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

All right. Good morning, everybody. My name is Chris Shutler. I'm the research analyst at William Blair covering the wealthtech asset management and fintech spaces. Before we start, I do want to note that for a list of disclosures and potential conflicts of interest, you can go to williamblair.com. Up next, we have MarketAxess, ticker MKTX. And from the company, we have President and Chief Operating Officer, Chris Concannon; and Chief Financial Officer, Tony DeLise. Chris and Tony, thanks a lot for joining us today.

Thanks for having us.

Thanks.

Maybe to just kick things off, guys. Let's talk about recent trends. May was another exceptional month. Maybe just walk us through the year, how it's progressed from pre-crisis into the extreme volatility of March and then kind of what you've seen here on the other end in April and May?

Well, I'll kick off, and then I know Tony can jump in. What's interesting is we started off January with records across the board in January 2020. And February was a strong month as well. So we were off to a great start in Q1. And then obviously, March kicked in. So January was close to $200 billion -- just over $200 billion for the month, and March went all the way up to $269 billion. So it was quite a jump, record volumes across all the different various products. Our Open Trading platform had record volumes. But as we go into April and into May, we continue to see very strong performance. Our May numbers were $229 billion for the month. So still showing great strength in terms of adoption. We're seeing client behavior that's just phenomenal adoption of the platform and electronic trading even here in June. So continue to see strong numbers. Tony, you want to add anything?

Yes. I would just -- echoing what Chris said about the beginning of the year, it started off pretty well. And this has been -- it's been a complete roller coaster from a market conditions and even from a market volume standpoint. The beginning of the year was, spreads were tightening, healthy new issuance, even U.S. high-grade market volumes were down in the first 2 months year-over-year our sort of -- our bellwether product, U.S. high grade. You get into the March time frame and that's when spreads gapped out significantly. New issuance has been massive. Order flow has bounced around between customers selling and customers buying. The one thing that's been constant throughout that, as Chris mentioned, was we've posted really good market share numbers throughout that period. And market volumes, more recently, it's really been U.S. credit where market volumes have been up dramatically the last -- in the last 3 months. New issuance has been massive the last 3 months. And we've got a dual benefit with market volumes increasing significantly in U.S. credit and then market share gains, significant market share gains in the recent months.

One of the challenges is trying to understand what the new turnover rate is. When the market has expanded so dramatically, $1 trillion in new issue, and we're seeing these volumes and the higher turnover, it's hard to peg what the right number is going forward and how we'll exit this year with new turnover rates. But clearly, turnover is up and the market grew. So 2 exceptionally good factors when you're in our business.

Yes. And how has the whole work-from-home dynamic? Is there any way to really disaggregate how much you've -- your market share has benefited from that dynamic? And maybe help me understand if I'm a corporate bond trader or dealer, how is work from home going to cause me to not -- I am not pick up the phone?

Well, some of that -- I mean we obviously converted into a work-from-home environment quickly and seamlessly. So as a company, I thought we did exceptionally well with the conversion. Our performance numbers looked better. Just internal statistics and development time, I don't have to be in a room with Tony. I can see him through video cameras, much nicer, without the -- look at and talk to our clients. The biggest challenge is when you really think about who do we compete with, we're competing with the phone. And so much volume done via chat and the phone. And the conversion to work from home, it's very hard conversion to have your full trading terminal or your phone turret replicated at home. So the communication challenges for most of our clients were probably their biggest challenges when we just got the feedback from them. So meaning on a terminal and maybe you're communicating via chat, but you're putting more things into our platform because it's easier given your workflow at home and what you have access to. So I think some part of our increased market share is clearly the environment, but some of it is just the pure liquidity that was found in our system during March. Our Open Trading results were phenomenal. The feedback from clients with unique liquidity was discovered in the most difficult times for liquidity. That stays with you for a long time. It's just not the work from home conversion has improved our market share, it's really what they found when they went home in the middle of a crisis.

And obviously, beneficial market environment, as you alluded to, Chris. But what would you point to, though, as kind of early evidence that we're nearing or in the middle of some kind of an inflection? I know it's tough to call an inflection when you are in the middle of it, if you are, but what kind of signs would you point to beyond kind of the headline numbers that we all look at?

