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

Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. Note that taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. With that out of the way, good afternoon, everyone. Thanks for staying with us and to the home stretch here on day 2 of the Morgan Stanley Financials Conference. I'm Mike Cyprys, Equity Analyst, covering brokers, asset managers and exchanges from Morgan Stanley Research. And for our next session, I'm thrilled to welcome here, Chris Concannon, the CEO of MarketAxess; and Ilene Bieler, who recently joined MarketAxess as CFO just 10 days ago. So welcome. Thanks for joining us. As many of you know, MarketAxess is a leading electronic fixed income trading venue that, over the years, has established itself as the deepest liquidity pool in credit markets, with further expansion into new protocols, geographies and asset classes, which we will discuss today. So Chris, Ilene, thank you for being here.

Thanks for having us, Mike.

Maybe before we dig in here, Chris, maybe you could just share some perspective on your recent hiring of Ilene as CFO. And then Ilene, maybe just tell us a little bit about your background and what led you to join MarketAxess and what your focus will be.

Well, I'll start. Obviously, as the interim CFO prior to her onboarding, we needed to get rid of that interim CFO, and it was pleasant to have Ilene. But really, we spent a lot of time recruiting and Ilene is just a spectacular candidate. She comes to us highly recommended. And she promises me that she's a portfolio trading expert, and she's going to increase our portfolio trading market share.

That sounds awesome. No pressure.

Yes. No pressure. And I think there might be a few people in this room who know me who would say that might not be quite true. But in terms of sort of what brought me to MarketAxess. Honestly, I think this company has -- it's got a great history, a great legacy, but it's at a really interesting inflection point. And when Chris -- when we chatted, I thought his vision really sounded like the way forward to MarketAxess and that there would be a good place for me to help him achieve that strategy. At the end of the day, you need to execute. And I believe the best way to do that is through metrics, measures, discipline, and are we taking the resources, you have to invest in this business, right? How are we doing that? Where are we putting those resources? How are we going about that, whether that be investments, cost efficiency in what we're doing day to day as well as how are we allocating our capital, right? So that's really going to be where my focus is, all to help drive this forward.

That sounds exciting. Might we see any new KPIs or disclosures as a result?

Anything is possible. I can't tell you today, but they can.

Some people might turn down the transfer.

So we'll see.

What's great is when you think about MarketAxess, we're 865 people, and we touch the global market. And so that leverage business model, it's critical to have someone like Ilene to help guide where do we really allocate resources. Because we don't have a lot, and we don't intend to have thousands. It's actually a nice organization at its size level. It can grow a little bit, but you don't have to have thousands of people to tackle this global market. That's the best part about MarketAxess.

Great. Why don't we dig in here a little bit, just big picture first, just on the sort of state of electronification and credit markets. It seems it's maybe slowed a little bit in recent years after we had maybe a bit of a pull forward or large acceleration back during COVID. Just maybe you could talk a little bit about what you see happening across big picture electronification of the industry. What are the major roadblocks or impediments that you see at this point?

Sure. And we've spent a lot of time on this over the years, obviously, an early adopter of electronic trading in the credit space. When you look at other asset classes, they're as high as 90% electronified. I actually look at fixed income broadly, including the fixed income government bond market, and do believe we can achieve similar levels of electronification. I think the biggest puzzle to the credit -- U.S. credit electronification is further along than any other -- it's -- IG is further long than high yield, high yield is further along than EM and EM, probably eurobonds are pretty healthy in electronification conversion. The key ingredient to me was early electronification was small tickets. Everything we built was designed for small ticket electronification. We've successfully achieved electronification of small tickets, it's high in the 60s right now on electronic. And then what's interesting is we stopped developing how to convert a block into the electronic atmosphere. We largely focused on let's make blocks smaller. Let's make blocks cut up into smaller slices and electronify them. And I don't think that's the right conversion. We first have to go and replicate the phone and chat market and just replicate how that market is formed, and that's really where we're headed now. The biggest move to electronification of the credit market was the introduction of portfolio trading. I think about portfolio trading, it's $300 million and bigger is your typical portfolio trade size. So we've electronified $3 million and below quite successfully. And we've now electronified $300 million and above, and we left the big fat middle, and that's $3 million to $300 million. And so the best excitement I get about where is this headed is that we've electronified $300 million and bigger. And so that middle, I know, will come. That -- right now, with our high-touch offering, which we're rolling out at the end of this summer, we're targeting just $3 million to $10 million in size. So we're still carving up and targeting a small part of the market, but it's -- just know that above 3 million is 60% of the credit market. And we're just now offering solutions there.

