildout, or have you maxed -- how much more buildout is there? I guess there's a need to get more people more engaged on the platform. But is there any way to -- from a competitive standpoint -- well, first, are you there where you've gotten the liquidity that you need -- you could potentially get? And can anybody else catch up, I guess, is the question?

Well, so yes. So I think there is a few different questions, 1 on investment and 2 on the gap versus competitors. But look, we're nowhere close to what we think fulfills our mission to be the global leader in electronic trading for fixed income. And so the investment budget is [ probably fair ] as far as the eye can see because we're just getting started in Asia. We're just getting started in munis. We're just getting started in rates. We're closing the gap and catching up to the incumbent in Europe. So there's so much for us to work on. There's lots to do in structured products. So the good news is there's no shortage of ideas and it's all about prioritizing investments, but that's going to continue as far as I can see for a long time to come because the future opportunity is still so large. Catching up is interesting. When you get this kind of volatility, it's -- you don't want to be the second or third platform in the space because the concentration of activity and liquidity goes to the leader, and we're convinced that we were the primary beneficiary in global credit trading over the last 3 months. And I think all the metrics that you and others look at would suggest that our competitive lead and advantage has widened over the last 3 or 4 months again.

Understood. I did -- hopefully, this is coming through, but you can see my fire -- make it a true fireside, you can check the box, Rick, for doing your yearly fireside chat with me. If that did come through. I hope it did.

It did.

Anyway, the last question is -- and you started to touch on this. But again, both you and your peer have a long period of experience. And you just named a number of different things that -- where MarketAxess could go, I guess, in the number -- you're just getting started, as you just said. What would the firm -- and we've been talking about this, I can remember, since early 2000s about the potential here and the opportunity. So I guess the last question is for you to sort of expound like what will MarketAxess look like in 3 to 5 years, or you pick the period where you think you need to -- the time period it needs to get to the point where it's realizing a good part of the potential that you get excited about.

Yes. Well, the opportunity, even in our core business where we have demonstrated consistent growth and leadership, is still massive. So I think you're going to see client investment in automation grow over the next 3 or 4 years, which will increase the benefits that they see from electronic trading. So I personally see an acceleration of share gains coming in global credit for electronic trading over the next 3 or 4 years. So that could land us at a very significant market share over that time period. I'm very optimistic we're going to succeed in munis and have a great market there. I like our odds in rates. We have so much more to do internationally. We have an aspirational goal in Europe to be the #1 electronic trading provider there that would come with significant growth, and Asia is just getting started. So there's, if you think about international expansion, a lot more share in our core and growth complemented by new product opportunities. We feel really good about the growth opportunity we see in front of us.

Rick, I want to thank you for participating. We're going to a full slate of panelists on fixed income electronics next. So this was a great, what you call it, segue or great content to go into that panel. In fact, your man will be on the panel as well. So thank you for participating. Sorry it couldn't be face-to-face, but next year.

Thank you, Rich. And thanks again for doing this. It's always a great pleasure to be here with you and to see your clients at the conference. So thanks for having us.

Thank you, Rick. With that, next up will be a fixed income electronic trading panel at 4:30. So we hope to see you all there. Thank you. Thanks, Rick.

Welcome back to the Piper Sandler Global Exchange and Financial Technology Conference in 2020. Again, this virtual conference has been an interesting experience today. But we are in -- towards the end now in the fixed income segment, having heard from Lee Olesky of Tradeweb and Rick McVey from MarketAxess. I'm pleased to announce the all-star panel that we have: from Bank of America, Sonali Theisen; Greenwich Associates, Kevin McPartland; Jane Street Capital, Matt Berger; MarketAxess, Chris Concannon; Tradeweb, Billy Hult. I know that these -- I know you don't -- have not heard of any of these people, but they are -- and I take that back, they are very -- we've picked them because they are prominent in the space, and they're very knowledgeable coming from different aspects in the space as well.

So first, I want to welcome all you guys. And we'll start with our first question. So we just went through a pandemic, plenty of volatility, increases in electronic trading. I guess the first question is can we differentiate which markets went electronic and which didn't? I'm not of the total belief that all markets go electronic involved in heavy volatility. I sort of believe that the market's going to be ready for it. We're going to have certain liquidity on the other side. But I'll start with that. Which markets went electronic? And which is -- and I guess, maybe I'd start with Billy because you got -- you have some multiple asset classes.

Sure. Hey, Rich, and thanks for the very nice introduction. I think I am aware, by the way of the fact that I think it was the last person you picked for the panel, so I'm going to try not hold that against you.

You're still in the first -- you're still in the first round [indiscernible].

[indiscernible]

Yes, I think someone from Trumid dropped out, Billy.