It's -- when you look at the penetration that we have in some of the larger firms, some very large fund complexes continue to use us across all of their products. So it's that adoption rate that we're seeing, not just in high grade, which is one of our, obviously, strengths, but across into even high-yield Eurobonds and obviously EM, which has been a phenomenal growth area for us. That has -- we've seen a lot of the large firms driving automation and use electronic trading in emerging markets. And so it's that support that we're getting and it's support from large firms in Europe and large firms here in the U.S. that's driving that. That continued adoption is what we see as really driving a lot of the growing volumes in the organic growth.

Chris, I just wanted to jump in on one item because Mr. Shutler started that question by saying we benefited from -- obviously benefited from the market environment. And Chris, there's no doubt that we benefited from the increase in market volumes. There's no debating that. Size of the market is bigger, our market share is accelerating. So the volume that's conducted over the platforms increased dramatically. But I would tell you that from a market condition standpoint, what we've seen the last 2 months, and we've had this conversation before. What's a better environment for us is when spreads are widening, new issuance is lower, client orders favor clients selling. It want -- if you look at the last 2 months and we would tell you that market conditions haven't been optimal for us. It's been one where there's been massive new issuance. We don't do as well in newly issued bonds. It's also one where order flow today is favoring clients buying bonds. There's been lots of inflows into credit. Hit rates are lower when clients are looking to buy bonds. And spreads have narrowed. The last 45 days or so spreads have narrowed, and U.S. high grade, for example, hasn't completely retraced its steps, but it's largely retraced its steps from where we started pre-pandemic. So I just wanted to tell you that these aren't optimal market conditions and you know that.

I get it. All right. Makes sense. In March, I remember reading something you guys put out that there were 121 new liquidity providers responding to an Open Trading RFQ in the month of March. So not necessarily new to Open Trading per se, but new to selling bonds on the platform, I think, is the point. So have you seen that activity continue? Or has that died down a bit?

I'll jump in. We continue to see similar numbers to Q1 that we -- in Q2, we're seeing similar numbers to not only March, but all of Q1 numbers. So the responders are there. What's most exciting for me is the launch of Auto-Responder, which we talked about in prior quarters, but we've just populated Auto-Responder with our CP+ data. So clients can now have an Auto-Responder turned on that is automatically priced using our internal data feed that is obviously a data feed that they use Auto-X for as well. So they've adopted the CP+ data feed, and now they can use it for both Auto-X and Auto-Responding, and that we expect should change those numbers pretty dramatically.

When, Chris, did that actually happen?

Literally, just 2 weeks ago. So yes, it started -- we ended -- put that enhancement in.

Got you. Okay.

I will add what was exciting for me is we recently just had an Auto-X match with an Auto-Responder. So 2 clients, no touch whatsoever, MarketAxess put 2 trades together in a fully automated fashion and that's super exciting because I think there will be more of those trades happening in the future.

Okay. I was on a call with an investor last week and one of the questions that came up was just a comparison of inflections that have happened in different markets over time. So thinking about inflections that have happened in like the equity market, definitely some differences I recognize in terms of market structure, so many CUSIPs with many of them rarely trading. But are there parallels, Chris or Tony, that you think that we could draw from other markets that could be applicable to the fixed income space?

I don't think of equity as the right parallel. I do think of equities in terms of -- when someone says where do -- equities happen fairly quickly over, call it, a 5-year period. But the end state of equities, which is close to 90% of orders are electronic or start in an automated form. I do see similar parallels in fixed income. That doesn't mean all e-trading. What it means is the clients' workflow will slowly migrate to a fully automated means. And where it ends up maybe on a chat or maybe someone manually responding, but the workflow will be fully electronic and migrate where you'll load your portfolio demands for the day and be able to have a number of things programmed for solving those portfolio needs. And you can go from portfolio trading to Auto-X to Auto-Responding to sitting in the market posted somewhere. So the solutions are going to be pretty robust. I feel like we haven't delivered on what the market needs in credit to fully automate the market and get to that 90% threshold. But in terms of the inflection point, I still think we're early innings in what we have to convert to electronic.

Yes. I just got a question from an investor wanted to ask. So somewhat specific. But given the -- this is on the syndicated loan market size. Given the syndicated loan market size today, can you speak about your current capacity or initiatives there?

Tony, you want to grab that? The loan market is something that continues to -- look, we watch those markets. There's a number of markets we've been watching. We've been watching rates, but decided to jump in because it's one of the larger market opportunities for us. There's a couple of other markets out there that we continue to look at. And -- but when we look at the organic opportunity sitting in front of us in U.S. credit, EM, Eurobonds and rates, all of our energy is focused on those markets because there's such a long runway ahead for us.