Maybe just to dig in on that point, needing to replicate the phone and chat, maybe a little bit of an evolution of a viewpoint versus a couple of years ago, looking to kind of open up into the block side of the marketplace. Talk about how you're thinking about overcoming these roadblocks. Talk about some of the investments that you're making here to drive growth in this part of the business.

Yes. I mean, the key ingredient to electronification and the objection from the trader to electronification has been their fear about information leakage. And when you go to all-to-all with a block, you run the risk of having information leakage. You're basically asking the entire market and sharing your side and your direction and your size and hoping they don't impact that market. So there's been a lot -- when we surveyed clients and third parties have surveyed clients, the feedback is, I'm worried about information leakage. By creating a solution where you can go to one or several dealers privately, like you do in chat and phone in the electronic form, it's a much easier conversion for the clients to move over because it protects that information. And ironically, the biggest information leakage is around a portfolio trade of $300 million. Right now, they go to 2 or 3, sometimes 1 dealer. So we're able to electronify $300 million again. It plays perfectly in the $3 million to $10 million size Look, our buy-side clients want efficiency. They are not hiring more traders. That's come to an end. So now they're just trying to figure out what's the most efficient way to get my cash exposed to the bond market, and these electronic solutions are really the answer.

Why don't we talk a little bit about portfolio trading. You've mentioned it a number of times here. It's gained significant momentum across the industry. And at MarketAxess, the protocol or workflow solution as you, I think, described it, it enables one to trade a basket of different bonds in a single trade. This has expanded to be about 7% to maybe 10% of the market, depending upon which month you're looking at, April or May, from about 5% or so a year ago. So significant growth. You're breaking in. You've had tremendous success in terms of your volumes there as well. Maybe just talk about your approach to portfolio trading or PT, as we like to call it through short here. How do you see the use cases evolving? And is there room for innovation at this point?

Sure. There's -- I think we're still early days of innovation. And it's not like you're going to create a new portfolio trading tool. You're going to create new analytics around putting together a portfolio. When the first portfolio trades came to market, clients were trying to decide, do I portfolio trade or not. And now clients are trying to decide, well, how do I optimize my portfolio. Throwing everything in isn't the answer because you will degrade your pricing. So giving clients the ability to predict what their pricing outcome could look like, one, it helps them optimize their portfolio, take line items out or add line items. It also helps them decide should I even put a portfolio trade on. Or is this list of bonds liquid enough to trade automatically in the market as it exists today. So it's really that what clients are asking us to do is give them analytics, data around optimizing their portfolio, determining when is the appropriate time to trade. What's impressive around the execution quality of portfolio trades, they're quite attractive. So clients are getting high levels of execution quality, but it really depends on where the ETF is trading. If it's trading at a premium or discount, it really is reflective of how well you do on your portfolio trade. There's not a lot of traders that use that as a guide to PT. And so adding all this functionality, adding real data is a critical ingredient to what the portfolio trade offering looks like. And so when I think about where we're able to go with data, we're still months away from having that complete offering.

Any sense on how large PT could become as a portion of the marketplace? There are some numbers out there, some say like 20%, 30%?