Yes, Yes, I'm the player to be named later. I'll answer it this way for a second, then I'm happy to hear -- very happy to hear from everyone on this [indiscernible]. A lot of times when people ask me what I do, I kind of say I'm in the human -- I'm in the change of human behavior business. And a lot of what a company like Tradeweb, and I'm looking forward to hearing from Chris and a company like MarketAxess, has done for all these years has really been about changing human behavior. A lot of that change, interestingly, kind of happened really around sort of a traditional kind of structure, right, the sort of like traditional kind of work kind of office structure. And a lot of that change was really incremental in my mind. So as like the global government bond market went electronic and the TBA mortgage market went electronic and the global swaps market went electronic, it went electronic pretty incrementally. And our client base, and Sonali, you'll have a very interesting perspective on this, our client base, in some ways, was always able to sort of like, pick and choose on some level how they wanted to access markets and how they wanted to trade and how they wanted to consume data. And in a very kind of interesting way, and I think we all know this well, the reality is this environment has kind of sort of like thrown the structure upside down. And the reality is all of the ecosystem, all of the participants are in like a brand-new world and the ability to kind of pick and choose, quite honestly, has kind of changed. And now it's about like how do I do my job most efficiently, how do I take all of these things that I've learned these years and put them to use. So we've seen through March and now into kind of, obviously, the beginning of June, we've seen clients now integrating market data into the trade selection in a much different way. We've seen sort of onboarding of functionality around [ axis ], around request for markets, which is a very interesting way of kind of mimicking kind of phone trading behavior in a much different way. And I think we've kind of entered into a brand-new world now where the ability to pick and choose has kind of gone away and now it's about how am I the most efficient at what I do. And so much of what we've done all of these years is playing right into this moment. And I think that's how I would sort of describe the very kind of moment that we're kind of in today.

And Rich, I would just add, markets in volatility, if you're a trader, you're looking for certainty and speed of execution. Whether that's electronic, that's a phone or that's a chat, you're going to gravitate towards those solutions. I would say in some markets, and this was, to your point, some markets are ready for electronic where they solve that. The automated execution is both liquid and fast. And so they -- if you look at the equity markets and even in the FX markets, those markets are driven electronically in volatility. I think the credit market and a little bit what treasuries was a little bit unique because of a liquidity challenge throughout March. But in the credit market, there was gravitation to solutions that had alternative liquidity, not just your traditional forms of liquidity. So I do think liquidity was the key. And if you were able to offer liquidity in a fairly efficient process, you were a winner in March, and that was the key.

So yes, I would add that I think in terms of what some of the defining principles were, some of the markets that Billy mentioned, it comes down to how much does that market need to be negotiated versus there can be immediacy of liquidity. So some of the markets where, again, in volatility, there can still be firm liquidity and it maybe is more of a macro product where there is a more consensus view that's easy to have at that moment on what's happening, like, are more inclined to remain electronic, and that's what we saw. Even if you look at swaps versus like a treasury market where like portions of the treasury market, like volumes went -- were through the roof, but a lot of that went voice where the [ 30-year ] was trading like a distressed credit, right? But the swaps market stayed largely electronic. So it also comes back to structurally, like I talk about this a lot, the market structure. Like if you look at equity, as I always make this argument, everyone's probably sick of hearing this, but like the inverse pyramids of number of participants looking to trade it versus the number of instruments and what that looks like. When you think about the more credit aspects of instruments, like the more credit intensive they are, the more idiosyncratic they are. There's not going to be that -- like I know exactly where this is, particular something's [ off-run ]. So I agree with everything that was being said. But like we definitely saw, in this volatility, that increased dispersion of what is a more liquid macro product versus what really -- you need to do the homework and it wasn't necessarily consensus on where it should price.

Sonali -- before you get to Matt and Kevin for one quick second. I'm just -- I'm really curious what you're going to say in this. Do you see a different mindset of the traders in your business across fixed income? Or is that -- do you still feel a little bit of that resistance? Or what's -- how have you seen sort of a little bit of a mind shift?

On electronification?

Yes, around electronification, around how they deal with their clients, around where they kind of come out on all this.