And also in the -- think about our differentiated and that's Open Trading, all-to-all trading. And it's that anonymity and facing off against the 2 parties in a transaction. That's where our real value proposition is in. Generally speaking, in the loan market, they don't settle the same way. It's just something that Open Trading is not suited and also all trading not sitting in the middle of trade, it's just not suited for that environment. It doesn't mean that it's not an area of interest, but at least in terms of differentiators, it's not obvious right now.

Okay. Maybe just stepping back, looking at U.S. high-grade for a second. So how much of that market today do you view as fully electronic? Is it around 30% or so given your market share plus Tradeweb plus maybe Trumid having a few percent? Is that a fair kind of number? Or what do you think there?

I didn't know there was any -- Chris, I thought we were the only ones.

I don't know these other brand names that he mentioned.

No, I think there's a lot more transparency in U.S. credit. There's a lot more survey work out there on U.S. credit. And I think the number you threw at us whether it's 25% or 30%, those are the numbers that folks like Greenwich Associates attached to the U.S. investment-grade market. And U.S. high yield, half of that number, it's 12% or 13% or 14%. But I think you're in the right ballpark there.

And then how do you think about where Europe is at, Tony?

It's always been an area that -- and again, this one, there is not a lot of transparency. There's no trade takes. So getting at exact figures is a lot more difficult. There's some survey work out there. What would -- what's suggested out of that survey work, and we're talking about Eurobonds here. It would be more electronic than what you see in U.S. credit. And that market is a little bit different. There's a lot more activity coming out of the private bank space and wealth managers who were earlier to adopt electronic trading and really embracing Bloomberg in that case. And they're the market leader in Eurobonds. We're #2 in that space. We believe we're -- we've done a lot over the last 5 years to differentiate our offering to take market share away from Bloomberg, but they're bigger than us. And they have a different way of going about doing business, obviously a different revenue model. But that market today from what we've seen could be 50%, 5-0, electronic, probably growing in terms of overall electronic adoption, but for us, we were taking market share. I know that wasn't your question, but where we're taking market share in the U.S. is probably from traditional ways of the way bonds trade, phone, e-mail, instant messaging. You turn to Europe, it's probably a combination of taking it away from traditional methods, but taking it away from the competition. I argue it might be larger in terms of taking away from the competition.

Okay. Got it. Just thinking about what's addressable going forward. So I think blocks have been one area where your market share has been lower historically. Maybe just talk about the initiatives you have currently in place? Are there any new protocols on the drawing board? I know you talk about live markets. Is there anything else that you're thinking about there? Or maybe you could dive into live markets what you're up to and the timing on that initiative?

Sure. So blocks are interesting. A lot of the clients are more comfortable using traditional means for their blocks. They're concerned about, obviously, price impact and information leakage. But when I look at the electronic version of an RFQ, you can limit how many people see your RFQ. So the results of an electronic RFQ to what you do on chat are quite similar. And so the justification to me is, it doesn't hold up well in terms of how you price the block. What's interesting is the adoption of our portfolio of trading solution. If you look at a portfolio trade, while the pieces of the portfolio are small, and some of which are under a block, the overall size is some very large block trading. And yet, they can use the platform for large block portfolio trades. And they're comfortable using it. So I do think there is a time when our clients will slowly adopt larger sizes for the electronic RFQ solution. One of the things we are seeing is in our Auto-X solution, which is just an automated RFQ, clients are moving up from 1 million all the way up to even 4 million in larger sizes. So we're seeing larger-sized adoption of our Auto-X offering. And so we expect that to grow and it can easily grow over the block size of 5 million, and you could launch Auto-X. The other the way I look at the market is we do smaller sizes quite well. We kind of dominate in some of the smaller-sized trades on TRACE in terms of market share. Large blocks do get chopped up into smaller trade sizes in all other products. So when I look at the universe of financial instruments, most electronic platforms never won the block. They actually just won the block slicing. So as blocks get sliced up and traded over the day by more automated means, the electronic platforms won that way and ended up winning never one in the block, just won the sliced up version of the block.

And Live Markets, Chris? Just maybe give us an update there where you're at in the development?

Yes. So Live Markets is live, which is great news. We do have trades going off on Live Markets. We've been waiting for the streaming liquidity to come in, working with dealers on the platform to get comfortable with, providing a fully Auto-X price on the screen for our clients. That's a big difference from what we have today in terms of an RFQ and the timing of an RFQ. So dealers are getting comfortable. They've been writing to the API and coming in. So we're pretty excited for live markets in the second half of this year.