So that's a little bit bold to predict that a market that is capital constrained can do giant PTs up to 30%. I just don't see that, particularly with capital constraints coming in, in 2025. These are capital-intensive trades. I think the better question is, where is volatility. Because volatility does impact that trade. It impacts the pricing that the dealers are willing to give in a volatile market where the market is moving and you have a giant portfolio and you're trying to price all the incremental line items, it's hard. So we do see volatility impacting the level of PT volume. The other piece is, are there other solutions in this market that will rapidly automate the market where you don't have to use a PT to get exposure. You can use other tools. And if you look back in history in other asset classes, portfolio trading was a rage in the 90s and cash equities. Everyone was portfolio trading. It was the greatest thing. And then suddenly an algorithm came along and everyone shifted and you see portfolio trading in equities is quite reduced. So automation, friction-free trading, things that help you get exposure quickly, better economics to your execution quality, those can impact what the level of PT looks like.

And that's a great segue to the next question on automation. So you have an algo suite that's gaining traction across your customer set with dealers, market makers that are using algos. Maybe just remind us how these algos work. And then talk about where you see this headed as you look out over the next couple of years. And any sort of catalysts along the way that could lead to sort of a step function change in adoption?

Sure. One, we have this very large automation suite that we're pretty excited about. It's been growing anywhere from 30% to 40% a year. So there's high demand for that. I think it would grow faster, but a lot of those trade sizes moved into portfolio trades. So it does solve for small tickets in a very fully automated way. What's exciting about our suite of product is you can do a basic RFQ, so replicate what a trader does, or you can do something more sophisticated for a block size trade where you're taking a large order, slicing it into smaller pieces and not having any information and market impact. So that market information leakage and that market impact has become a bigger issue for the market as liquidity is a little bit more responsive. So as we have more liquidity challenges and more volatility, market impact becomes a bigger factor. So we see the use of algorithms for our clients as a way to, one, automate their trading; two, engage the market without leaving a footprint, quietly engage the market in smaller trade sizes at certain times of day based on AI information that's basically dictating how to trade the bond. The other piece of the puzzle is we do think clients can be big, important liquidity providers in the right circumstances. For a trader to respond to someone else's RFQ, it's manually intensive. But for an algorithm to be there working in order and then respond, it's seamless. So we build algorithms that quietly execute your trade in the market. We built algorithms that respond to other RFQs while executing your trade as well. It's quite a sophisticated group.

And how does the Adaptive Auto-X workflow tool fit into this?

It's Adaptive is the suite of products. What's nice is a trader can customize their own algorithm. They can have 6 or 7 different algorithms running at any time in the market.

And maybe you could talk a little bit about the traction that you're seeing with this across your customer set in terms of the pace of adoption, how you see that trending.

What's interesting, some of our largest clients, they would like to automate on their side, but they're seeing our solution as what they would build. And we're working with them to build custom algorithms. So that's where a lot of the adoption is coming in. Sorry. Ask Ilene another question.

So about that margin profile. 10 days in, any target?

I think he's better now.

I'm good.

All right. Great. Maybe you could talk about some of the workflow tools just more broadly that you're introducing, expanding your footprint and presence with clients. What are the other types of workflow solutions that you might think about? Are you thinking about PT? What other workflow solutions come to mind? You have the auto algo suite as well. Where else might you innovate with this?

Within the block area, there's a lot of innovation -- sorry, I'm going back to my froggy voice. No, but in blocks, what's interesting is there's a whole litany of different protocols. We hear a lot about attributed quotes and that's just a dealer providing a price and being able to execute with that dealer directly. That's an offering that we're building. And it's all within our high touch. There's direct to 3 dealers. So you're streaming Axess and being able to execute on those prices. Another protocol that we're seeing growing and part of our growth in EM is a request for market. It's a smarter way to trade. Remember, an RFQ is I hand you my side and my size. So I'm a buyer of a certain size and I ask you for price. In a request for market, I just ask you for the market in a given bond. I'm not going to tell you my direction. So it's less informative to the market. And the dealers have now started quoting in these RFM markets, and it's gaining traction in EM, and it's certainly been part of our growth engine in EM. So those are protocols that we see expanding across the market. But the #1 demand that we hear from our clients is data. Anything that helps them -- when you think about the data landscape, we've given our clients the price of the bond, our CP+ data. So we can tell you where the bond should be priced. Now we're going into a new level where we can actually tell you and predict with accuracy for you, a premium client, your price of that size in that direction should be X. And so we can predict your pricing based on your side, your size and the type of client you are. And that's key information for traders. The other piece that we're rolling out in our high-touch offering is we will help you select the dealer. We can predict which dealer, and this is -- these are all based on AI tooling, we can predict which dealer is best associated with that bond based on the direction you're going. So we can tell you if there's a dealer that is buying that bond, you should select this dealer. There's dealers showing an X and actually responding, you should select that dealer. So it's pretty powerful information that we're sharing. And then last piece is, we can tell you when to trade. We can give you levels of liquidity in the market at this moment in time for your bond and whether or not you should trade that full size or should you break it up? So it's -- we're entering a new phase of data opportunity, which is really telling data -- telling traders, how to trade, when to trade and what size to trade and finally, who to trade with.