Yes. I don't think that the resistance -- look, I mean, I don't think that there's the resistance or the skepticism, if you will, or my market -- this doesn't apply to my market. I think, if you look the last 10 years, that's really been melting, that's melted pretty much everywhere. I think it does come back to as well, now that we've had many years of evolution, we recognize that it's not going to be one size fits all in terms of the protocol. And that I wouldn't go broader, Billy, than maybe just e-trading to like broadly electronification of just -- once you know, again, some of this is going to remain bilateral. The more it's a negotiated market, you may only interact with 1 or 2 dealers. You may not see firm liquidity, but you may want to source, to your point, all the data to make that decision and then engage electronically and consummate the trade electronically, and there's really a spectrum. And I think now we have more options evolving in the fixed income market to really address that spectrum, rather than just say, let's try central limit order books or dark pools or the protocols that are over here for more firm markets. We've evolved the spectrum. And as we've done that and as this is getting easier and easier technologically, I think the skepticism, the resistance has definitely faded. But obviously, the markets that are more, again, more idiosyncratic, less liquid, lots of instruments, fewer participants, those have been the slowest to kind of migrate to electronic.

Sonali, I'm glad you bring up equities because we don't really have any equities expertise here. Oh, yes, we have Chris.

Rich, he's now an ex-equities guy.

Yes. And I'm a happy, happy ex-equity guy. Yes.

Literally.

Matt, I want to turn to you because you're a guy that can get -- really benefits as an alternative liquidity provider, Jane Street. What were the markets, in your experience, was this the opportunity that you've been sort of waiting for to further penetrate, to get more active in this space?

Yes. So I guess I can talk about some about just what we saw. I mean the first things that we saw were outflows in ETFs. I mean you're really starting with treasuries and then going into IG and high yield. It was surprising to see that strain show up first in treasuries and then maybe second in short-term IG, which is not where you think -- people talk all the time what's going to happen to high-yield ETFs, how are they going to melt down and things like this. And really, the stress was elsewhere in the markets. It was in treasuries and IG primarily. So the first thing we said, when you talk about electronic trading, most of that trading is electronic. Some of it is RFQ, which is kind of like an in-between electronic and manual protocol, and that's growing. And then a lot of it is just straight up electronic. And things are moving so quickly that I think a lot of people move to electronic. And similarly in IG, a lot of the order flow is coming through via the various different electronic platforms. One thing that was very interesting to us that we saw is as we saw all this outflow in ETFs and ETFs trading at a discount, we still saw a lot of investors looking to put money to work. And a lot of that trading that we weren't able to do was, again, a mix of electronic and kind of more high touch. It was important to find out what inventory we had that we could match up with others. And we did a lot of this via portfolio trading, via streaming levels to our clients and things along those lines. So it was really a mix, as others have said. And I think in the high-yield market, more of it stayed voice. And in fact, I think a lot of people just chose not to sell in high yield. It was like the market's really wide, I'd rather go to treasuries, I'd rather go to IG. Those are places that I could raise cash without crossing giant spreads. Maybe I'm going to focus on those markets. So maybe that's kind of a summary of what we saw. In terms of our business, yes, it was a great opportunity for us to provide liquidity in all of those different ways. ETFs had record volumes, and our market share was certainly up and similarly in IG. Whereas, honestly, in high yield, I think more things were kind of appointment to trade and then things that were trading at distressed levels, again, that's not as much our expertise. So I think there were certain things that really fit us and certain things that moved, that stayed in kind of more older style protocols.

I want to turn it over to Kevin, who I highly respect for his work that he does in this area, in the whole electronic area. And I'm not joking. This is serious. What are your observations that you've dug out in your work?

Sure. Yes. I mean, of course, I agree with everything that's been said so far. I mean, I think it's worth noting that the market infrastructure, as a whole, held up remarkably well given the volume that went through and the volatility and uncertainty, especially in early March. The treasury market, right, as was pointed out, right, in early March, there were a few days where it traded over $1 trillion a day, right, which is absolutely incredible, right? Usual days are $500 billion, $600 billion. So $1 trillion a day was traded and there were no major outages, no data outages, no trading outages, which is just amazing. We did see, as was mentioned, right, there was definitely a pickup in voice trading as, I think, as investors just didn't know what was going on. And to some extent, the dealers weren't sure where they wanted to price. And so sort of human intuition kicked in and people wanted to talk to understand things better. Although that said, right, the total volume traded electronically certainly jumped for the month of March. And order book trading picked up quite a bit more than the other aspects of e-trading, which is common, right, because then you get a lot of market makers sort of jumping in and trading on the volatility. But so e-trading, yes, was down, but the markets held up remarkably well. On the credit side, e-trading really, really held on maybe a percentage point or 2 down looking at the total market. Again, another case where total market -- total sort of absolute volume traded was up, for sure, in credit, another sort of incredible showing there. I also think one of the points worth noting in the credit markets is that there's been a lot of focus on automation from the market participants from Tradeweb, MarketAxess, right, the others in the space over the last, say, 2-or-so years that helped not just with the execution process, but with end-to-end, right, end-to-end trade processing from pre-trade to settlement. And so I think a lot of that were probably helped as well to handle like when you were doing a sort of $50-plus billion days in March, that, that really helped all the market participants to sort of keep up and sort of know where they were from a risk perspective.

