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

All right. Good afternoon, everyone, and thanks for joining our virtual fireside chat at the Deutsche Bank Technology Conference. I'm Brian Bedell, and I cover the securities exchanges and fixed income trading platforms for DB. Today, we're delighted to have Tony DeLise from MarketAxess with us. For those of you who don't know MarketAxess, this is a leading electronic marketplace for fixed income trading with sizable leadership positions, especially in electronic corporate bond trading. Founded over 20 years ago when there were some 70 different start-up fixed income platforms, MarketAxess endured and thrived to become the leading electronic corporate bond trading platform with a market share of about 22% today in investment-grade bonds trading and about 16% in high-yield bond trading according to some trace data. Just for those participants on the call that have not been following the fixed income trading markets story, this is really one of the last trading markets of substantial size that is still traded more manually in some segments than electronically. For example, only about 30% of the investment-grade corporate bond market is traded electronically today, and that number in high-yield is less than 20%. So there's clearly much more runway for growth here, which, of course, Tony will get into in the conversation. And so before we get into that conversation, I'll just make a quick intro for Tony. He started at MarketAxess 14 years ago, I believe, becoming CFO in 2010. And while Tony has a ton of CFO and accounting experience going back over 30 years to PubliCard and Arthur Andersen, he is much more than a CFO. Having been involved with the firm's strategy and the industry's technology evolution for most of its time as a public company. So just quickly for the format today. I'll start the conversation with some questions of my own and leave some time for participant questions as well. And just some quick instructions on that. You can ask a question via the web portal at any time. And I can ask it and I'll keep the questions anonymous, of course. So with that, without further ado, welcome, Tony, and thanks for being with us today.

No. Thanks, Brian. And thanks for hosting us and thanks to DB for continuing to put on this conference during these times, but happy to be here and happy to work through the chat with you.

Yes. Our pleasure. Even virtually, we think, hopefully, this could be good. Anyway, so maybe we could just start with the drivers of the pace of electronification of corporate bond trading as this is really I would say, the heart of the debate around the pace of earnings growth for the company. For example, you've mentioned on prior calls that the work-from-home situation will drive an inflection in the pace of electronification of corporate bond trading to permanently higher levels. So maybe if you can talk about the drivers of that? Is it behavioral? Or is it more of a change in the trading workflow since before the pandemic? Maybe if you can go into some detail on that.

Yes. No, sure. Happy to do that, Brian. And first, I'd tell you that the pandemic and the whole work-from-home environment, that's -- it's likely one of the factors that's influenced our recent market share gains. And certainly the work from home, maybe out of necessity has provided some tailwinds for electronic share. Early on in the pandemic, definitely in that March time frame, where there were dislocations for the trading desk, and we helped clients connect from home and continue to transact over the platform, which was critical, think about that time frame when there was lots of volatility in the marketplace and lots of dislocation, we did help clients connect. But this -- what's driving the market share gains. And I would tell you, I'd argue that there's 2 themes that aren't necessarily new. And one of them is around open trading, which I'll explain in a moment. And the second piece would be around automation. And we've -- we're an electronic marketplace for transacting, mainly in corporate bonds. One of our key features is allowing any participant to initiate an order, any participant to view and act on an order in this all-to-all environment. And if you've followed us, you'd see that the cost savings that we delivered to clients in the first half of the year, they were north of $600 million in liquidity taker and liquidity provider cost savings. And there's a growing activity in market participants on the platform and our open trading percentage, one of the key metrics for us is what portion of our business comes from all-to-all trading is now more than 1/3 of our business is conducted anonymously all to all. And that penetration level continues to increase, and there's more participants providing liquidity. So I'd argue that's one of the big items driving the market share gains. And the second piece would be around automation. And we'll probably get into automation in a little more detail. But when you look around what's happening from a trading efficiency standpoint and workflow efficiency, there's tools that we're providing to help with automation. And so I'd tell you that those 2 items, open trading and automation, that the combination of trading efficiency, transaction cost savings that those we believe are more permanent behavioral changes. So the pandemic -- typically, during periods of volatility, our market share gains come through more clearly. And you've seen that over the past 10 years or so when we had the taper tantrum. And then the energy sector blew up in the fourth quarter of 2015 and now the pandemic, where you see our market share gains accelerate. And in this case, we think it's in combination with some of that activity. And then more importantly, what's happening around open trading and automation, we think those gains are permanent.

Yes. And maybe just -- you mentioned automation, maybe just to get a little bit deeper in the weeds of the drivers of automation. Can you talk more specifically about the evolution of the changes in that client workflow that you've been seeing, both on the dealer side and the institutional client side?

Yes, sure. And not knowing exactly who the audience is. I'll take one -- maybe one giant step back just to help put it in context on where we are today. And if...

Yes, that would be great.