Now as markets electronify, we're hearing more about growing demand for these execution management systems or EMS platforms to enhance workflow efficiency. I guess, how do you see the role in demand for EMS evolving across the marketplace? And what does this mean for MarketAxess?

Yes. And there are a number of EMS in our space. We do have EMS connecting to us. So they're a distributor of our service. But when I look at our fundamental offering, I do see us as what I call hybrid EMS, we're EMS like. We aggregate all these dealers and all these clients to put price together. Sometimes it's direct to a dealer or sometimes it's direct to several dealers. So we can go to all, to one, or to a few, and that's really what an EMS is doing. And EMS will add, they can get you to Tradeweb. But if we can replicate the liquidity that's inside Tradeweb, we can provide the same level of liquidity in our services. Part of our Pragma acquisition was it comes with an EMS solution. So having that EMS solution embedded into our offering was a key ingredient to that acquisition.

Is that something you would look to build out and invest into more and...

Yes. We're already looking at ways we can integrate the Pragma EMS solution under MarketAxess' X-Pro offering. So think about X-Pro, our new platform, our new experience for the client, there's already aggregated data coming into X-Pro. So you can see dealer access. You can see dealer prices. You can see our own prices and our proprietary data. And then you can actually get to multiple protocols within MarketAxess. So think of it as an EMS for MarketAxess, but it has the ability to go outside of MarketAxess as well.

Maybe taking a bigger picture. Just curious how you think about and see the competitive landscape, whether it's these EMS protocols that are connecting more broadly to others in the marketplace, there's newer platforms, there's technology solutions and also dealers are trying to establish direct connections to their own clients. So just curious how you're seeing this. And how do you sort of plot a course for MarketAxess for growth to navigate around all of that?

For us, the direction of travel is dictated by the client. Clients have limited desktop. We currently sit in that desktop, so we have a very privileged position. So I see that as we have to provide them functionality that they're in demand for. PT is a perfect example. We're late to the game, but we're actually catching up quickly. So we have to maintain our presence on the desktop. There are some clients that don't want a desktop, they want an API. So we have to offer enriched APIs that allow them access to multiple places within MarketAxess or potentially externally. So I see that we have to provide -- I think about it as I call it, protocol agnosticism. Like we have to be agnostic around the protocol that we're offering, let the clients decide which protocol they want to choose. But provide an offering that gives them an enriched experience when they're selecting protocol. Sometimes, we're a little biased in our data and we might suggest a protocol. But we do need to be agnostic across all those protocols.

Fair enough. Maybe shifting gears to high yield. Overall industry volumes have been a bit softer in high yield this year. Market share as well has been a little bit softer at MarketAxess. Maybe just talk a little bit about what's driving that. What will it take for MarketAxess to sort of reaccelerate growth and share in high yield? Do we need to wait for a market backdrop to evolve to change? And can you navigate through and grow putting aside any sort of market or macro evolutions?