One thing I'd say real quick, Rich, is, first of all, I'd like to borrow a couple of Kevin's books and put them in the back of my background.

He looks much smarter.

Just give me like 5 books, please.

It's really a virtual background. He hasn't read all those books.

But I can say this, and Sonali will appreciate this. We had seen something that was happening 4 or 5 years ago around fixed income, which is obviously not including Bank of America, but there were a bunch of specifically European banks that were kind of pulling out of a lot of the different fixed income markets that, for example, Tradeweb was in. And we made a pretty concerted effort to make sure that as -- in terms of the different businesses that we were in, we were going to stay really close to what you were describing as the alternative liquidity providers in the marketplace. And again, whether or not that's Jane or Flow and Citadel's kind of rise around fixed income has been pretty well documented. I would say this, and I know Chris has seen similar things. Those entities not only did well, they did extraordinarily well in those moments of the very volatile markets. And I think, in a good way, it was a real sort of positive effect on the marketplace because I think there was always a skepticism, which is, are these guys going to be there when the kind of proverbial, whatever the word is, hits the fan. And they were real entities that were kind of thriving in those moments, whether not we're talking about ETFs or credit or government bonds. And that was a very interesting kind of component of everything that happened.

Well, of course, we can't ignore, right, I mean, the market is used to the Fed buying, right, for the last decade, but this is a whole another level. And in corporate and in munis, we could even see in some of the treasury, reported treasury volume data, right, you can see a big spike in off-the-run purchases, what looks to be right after the Fed started to step in. So we're still digging into that. But there's certainly going to be an impact on market activity and the way the markets interact when the Fed's in there buying. And where -- where -- what are they using, where are they -- how are they trading, you have to imagine they're leveraging a lot of the same tools as the major market participants to find that liquidity.

I think -- well, the Fed has been very interesting. And obviously, in ETFs, the Fed is using primary dealers, and that's the plan for bonds as well. But just as interacting with some of that flow, what's been interesting to me is that there's been huge inflows into ETFs without the Fed really buying anything. I mean, now the Fed is buying and has bought a few billion, but we've seen much, much larger inflows into those products in advance of the Fed. And it'd be really interesting to see how it kind of -- how it all plays out, but I thought it was interesting how dramatically markets moved just on kind of the announcement of what the Fed was planning to do. And then I think everyone was waiting around when the markets recovered so much, all right, now the markets recovered so much, is the Fed still going to make these purchases. And it seems like, at least for now, the answer is yes. But a lot of that's kind of surprising things and all that.

Rich, I'll just throw in, the interesting pattern that we saw during March was the entry of the long-only as a liquidity provider. They just saw levels trading that -- again, they aren't fully automated to do this, they're not built like a dealer, but the levels that they were seeing were attractive to them, and they were able to step in and provide liquidity to the market, which is -- you see that in a more automated market, but they were able to leverage some of the tools that we have and others have, and they came in and they actually supported the credit market. Obviously, the Fed wasn't in the credit market during the most volatile periods. And there's really alternative liquidity, the buy-side, the long-onlys coming in and being the other side of some of the liquidity demands that were on the system.

I want to get more into the auto algorithmic trading side of it. But before we go there, just right off what you said, Chris. I guess the question is the sustainability of all this. I mean, certainly, we're not going to be at the volatility levels. When I look at sort of what happened, there was the stay-at-home factor, there was an illiquidity factor, and then there was volatility as well. So I don't know whether you can really separate those out or not. But if those are the drivers, how sustainable are they going forward? Or some elevated level, how sustainable is it? What strides have we made that we're not going to go back to prior days?

One thing you -- sorry, one thing you left out is the new issue, the explosion in new issue that we saw immediately after. And that's going to be a factor going forward as well. But go ahead, Billy. Sorry.

No, I was just going to say, it's really interesting as we saw in a lot of our businesses are the volumes go through the roof in this period of time. And I've talked a lot about AIX and the sort of movement from kind of low touch to no touch and how, in general, the buy-side has gotten so much more sophisticated around their access into liquidity in the market. The percentage of AIX trades in the sort of most volatile moments of the market actually went down a lot, right, because there was the sort of need for some version of kind of human oversight because, I think, the truth is the market was just so stressed. What's interesting is just really, quite honestly, and this is to your point around, I think, sustainability, is just really how quickly that percentage has now recovered as the markets have gotten more healthy again. And I think one of the lessons learned is we have to continue to invest a lot in terms of getting smarter and more sophisticated around the search for liquidity. That's not going to change. There's no going back from I need to get smarter around all this.