Okay. Could you talk about your relationship with the dealers at a high level? On one hand, they're using the platform more and more and increasingly the Auto-Responding, like you mentioned, they are more focused on larger trade sizes, I think, on average, though. So maybe just help me think through the conflicts that exist and just how you kind of manage that relationship?

Yes. I mean when you think about how a dealer views MarketAxess, certainly from the trader perspective, there's concerns within the dealer, making sure that their role is protected. From the larger dealer management side, they see MarketAxess as a pretty efficient client network, where they can reach clients all around the globe through one connection and show prices to clients, whether they're in Europe, in Asia, in U.S. products. And so the distribution value of the MarketAxess network is quite sizable to the average dealer. Whether you're a large bank or a small bank, you see the benefits of that network effect. From conversations with dealers outside the U.S. that go out of the large global bank dealers, more regional dealers find MarketAxess very attractive. They are accessing U.S. clients for the first time without having a sales force onshore. We bring those clients to those local dealers. And so things like our EM volume is certainly helped by accessing those local dealers. And so MarketAxess becomes this wonderful distribution network. And then if you're a nonbank liquidity provider, you see MarketAxess as a way to make inroads into the credit market, with Open Trading, giving you access to client flows that you don't -- you could never imagine you could see. Our Open Trading solution allows you to see interest from clients all over the planet. And that's unique to someone who doesn't have a client franchise. And when you look at how our Open Trading solution performed in March, that's the benefit of that client network, interacting with some nontraditional dealers.

And Chris, even to add on to that, what Chris was describing was more of the network effect and ability to reach more clients from a liquidity providing standpoint. And what's dramatically different from where we were 5 years ago, it's just that participation of dealers as liquidity takers. We -- when we were to have a conversation 5 years ago, clearly 10 years ago and you say what portion of the market could go electronic, one of the pieces we would discount was on the dealer-to-dealer space. We didn't have an offering. We weren't participating in that space. It was largely interdealer broker voice-dominated. You look today in Open Trading, this is the other side of Open Trading, dealers are accessing Open Trading as liquidity takers. Today -- 5 years ago, our market share in dealer-to-dealer was close to 0. Today, our market share in U.S. investment-grade dealer-to-dealer is more like 6%, still smaller, but it's 600 million a day in volume, 700 million a day in volume. So that's a big change in the relationship also. We're delivering value in a different form now as dealers are cleaning up their balance sheet and acting as liquidity takers.

Great. Can we just talk about Rates for a second since that is a new area for MarketAxess with the acquisition of LiquidityEdge last year? So a couple of questions there. First, just help us think through where you're at from an integration standpoint? What investments need to be made and what the time line is?

Sure. So just to remind you that we closed that transaction in the fourth quarter of last year, kicked off our integration around that time. The plan has been always to allow clients to access the unique liquidity that the LiquidityEdge acquisition brought. Now we call it MarketAxess Rates. That is now happening. We have launched what we call Phase 1 of the integration, where MarketAxess to broker-dealer has its huge client network. Clients are now using a front-end platform to access our Rates platform. We can obviously work around the liquidity needs that, that client has. So whether it's by tenor, we can actually make sure we have the right market makers set up and design for that client specifically. So it's a very customized liquidity is what we refer to it as. That's Phase 1, that's live. We're working on the integration of all the OMS platforms that are connected to MarketAxess. That's another part of the larger integration plan. And then allowing MarketAxess, the traditional MarketAxess terminal to have both streaming click-to-trade rates as well as RFQ solutions side-by-side is an important part of Phase 2. And so we'll be working through that for the remainder of the year.

And our -- what do you see as MarketAxess' competitive advantages in that space? I mean are there ways that you can be more innovative than the incumbents? Or is it mainly be boiled down to you already have thousands of investors and hundreds of dealers on the platform, and now this is just something you can put side-by-side alongside it?

No. Look, we appreciate that this space has been covered for quite some time, that dealer-to-client space. I do think if you look at what happened in March in the rates space, the unique liquidity that we experienced in credit really didn't make its way into the rates market. So there's definitely a liquidity benefit that I think could be used in the rates market. The customized liquidity solution that we have is unique. It's not a cloud. We don't attack the rates market with a traditional cloud. It's much more customized for the take of liquidity, but also customized for the provider of liquidity to make sure they don't trade against such sharp flows that happen in a traditional cloud. So I think narrowing the dealer market with customized liquidity to the client market is actually a unique offering that true click-to-trade solution where someone can stream comfortably across all tenors on the run and off the run is a unique offering right now. I don't see anyone else who has that offering.