Yes. I mean, high yield has been a challenging market for pretty much all our clients. Obviously, our long-only clients, they're really not moving a lot of high yield outside of their portfolio. There's some high-yield products that they're sitting on that they'd rather not take losses in. So there's not the same level of turnover in the high-yield market. More importantly, the ETF market maker or the ETF arbitrage trader within MarketAxess, it was a key ingredient to our high-yield market. And that's really been challenging, both for us and the ETF market maker. That arbitrage between the high-yield ETF and the underlying market has been a very difficult trade. And so we've seen a lot of ETF market makers pull back from trying to make that trade work. The other piece that we've seen, I think, really goes to the volumes. It's interesting that you see high-grade volumes at such high levels of growth, close to 28%, almost 30% of growth. And high yield was flat. And what we're seeing is there was a robust new issue in high yield. Typically, you will see our clients turn over their book to put -- make room for that new issue. In this instance, they were using all of the incoming cash flow to buy that new issue. There just wasn't this usual secondary trading that we see around new issue. It was quite light from that perspective. So we had record high-yield new issuance. Probably you haven't seen that type of new issuance in high yield in the last 5 years. And yet, there wasn't a secondary market turnover that you normally see. So when we talk to our long-only clients, they mentioned that they tend to take all cash inflows and just put it towards new issue.

Maybe shifting gears over to RFQ-hub. You mentioned ETFs already here. Maybe just talk a bit about how your ETF volumes are evolving here. Talk about the contribution from RFQ-hub and how much that contributes today.

So it's still below the line, but it's quite an exciting investment. We certainly see the RFQ-hub solution as not just ETFs but derivatives as well. They have a very big footprint in equity derivatives, unique derivatives in Europe. There's an opportunity to have those same derivative offerings here in the U.S. The ETF offering in Europe is quite robust, but we're bringing it here to the U.S. as well. So we'll really want to have a global ETF RFQ solution for both institutional clients, big high net worth distributors, large ETF players across the country. And it's still early days for RFQ-hub, particularly here in the ETF market. But we see a pretty robust offering in the derivative side that we want to expand. And we get a lot of positive feedback from our clients on RFQ hub about that derivatives offering.

Maybe shifting gears over to emerging markets. This has been an important area of growth for MarketAxess over the years that has accelerated even quite meaningfully and recently. What excites you most about the space in EM? Where do you see the biggest opportunity? And talk about some of the initiatives that you have that you're focused on.

So EM is this great market that has this been quietly growing for us. It has macro issues from time to time. We saw that in part of '23 and part of '21. But we're seeing great growth in the overall EM macro space in '24. We also see our share is growing there. It's hard to predict where share is because these markets don't have trace, they don't have real market volumes. So we try to predict based on what we see in Europe from the EM perspective. And we do see our share growing in EM. It's open feel for us. We don't see other electronic competitors in the EM space, and we are adding new clients. International clients are being added regularly, and we tend to show that in our quarterly earnings charts. So it's pretty exciting that we can grow off of the back of very big, large client franchise. That has really been a big part of our EM business. And now we're growing those local markets. The local markets are growing faster than the hard currency, which is exciting. We've made investments in those local markets, and it's finally yielding returns, which is exciting. The -- when I think about the offerings there, we're rolling out. We have a portfolio trading offering, but our X-Pro, which is our robust PT offering, is rolling out this summer into Europe and the international community. So we'll have a global portfolio trading offering sometime this summer, available to our international clients, which is exciting because that's an enriched offering that they're just not seeing in Europe and throughout the international landscape.

So that's European credit as well as emerging market?

What's exciting about it, it's everything. So you can put a portfolio trade together with European credit, EM and high grade and high yield.

Which one cannot do today.

Today, it's separate offerings.

You'll enable that over the summer?

Yes. And clients have been asking for a global PT solution.

Could you envision rates embedded in that at some point, too?

Definitely. Definitely. They've been asking for rates, portfolio of trading solution as well.

Okay. Maybe shifting over to data. Your platform has some interesting and compelling unique data sets. Maybe just talk a bit about how you think about enhancing monetization of these data sets, whether it's data subscriptions, indices, even end-of-day pricing. Where do you see some of the biggest opportunities?