I also think that listening to everything that everyone said, I agree with all the comments. I think that you could potentially even characterize March was much more of a liquidity crunch, right, than it was a credit issue. And in that liquidity, there was such volatility in the needs in the market and reaction, et cetera, it's very understandable, right, that the algos got shut off or didn't work or data like the black boxes like weren't programmed for this event, right? I mean most of them have been developed in the last several years. They weren't really set for this event. Most likely, we will now see this over time, right, like read into more of a credit quality issue for the marketplace, and that tends to be a slower-moving factor for the market than these -- certainly, in this last period, the liquidity crunches that we faced. And I think it does make sense as that -- as we kind of shift, I think we've gotten to a calmer period on liquidity needs. And we are probably forecasting having more of a credit risks that are going to be at play. That like the models, again, will turn back on in, again, whether it's algos, market-making algos, whether it's AIX, et cetera, that they're going to be more adept at handling that. I think interestingly, more broadly speaking, you can make the argument that like the programmatic trading that exists, certainly in credit, especially, is just -- has not really been as equipped to handle like volatility that's related to liquidity, right? Like...

Well, there's been so much work done in fixed income markets on both to generating new data, gathering data and then figuring out how to do something with it, right, which the technology over the last 2 or 3 years is really only what's allowed that to happen, and that can be both post-trade execution analysis, writing the algos, systematic trading. The list is almost endless. And if it's a weird silver lining from this market event, there's a tremendous amount of data that was just generated, right, to help market participants to understand how markets react in a variety of situations, right? So we joke about -- I don't want to joke about it. I guess maybe we talk a little too much about artificial intelligence and there's only probably a relatively small few that are truly doing that. But the robots are going to learn an awful lot from what just went on, and it's -- there's really nobody else that can because there's just so much data to digest. Like in this case...

I think one of the things -- and I'm really curious what you guys think about this, but I think one of the things that makes -- there's a lot of things that make work from home kind of, in some ways, day in and day out, challenging. One of the things, I think, is it just cuts against the sort of culture of how the sort of the fixed income ecosystem has kind of grown up. They kind of -- they're used to sitting next to each other. They rarely kind of change seats, let alone anything else. And so how are they going to incorporate what they do going forward because no one's rushing back to these big trading floors anytime soon. So there's going to be this need to continue to get efficient and excel at your job. But I think part of what you were saying, Kevin, that makes a lot of sense is just around the incorporation of data to help make these trading decisions. You can't yell over your shoulder anymore in the most obvious way.

I wonder...

Go ahead, Matt.

Yes. I guess I would say I wouldn't want to minimize the importance of these like super high volatility times. And we, at Jane Street, spend a lot of time thinking about times like this and how can we be kind of at our strongest in these moments and spend a lot of time preparing. Some people think of us as this very much tech-focused firm, and that's absolutely true, but people would be surprised how many human traders we have and how much manual discretion there is in our trading. We're really going through a hybrid model where obviously we have as much data as we can. We have our algos too the best we can. But there's a lot of adjustments that have to be made on the fly. It's like ETFs are trading at a level that we're not used to. What does that mean for our providing an investment-grade bonds? Agreed. That's not going to be a purely AI-driven decision because it's a market that we've never seen before. And that's why we have so many people, and that's why we're always trying to add a large amount. We have 40 new traders starting out of college, and they're not just developers, they're thinking carefully about the trades that we're doing.

That's very important.

Put a lot of value in that.

From an information sharing perspective, Matt, I'd be curious, right, do you miss the data? Or the information you would get from the person sitting next to you more? Or the fact that you have 8 screens in the office; in your home, you only have 3 or whatever?

It's funny. It's actually a mixed boat. I think that's a bad analogy, a mixed bag. That didn't make any sense. But there's some disadvantages in that we're not all in the same room, and you might not hear screaming. The one thing we benefit from is we might hear people on the equity side yelling and screaming because something's going on. And then they think, well, something's going on and you learn that way. What we've tried hard to do is find new ways to communicate, whether it's group chats, group text, just listening in on each other's conversations. And in many ways, it's been easier to understand what's happening across the firm. I can go into any number of different rooms and understand what's going on with different desks, in some ways easier, from here than I can from there. I worry longer term about how do we collaborate and how do we really innovate in this situation. So that's a big challenge for us right now. But in terms of the day to day, it's been surprising to me that it's not purely negative. Like there's negatives, but there's also positives.

Yes, getting back on the algorithmic trading thing. What the investor audience, we're very interested in, is what can drive that higher? And it's a debate. Again, you bring up great points about the volatility, was it the time for all products. But I think a couple of you have said that market data, and Kevin, you brought up the data issue, but that good pricing, whether it's AIEX or whether it's stuff that MarketAxess provides, but good market data is a key to the adoption and growth of more real automated trading portfolio trading. Is that correct? And are you in the midst -- how can it be better? What else...

