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

Can we maybe unpack that a little bit? Like what are those kind of things that you're thinking about in terms of differentiation?

Yes. Well, it comes down to liquidity providers, right? And is there a way to introduce new liquidity for these types of trades, right? While still having that benefit of the all or none list, while still having all of those analytics, and we think about things where even with competitive list trading, what about delivering some of the analytics and the aggregate kind of price color on an in comp list and kind of knowing where someone stands in that way, for example, right? Or some of the more competitive elements of liquidity provision into the PT framework. Now it's not Open Trading, where you've got 2,000-plus participants involved, and you're not necessarily going to get anywhere near that kind of number of market participants that can price in that kind of way. But I think there are interesting things to do with more stratified groups of liquidity providers and things. So I think, again, it's a pretty new protocol, just being around 5 or 6 years or so. There's plenty of room for innovation in the PT space for clients.

Sure. And I know, Chris, on the last call, you kind of talked about this idea that the longer-term market opportunity as sort of shifting in your favor, he thought. And he was talking about these larger trade sizes getting broken down, running through RFQ to a higher fee per million, and that's going to increase trading velocity. So can you kind of just talk about how you expect that to evolve? And maybe just elaborate on some of those items of why you think that it's shifting in your favor?

Yes. No, happy to do so. And so using investment-grade market as an example, and I believe the stat is, it's somewhere just below 50% of the notional volume in the market today, is taking place in block trades. We call it 5 million and up. And that's the area with the lowest electronic penetration. And I mentioned some cases of how we're trying to solve that with our protocols, even if it's -- we do quite a bit of volume just with the traditional RFQ in doing blocks, but there is a reluctance sometimes to put those out broadly. So that introduces solutions for doing them more narrowly in terms of how they go out. But the really intriguing one and what we've seen in other markets is, these opportunities to break that large block up into smaller pieces. And this is where our algorithmic capabilities come into play. And we made a pretty substantial bet, investment in working with algorithmic capabilities by buying Pragma towards the end of last year, which is all about providing solutions where we make it very easy for a buy side trader to break that piece up, to take advantage of the different protocols that we offer, whether it's our order book being able to leave a resting order of a partial size, have that algorithm respond automatically to increase that come into the system during the day. And then if there's some time constraint, then maybe after they take advantage of those opportunities, be able to RFQ that into the market, even breaking that up into smaller pieces. And to the extent that there is greater capital constraints on the banks, their ability to take risk, especially in the larger sizes gets diminished, the way to get these larger pieces will be done and a better liquidity is in those sizes, let's call it, 0.5 million to 1 million where all of the alternative liquidity providers kind of operate. And that creates a lot of opportunity for the buy-side trader who needs to move the large position to get favorable pricing. So that is an area we are quite excited about. As Chris has noted, it opens up the opportunity for relatively higher fee on the smaller trades. Some of these algorithmic capabilities, again, we think can command higher fees and things and good for the client, good for MarketAxess in terms of business opportunity.

Maybe switching gears. Looking internationally, you've seen a lot of strength recently in eurobonds and emerging markets. In the first quarter, you saw a record ADV in both. What do you think is driving the success there? And maybe you could touch on just how these markets differ from the U.S. in terms of customer mix, protocol utilization?

Yes. No, happy to. It's definitely an area of strength for us, and we have a major presence in London. We have our offices in Singapore and Hong Kong where we cover the client base from the local market itself, and it's been a real bright spot. I mean, emerging markets, especially, I mean, that's a market that is really benefiting from the service that we provide. Open Trading comes to be a very big factor there because it's a global product. You've got someone who's trading in Asia that might be trading LatAm paper who can do so with a dealer in South America, and not have to worry about that relationship, right? Without the Open Trading solution and this type of connectivity, it leaves a lot of hops manually to get to the end liquidity, and that's costly. So I think that's one of the big factors that drives the electronic trading, being able to bring this together. Our presence in local markets now -- in emerging markets, we're trading in the local currencies and local debt. It's also an area where global investors have this really easy way now to tap into local market liquidity providers that they otherwise wouldn't naturally have access to or necessarily have a relationship with. So these are big factors that drive emerging markets. Eurobond market has been definitely a strong one for us. RFQ protocol and PTs prevalent in the European market, and we're getting traction, of course, in the RFQ, but PT is now as well. Open Trading quite attractive again, broad liquidity provision from alternative providers and clients. So we find that our solution is -- works quite well in these areas, and we've been able to compete favorably with the other venues, especially in the eurobond market.