Yes. The opportunity in data is pretty robust. Just in our current data offering, we have CP+, it's global, so it's CP+ for U.S. products, European products and EM. The opportunity in EM is sizable. I think, we're just starting to crack that market globally, getting clients abroad to start looking at our CP+ product. Remember, the EM market is not transparent. The only way to get prices in EM local is ask somebody. And here in the U.S., we're blessed with trade, and we see prices get printed. Other markets don't have that benefit. So CP+ comes along and we're showing you a calculated price in real time. It's a pretty powerful tool in what is a local dark market. And so we think there's huge opportunity in the EM space with our CP+ offering. We also have our access all solution out of Europe, which also covers EM, which is a pretty attractive offering as well. Just think of it as like a trace print. Not complete market, but a sizable portion of the market is available in EM and eurobonds in Europe. And that's all been getting traction, so the real-time pricing kind of opportunity for us is quite robust and quite big. And you see that in our kind of annual growth rates, double-digit growth rates. The key ingredient for us is this new data that really reflects what the market looks like at that moment in time, not just price, but depth of liquidity, a direction of the market, which direction is the market going in a given bond, who you should trade with. All that data is being placed on our platform today. We're not ready to convert it to hard dollars because we do think it creates a very sticky user experience on the platform. But over time, as you get clients that get used to that data, they're going to want to start ingesting it into a very unique area, into their portfolio construction area. So I think there's a huge opportunity for us to start selling data that helps you decide how to train, to data that helps you decide how to select a bond. Remember, when a portfolio manager in the bond world is expressing their investment thesis, it's not in individual bonds. There's a lot of bonds they can choose from. And so they have a raw method of choosing bonds. Obviously, ratings and sector and sector exposures and maybe down to issuer. But when it comes to maturity, they have a target maturity. So there's more selection tools that portfolio managers could use that reflect the vibrant real-time market at the moment of selection. And so we're starting to use that data for how they trade once they've already made the selection. But we envision a huge opportunity to help them make the selection to have a better outcome to trade.

And this is some of the data that's powering your algo suite.

Exactly.

But just not opened up for them to...

We have not opened it up. We really want the adoption to happen at the trade level, call it, the front office. And as they become more comfortable with the power of that information, then we can share with the PM and help drive selection. It's a unique area that not many people are spending time on.

And is there meaningful opportunities here around indices? I know you've partnered and have -- talk a little bit about that.

When I look at the index market, I still think everyone is predicting growth of fixed index and passive investing. It's a very easy prediction to make. Just look at the robust ETF issuance that we're seeing. Clearly, we're going to see ETFs with the ability to manage some portion of the portfolio, factor investing, all of that is data dependent. And so we do think that selection that I'm talking about at the PM level, it can be replicated in an index level as well. And so there are better selections that can be formed, particularly on the liquid end of an index. When you look at some of the indices that exist today, half of the index doesn't trade. And I just don't think that's a perfectly constructed index, and it's hard to replicate. So the ETF always has tracking error. So there's ways to get more optimized index selection using basic data that is already available in the market.

Great. We're just about out of time. Maybe just a final question on M&A and sort of capital allocation. You've done a few deals over the past 5 years or so. Just curious how much time you're spending on M&A these days and just how you're thinking about capital allocation.

So as interim CFO, we're spending too much time on M&A. Now I have a CFO, and I don't have to do that. And so I'm very excited about Ilene being here. She certainly wants to buy things, so -- I'm just kidding. No, we're just -- it's just a better use of my time to have someone like a professional looking at -- there's lots of M&A, little tiny M&A opportunities that we see. We don't action many of them, obviously, if you look at our record. But there's tech enhancing things, data enhancing things. Unfortunately, there's no clear M&A to consolidate the market. There's not a lot of platforms that look like us, Tradeweb and Bloomberg. And so when I look at the market globally, there's not things to buy that make us accelerate the electronification. We're it, and it's just up to us to deliver that. But there are cool things that are out there that are small, bite-size that may enhance our technology. And so having someone here to do that is very helpful.

Great. Well, I'm afraid we'll to leave it there. Great. Ilene, thank you very much.

Thanks for having us.

Thanks.

Thank you.