The two are intertwined, right? You can't have automation without feeding it information. And that data becomes critical. And it's not just a price data, it's other components. If you think about the fixed income market, it's a price request market. We all see trace, and we can see responses, but it's much more private-based price request. And so market data is that much more critical in this market. Obviously, the treasury market has the live order books that are streaming, but that's a little bit off-price of where people are really getting down on big blocks. But so that -- in order to have automation, you need better and more sophisticated data. But you also need data that tells you when to trade and what protocol to trade in and how to trade to feed those algos that will probably one day live throughout this marketplace. Because if you look at the size of the market, it keeps getting bigger, it just got really big, the overall notional just exploded, both credit as well as the government bond market. And we have a long road ahead of new issues coming to market because people are desperate for cash. So when you look at the product set, the diversity of product and the diversity of places you can get executed, the data consumption to feed an automated trader where an automated trading solution is enormous. But once you solve that, you could have phenomenal outcomes that are beyond what a trader can consume in an average [ desk ].

So I think it will continue to be as we've seen, at least in this cycle, is just the increased dispersion, right, of spreads. I think we'll continue to see more and more of the tale of 2 cities, right? Like, as Chris has mentioned, this massive new issue calendar, as we know, in corporates, right, like the first 6 months, the bond stays very liquid. After those 6 months, particularly if we enter into a prolonged cycle, those bonds trade by appointment, it's not unusual for there to be 3 or even fewer holders of a high-yield bond, right, like -- and so as you enter that very long tail, which can -- may get longer, the thing that we look at is not just volumes traded in the market, but the turnover in the market, right, which is obviously the volumes divided by the notional outstanding. You've just now massively increased the denominator. And so the more that, that happens, I think you'll continue to see this dispersion. We'll get better and better at algorithmically trading the liquid on the run, stuff that doesn't trade off of a matrix, right? If you look at level 1, 2 and 3 assets, right, like the level 3 assets are market data of quotes out there isn't going to drive those products to trade algorithmically because that takes a lot of IP for people to actually put a level that would have confidence for those products to, by and large, move electronic. So the question becomes, as we kind of go through this upcoming cycle, where do we land? So I very much think though, like we were saying before, like markets that have fewer instruments, we will just continue to see the algos get better, they'll be trained through this. They will -- as was pointed out by Kevin and kudos to Billy and Chris, like we prove resiliency through this cycle of the fixed income markets, which has been a question and an issue kind of like I've spoken on this before. I'm just so worried that like we haven't really tested the pipes. Like we've tested them. So those markets that are suited to, from a market structure perspective, I think will continue to go even more electronic, larger sizes go through. But you will, I think, continue to have this tale of 2 cities. And you'll have this like longer tail now of what is not going to be priced by a black box, algo and traded any kind of size, no matter how many quotes there are in the instrument.

And you know, Sonali -- Sorry, Chris. I want to say this quick.

Go ahead, Bill. Go ahead.

I think you're spot on. And I like agreeing with you...

I like it when you agree with me, too. Thank you.

I'm going to also -- as painful as it is, I'm going to also agree with Chris. I think you guys are both spot on. And part of what we're talking about -- part of what we're talking about, I'm again curious as to your guys' thoughts is a little bit also of this concept of, I think we're going to have kind of continued blend around market structure. As I've talked a lot about kind of our session trading in and whether or not it's credited or off-the-run government bonds, and that can rely. That's a kind of dealer-to-dealer business that can rely on Tradeweb, the client-dealer price to kind of fuel the transaction. That's a little bit of a sort of obvious example, but there's going to be a continued blend around market structure that's going to continue to kind of fuel all of this kind of positive reinforcement around data. There no doubt about that.

Yes. And I'm sorry. I agree with Billy as well. But what's interesting -- and it's a great point. Like the nice thing about the fixed income market is the client is going to decide the protocol, right? In other markets, like futures, for example, the exchange decided the protocol, and the clients have to deal with it and in some less liquid instruments that doesn't work well. The one thing I'm concerned about, and I agree with you, Sonali, that there are products in credit and even in treasuries that are going to trade by appointment. But as the electronic solutions sweep through the marketplace, a lot of times, those products get left behind, and it becomes no longer economical for the dealer to support the liquidity needs in those less liquid names. And so it kind of gets sucked into the electronic solutions. So it will trade by appointment, but it will be an electronic appointment is my point. So the humans do disappear, the price solution, the pricing mechanism still looks like the old -- you're paying 2 dealers electronically, and you ask them for price in that illiquid bond. But you start to slowly lose the human element because you can't afford to have it anymore.