Maybe bringing it back over to the U.S. and kind of taking a step back. On the competitive landscape, what's the current state of play in the U.S.? What are your thoughts on that? Can you kind of just give us a state of the union on how you think about the overall competitive landscape in U.S. credit, maybe specifically high yield where you've seen share kind of compressed from where it was last year?

Yes. And to address the high yield one and because we've looked, obviously, very, very closely at it and things. The share losses in high yield, we don't necessarily attribute to the competition, but rather other factors and new issue, attention, the drop in ETF activity, which was something that's a big part of our high-yield business. But look, generally speaking, the U.S. credit -- no question, competition and Tradeweb is doing a very nice job in PTs, especially and in the interdealer market with their product called Sweep, which is a matching protocol. We compete in that space with an RFQ solution. That's our main thing. We call it dealer RFQ. We offer the same liquidity solutions for sell-side traders as we do for the buy side, and that's great for being able to tap into the broad global liquidity that's available in Open Trading. But the matching solutions, the auction style, that's something that we're pursuing as well. We call our solution Mid-X. It's a periodic type of model. You come in once a day, for example, and let's see who wants to trade at mid-market. It's a very different type of protocol as opposed to the RFQ, which is available throughout the day. So there's use -- clearly, use cases for both of them. It's good to be able to offer both of those solutions in the dealer space. But, look, PTs are an area of head-on competition. We have still a material lead in, let's call it, the traditional client-to-dealer in competition type business. That's our kind of bread-and-butter and flagship area where we have a substantial lead. PTs are an area of real competition, and that's going to require innovative features like we were talking about earlier and leveraging the deep relationships that we have with our client base. We have all of those clients on board, our platform, it's a matter of getting them attracted to the solutions we're putting in the market and making sure we innovate in ways that are going to attract that business.

I think a lot of that is going to help drive electronification, which leads me to my next question, probably the last question here. What are your thoughts just on the pace of electronification we've seen? And what could be the next catalyst that kind of gets us over the next hurdle toward -- sort of the next step-up in electronification? How do you think about that?

Yes. Well, it's definitely going to come in the block space. I mean the electronic penetration in smaller-sized trades is actually -- it's reasonably high, and we have quite strong market share there. How we get to our 19% in investment grade, for example, is quite high. In the smaller-sized trades, it's about 10% in the block trade. So it's all kind of averaging out. And it's going to be coming up with the solutions that allow buy-side traders to feel comfortable doing those larger trades electronically. Not surprisingly, I am, of course, an electronic trading bull here and believe we're going to very high market share in electronic trading, it's going to come in different forms, though. It's not all going to be through one protocol, and you're going to have process trades being an important part of what happens as well. There's not going to be very much trading that happens where someone just talks on the phone and then books a trade manually. And I say that's going away. Everything is going to be handled electronically one way or another. Some of it's going to be done still in a rather bespoke manner and the venues in that case, not adding a lot of value that could be courtesy trades, which we do are very low-cost trades to do. And then on the other end of the spectrum are things like what we do with Open Trading, which is our highest kind of margin product, highest value-added service to the clients. And we believe going to be a growing part of this market, but that's the [Indiscernible] spectrum and a lot of things in between of varying degrees of value add for the market participants and corresponding fee capture with it.

Sure. All right. Well, I think that's time. Rich, thanks so much for joining us.

Yes. Thanks a lot, Patrick.