You think about the market that we're in, it's -- you're generally trading in the corporate bond market. And historically, whether it was voice, conducted via voice or electronic, institutional investor clients are typically launching inquiry. Again, whether they're picking up the phone or they're doing that electronically, they're launching an inquiry to their dealer counterparties, those dealers respond with the price and then the client decides whether or not to execute on any of those price responses. So that will be a typical request for quote. You turn the clock back 3 years ago, we were never talking about things like dealer algos, automated pricing. We weren't talking about auto-execution where in a low-touch or no-touch environment investor clients are executing trades. But you fast forward to today and trading efficiency is on the top of most clients' minds, whether you're a dealer client or investor client, reducing cost is important and trading efficiencies are critical. And today, we talk a lot about automated price making, for example, on dealer algos. And the steps that we throw out in the quarterly calls, for example, in the second quarter, we had 3.5 million algo responses in the second quarter. That was up close to 50% year-over-year. And what that means for us, the more price responses back on an order, the more competition for that order, better chance of getting a trade executed, more cost savings, the more competition you have for an order. So price responses that absolutely matter. And the dealer algo piece of it is critical to price responding on the platform. And if you flip to the buy side. And again, 3 years ago, we weren't talking about auto execution. And -- but today, we have tools where clients can set parameters and when price responses come back in, again, in a low-touch or even a no-touch environment, trades will automatically get executed if the responses are within those parameters. So the parameters may be a type of bond trading, the liquidity score, the tolerance from our composite plus price. All of those parameters fit into auto responding. So here -- those are examples where on the automation side, we think that, that is driving more flow onto the platform. And even in some way, could be helping with market velocity or turnover.

Yes. Very interesting. And maybe, I guess, as you see that algorithmic trading pickup, maybe just talk about like, I guess, the level of confidence for the institutional clients, in particular, for automating these trades? And what have been the major resistance points in the past? And are you seeing those resistance points break down? Or even what are the current resistance points for further market share gains?

Brian, this question on major resistance points, you reminded me with the introduction on how long I've been working and then how long I have been working at MarketAxess. So it's been a long time. And when it comes to resistance points, those themes really haven't really changed it. And while the 2 big resistance points for us are around trade sizes, the larger the trade size, the more resistance there is to putting up an order in competition. The second big item would be around new issues, and I'll tell you a little bit about both of those dynamics. On the trade side -- the trade size, there's definitely concern around information leakage. Typically, the larger the trade size, every client will take a view on what an electronic platform, what our platform is good for in terms of trade size. And just to give you a little sense, we talk about high -- U.S. high-grade market a lot. There's a lot of market information. There's a consolidated trade take. We can slice and dice volume in any way, shape or form. When it comes to trade size, our market share is lower as trade size moves up, and we often talk about block trading trade sizes over $5 million. Our share is somewhere, depending on the month, depending on the market environment, it's 10%, 11%, 12% of block trading. Our non-block market share will be appreciably higher than that, double that size. So 24%, 25%. So you could see that there's real resistance as trade size starts to move up, probably more so in long-dated paper. Typically, there's not a lot of resistance in short-dated paper, but when you have long-dated paper, that's where the real resistance comes into play. And then the other big resistance point is around new issues. And listen, if we had the secret sauce, we would have delivered it already, but around new issues that market share for us tends to be lower when the new issue calendar is heavier. And that's when there's more focus on new issues coming to market, less focus on secondary trading. And if clients are positioning their portfolios to participate in a new issue or if they're trading out of that new issue shortly after receiving the allocation, that's typically happening directly with the underwriter. We do much better once the bond has seasoned. But if there were quick fixes here, we would have delivered those already. And it's probably not any one single protocol that addresses either trade size or the new issue item. And that's how we continue to build out new protocols. We have protocols like live markets, which are tailored to more actively traded bonds, tailored to larger trade sizes. We have dealer direct or streaming access directly to clients, likely they'll be other protocols in the future around session-based trading, but there's probably not a single answer. And in all of these, we've done better, for example, in larger trade sizes. Our market share that I quoted before, which is, say, in block trading for U.S. high-grade 10%, 11%, 12%. That's double where it was 5 years ago, but you could see it's less than where it is in non block. So we've done well, but we know we still have a lot more work to address these resistance points.

Before I get into the new issuance question, I could segue into that. But the -- just what you mentioned that doubling of that share on the block side, I guess, can you say that you are seeing concern around information leakage, abate to some -- maybe abate is a strong word, but at least eased to some extent. And is it more about reducing that trade size to raise your market share faster? Or do you think you're really going to need to get a much better share within that block?

Brian, it's probably a combination of items. I don't think the information leakage concern has abated necessarily. But I also don't think that -- I think the market is going to evolve in terms of trade size as well. I think in all likelihood as trading in smaller trade sizes becomes more efficient as we've got more dealer algos and automated price making, there'll be more comfort in breaking up those larger trade sizes into smaller trade. So I think it's probably a combination of protocols addressed at larger trade sizes, like live markets, like session-based trading. But it's also proving to clients that there is confidence and comfort in transacting in smaller trade sizes and warehousing risk for a period of time until trades can get executed. So probably coming at it from both angles.

Yes. That's definitely interesting. And maybe thinking about -- we have seen an unbelievably heavy surge in corporate bond issuance this year, especially much more than any, I guess, anyone would have thought coming into the year. How are you thinking about expansion in the pool of the trading capacity as a result of that? And then I guess, also, your market share would theoretically be materially higher if you normalized bond issuance for, say, where we were last year. Maybe in rough numbers, how much do you think your market share would be -- is understated, I guess, if we normalized for that normal issuance?

Yes, maybe 2. I don't know how many questions were there, Brian.

Yes. Just 2 separate ones, really. I guess -- yes.