Yes, I think. Sorry, go ahead.

It's all right. No. I think all those points are good. I think -- so protocol flexibility, I agree.

Kevin, you agree with all of us, right?

We're a big -- it's like the Brady Bunch, how I can see myself.

How about this? The next time someone speaks, I'm going to disagree.

I'm not saying anything then.

We have a new rule. Unless you disagree, you can't talk.

I disagree with that, Rich.

Kevin, you go first.

I'm just going to go get a drink. Protocol, no protocol flexibility is, I think, it's huge, right? And that is a big part of what has helped the market to continue to electronify, particularly in credit, a little bit in rates, but particularly in credit and corporate bonds because there are just such a diversity of not just a market participant types, but even amongst the buy-side, right? The ways that people trade, their investment strategies, their investment styles are different. So they want to interact with the market in different ways. So I think that's been really important and helped the market to grow. And then I lost my train of thought because of all of the disagreeing. I lost it. Somebody else disagree with me and pick that up and I'll remember it in a minute.

We'll come back to. So one of the things that -- we've got about 10 minutes to go. You all have the experience that are in the markets. So investors are looking at this. Of course, Chris and Billy have vested biased interest here. But they're looking at the space and they're seeing...

Slightly.

Yes, exactly. They're seeing how other asset classes have gone electronic. They see the potential here. The numbers are out there about the TAM or the target. So I guess the question is have we -- and I know Chris believes that we can't really -- you don't know you're in an inflection point until after, until you're past it. Fair point. I'll agree with that. But I guess is there potential -- and maybe I'll ask the three and just for one sec ask Billy and Chris just to pull back on this. But is this a time of an inflection point where electronic trading on these platforms should, in all estimation, take off even further? Is it an adjustment for volatility down -- like volumes aren't going to be what they were in the first quarter. But they are -- if we reset, we've reset a whole lot higher than prior.

I'll pick up that. And I found my train, right? So it's -- I think as we -- so the part of the corporate bond market that still remains sort of largely manual, right, when we think about how that gets electronified, it's probably not the ways that we're used to. It's not the traditional way we would think about electronic matching, right? There's a huge amount of room for automation, for new ideas, for new ways to apply data science, right, to find a potential buyer, right? Maybe if somebody can figure out who holds every single bond at every moment in time, and if you're a seller, it's pretty easy to figure out who might be willing to buy or vice versa, right? Obviously, that's easier said than done. But in concept, I think the -- there are new ways that will be very data heavy or new protocols that maybe we haven't thought of yet, or maybe that Chris and Bill have already thought of, but haven't told us, right, that will help it to grow. And in terms of an inflection point, I actually think the inflection point was maybe a year or so ago, right? It was like we had a big burst, maybe one, was it like 2013, '14, they were all these new platforms, all this new talk, new protocols. That was right about when Tradeweb really came into credit. And there was a huge amount of innovation. There was a good jump into e-trading levels. And then it kind of came -- kind of flatlined for a little while from a volume perspective. And then really at the end of '18 into '19, it really started to take off again. And I think maybe the culmination of that was in March when the markets were, again, so resilient and really held up under stress because of all of that work and that progress. So I think we've hit it, Rich, and it seems like it should only continue.

Yes. I agree. I was going to say. So I manage market structure and e-trading. And I think about this line -- 2 of the most amorphous job titles you can have these days. But I think about this line as sort of more holistically than just the electronic execution aspect. To Kevin's point, the electronification of fixed income markets, improving the search function, improving the propensity models of Amazon tells you your son bought like all the cars except Mater, like you should buy Mater. Like those types of pieces, like are all developing across fixed income. All of this, this time, again, back to the point, the volatility, the work from home, the prolonged changes to business models, that search function and becoming more targeted in who you're going to engage with and know what instrument might fit, assessing the trade-off between liquidity and how you're compensated for it. Like we have an actually, I think, like the ETF portfolio framework lent something really valuable to the credit markets which is we now have a language by which to sort of assess, right, like these are the bonds in the ETFs and this is how we would price them, and this is what's outside. And we can now talk about what you're paying up or not paying for things that are liquid and less of it. So all of that to me, Rich, is electronification. And then the execution piece is the consummation of the trade is the end of the cycle. So all of this is primed to continue to accelerate. I will take -- I will -- I don't want to say disagree. I take a bit of a contrarian view. On the algos, I'm not certain that, particularly for credit, that this is going to accelerate algorithmic trading of credit in large sites for the reasons that I just described. I do think that the focus will again be on how do I know who to go to. Again, especially if we get into a real credit crisis and we move more toward high-yield distress, that, again, veers into the very negotiated market information slippage, which I know is something that is a very foreign concept on the equity side of, like, I know equity guys all ask, why do you care who you traded with? Like, well, you care, again, if 3 -- if there's 3 holders of the bonds, and the bonds only trades like once in the last 6 months, it might not trade again. It's very important to know who cared the last time, who may care before you make those outgoing calls. If we -- again, we move into a credit cycle where that's where we end up, I'm not sure that auto quoting, e-trading of bonds is going to meaningfully increase, but that doesn't mean that this whole electronification cycle isn't going to continue to accelerate. And again, the e-trading and the algorithmic trading of the more liquid, more macro products will just continue to increase. That's my view.