All right. Let's see. Maybe lastly, we just talked through -- the way I've tried to think through the stock is looking at like a DCF -- looking at it from a DCF framework, recognizing the inherent difficulties with the DCF. But if we were to take the top line of that DCF, guys, the -- which I think would be total corporate debt outstanding. That grew at about 4% in the first 4 months of the year. And so you're annualized into the double digits. And do you view that as something where -- I mean could that be sustainable over the next -- in the short term? And then I know the next layer is for the turnover, which Chris, you talked about, is difficult to know where we're at. So maybe just touch on the corporate debt outstanding piece, kind of how you would think about that over a multiyear horizon? And then kind of the step below market share, which would be pricing and how you think about that evolving over time?

Tony, you want to take that?

Yes, and I'm putting my mic back on. My neighbor decided to put a pool in, and they just -- lunch break is over so they're seen in the background. Yes, Chris on -- this will be on the market volume piece of it. Our model is pretty simple, size of the market, market share, fee capture. So 3 components there. Let's take the market share piece of that out of the equation. Size of the market, it is dependent on outstanding debt and turnover. Right now you've seen massive new issuance not only in U.S. high grade, but also in high yield emerging market that Eurobonds are -- this year, they're all well ahead of last year's pace and historical pace. And companies got to fund their ways out of some of the issues over the past 3 months, so we continue to believe there'll be relatively healthy new issuance. Even looking at some of the bank estimates are healthy new issuance for the back half of the year. Governments are going to have to continue to borrow.

Correct.

I'd tell you this, in terms of baseline DCF, you know what we do. We're looking back, say, the last 5 years, how has the market grown. We look at it by product, when you pull it all together in a baseline DCF, we're looking at a 3% or 4% or 5% increase in overall market volume. Is there a case to be made that turnover picks up if there's still -- if spreads remain a little bit elevated, there's more volatility, is there a case to be made? Sure, there's a case to be made. There's a high case scenario there. So -- but I would tell you, baseline is probably more backward looking on the -- we said we would take market share out of the equation. The last piece was on fee capture. This one, we haven't changed any fee plans in the last 2.5 years. So we haven't -- we have nothing on the docket in terms of any major changes in fee plans. When you look at fee capture at the individual product level, it hasn't changed in a number of quarters. So if you looked at high-yield standalone and high-grade standalone, emerging markets standalone, Eurobond standalone, it really hasn't moved. So if our headline numbers moved a little bit, it's just mix between the products. I could tell you that this quarter, without divulging anything, I'd tell you this quarter, if high-yield continues to grow at a faster pace than other products, that's going to influence the overall fee capture number on the upside. So that is the case. But if you're looking at longer term, I would have a little bit of a caution, a little bit of a caveat for a couple of reasons. One, some of these newer initiatives that Chris was talking about Live Markets, we've got portfolio trading. I'm not sure what else is on the horizon, but those may have a lower capture rate. If we're right about being successful in larger trade sizes, pretty certain that's going to come at a lower capture rate. All incremental volume and incremental revenue, but might be at a lower capture rate. So I'd give you that as the first caveat. Second one is the one product that is tied to -- really tied to duration, maturity yields is U.S. high grade. When you look at the environment right now, it's still a very low yield environment. Clients are trading. If you look at the, say, over the last 5 years, the years to maturity traded in our platform, we're at the higher end of that. So I'm not saying there's only one way to go, but if yields, at some point in time, yields were to rise, if clients start trading shorter dated paper, you may see a change in our fee capture. So I think it will be fair game in a -- in taking a view on fee capture over the more immediate term. You may see some decline, not because we've changed the fee plan, just the mix of bonds traded and duration as well.

And Chris, Tony failed to mention, one of my favorite products, which is, I think, will grow in this environment, the munis. If you think about our municipals right now, and the struggles that they're having financially, they're spending money and they're not seeing new revenue come in. So I would expect that market to grow as well alongside all the other markets that we're seeing with new issue. And that's a market that's begging for automation and begging for electronic solutions, maybe not the people in it, but obviously, the end user really needs to automate that market. So super excited about what's going to happen in munis in the coming years.

All right. Great. Well, that's all the time we have, guys, but really appreciate you both attending the conference, and take care.

Thanks, Chris. Thanks for having us.

Thank you.

All right. Sure.