Yes. I guess -- yes, I guess -- I see lots of room for increase. I wouldn't say we're at an inflection point either. I think the growth has been happening and I expect it to continue. Certainly, ETFs continue to grow pretty consistent and I think have a long way to go. And then we've got our algo trading, I do expect it to grow. I think there are aspects of it that will be better and worse depending on the asset class and how liquid things are. But I think there's a lot of room for growth in our algo trading. I think also there's things that -- is it electronic or is it not, right? Like portfolio trades, is that an electronic trade? Is that a manual trade? What is it? Like, I don't know, I don't really care what you define it as. But that's another kind of protocol that has a lot of room for growth that kind of comes on the back of ETFs, which is [ another kind of ] product. So there's a lot of things where it's not even clear exactly whether you call it electronic or not. Go ahead. Sorry.

No, I didn't mean to interrupt you, Matt. I think that's such a great point. Like, I think that, again, like the whole portfolio ETF business, the big change here, you could argue, right, we've been dealing with portfolios for decades and fixed income. But the big change again was this whole like factor-based view versus only fundamental, like look at each bond and put a price next to each thing. But, that's a massive change and that's because of data and technology, that it's driven it. But I agree, like does that -- is that an e-trade? Not necessarily. But did that happen because of electronification and should it fall in a separate bucket? Yes.

The efficiency has to get better, too. The efficiency gains are going to be electronic. So again, regardless of whether it's electronic execution, it has to be electronified. And I guess just -- what was I going to say? I had one more point, but now I'm also blanking a little bit.

It's catching.

Not exactly [ listening ].

Rich, I would say this quick, just real quick. These are extremely interesting perspectives. I think at the end of the day, we are at an extremely important moment. Because big change usually happens for a reason, and this is a huge moment, right? No one's kind of worked in this environment like this ever before. And everyone in this ecosystem is extremely bright and they are learning. They're getting more efficient, and they are embracing a lot of the benefits that are happening because of electronification in a different way than they ever have before. Those lessons are being learned and are going to be applied to the markets one way or another. That's where we are today. So it's a really, really important moment in time in this -- in our business. I think that's one of the things that makes where we are very exciting.

I guess I have one more point and then maybe Chris can conclude. Electronification of communication between dealers mean...

We're going to give Chris the last.

Yes. Electronic communication between dealers, between investors is another place where I think there's going to be a lot of growth. Us being able to get our [ axis ], our levels further upstream to investors as they make investment decisions, again, that's a different type of electronification, but I think that's going to become more and more important.

And I'm going to leave the last comments to Chris because I get very nervous when he's too quiet for too long.

I was getting pent up. No. Look, I agree with everyone actually. But I do agree -- I agree with Billy. Like this is a unique time. And as we talk to our clients and we talk to the dealers, everybody is in a retooling moment right now. People aren't sitting still saying, "Hey, everything -- all our plans worked out perfectly." They're all retooling and relooking at what worked and what didn't in the month of March and what's working right now and what's not and how do we become more efficient. And certainly, sourcing liquidity has been a challenge, and they're all looking at better ways to source liquidity. And sometimes that's direct to dealer. Sometimes that is an all-to-all market. It's a session-based market. Everybody is rethinking how they source liquidity because they're expecting more volatility, not less.

We're going to need to end here. We are at 5:15. It's been a great panel. It's been a great way to end the day. I'd love to keep on going, but I wish I had a cocktail and go on all night.

Rich, thanks for selecting me as your last participant.

Again, Billy, you were still in the first round, though. You still get a big siding voice. So with that, again, I want to thank everyone. This was an awesome panel. The investor interest in what's going on in fixed income electronics is at a peak. There's no question about inflection point there. It's up and to the right. And so I think this will be on the webcast and will be stored. So again, we appreciate getting the different viewpoints from all of you. And thank you for each one of your participation, great panel. So with that, we're going to wrap up. It's at 5:15, and I got to go home.

Thanks, Rich.

Thank you, Rich.

Thanks, Rich. Great to see everyone.

Thank you, Rich.

Thanks all.

Great to see everyone.