Tradeweb Markets Inc. (TW) Earnings Call Transcript & Summary

Let's get started, everyone. Good morning, everyone, and welcome to the 21st Annual Crédit Suisse Financial Services Forum. My name is Ari Ghosh, and I cover the U.S. exchanges here at Crédit Suisse. It's my pleasure today to introduce Tradeweb's management team this morning. With us on stage, we have President, Billy Hult; and CFO, Bob Warshaw. We also have Ashley Serrao, Head of U.S. Corporate Development and Head of Investor Relations, in the audience with us today. The structure of our discussion today is a fireside format. We'll hit on a few key themes and then open it up for Q&A. So 2019 was a pivotal year at Tradeweb following the company's very successful IPO in April, Tradeweb ended the year seeing record volumes, double-digit revenue and EPS growth and then also best-in-class margin expansion. The momentum is carried on into this year with strong Jan volumes, which were up almost 30% year-over-year. Gentlemen, great to have you here, and let's try and dive in.

Thank you.

So over the last few days, we've heard from some of your competitors. Certainly, given the market conditions, there's some near-record volumes as well. So curious if we could get a sense of what you're hearing for your platform. Give us an update on volume trends, more from a general sense, as it pertains to volatility. Do you still see that level of electronic trading on your platform and also things like AiEX? It's a utilization at the -- at same rates that you announced.

Sure, sure. First, Ari, thanks very much for having us. You're right, this is our first time at this conference. CS has always been a huge partner of Tradeweb. So like, super happy to be here, and we really appreciate you inviting us. Even once Tradeweb had become a successful platform and we have become sort of mainstream in government bonds and TBA mortgages and European governments and we've started to become, certainly, mainstream in global swaps, we would sort of, once in a while, find kind of some frustrating outcomes, and those frustrating outcomes would be we would do all this work with clients around behavior change. We felt like we were in this really good place in terms of all the efficiencies that we were providing. But when like the markets got really tricky, when the markets got really volatile, when the markets got really busy, when price location -- or price dislocation would happen, we would find this like, frustrating thing happen, which would be clients would revert and they would go from like, all of this work that we would do to getting them to click the mouse, and sometimes, they would go back on the phone and do trades. And that was like, this really frustrating thing. What I would say kind of very clearly is that over the past, really now, maybe 3, 4 years, that trend has gone away. And so in the most volatile markets, when the markets are the most dislocated, when there's a lot of things happening, actually, the pace of electronification tends to 100% increase. So these are kind of like very interesting times for us as a company for a bunch of reasons. The other thing I would say, back to your question a little bit, is like it's -- and I say this in a very straightforward way, it's a good time to be kind of in the rates markets, right? And if you think about what's happening obviously with the yield curve, when you think about what's happening with treasury prices, the fact that Tradeweb sits in this kind of leadership position -- specifically speaking, I'll give sort of like 3 obvious examples. Dollar swaps, European -- euro swaps, and then obviously, we have a very, very strong position in the TBA mortgage market, this is like a very, very interesting and I think a very kind of good environment for a company like Tradeweb without getting into actual numbers and all those things. Ahead of time, it's a sort of very interesting moment to be sort of both getting all the benefits of this kind of onslaught of further electronification and then all of this activity that's happening at the same time. It's pretty interesting. AiEX, and I kind of talked about this a lot. For anyone here that hasn't heard me speak about this, AiEX has been kind of a game-changer in some levels because I used to ask the question, which was like, "In this day and age, in 2020 and 2019, like, why are customers still picking up the phone and doing trades the kind of old-fashioned way?" And I would sort of obviously come to the answer that it would usually be kind of like 1 or -- for 1 or 2 reasons, right? The one reason would be I'm doing a trade -- I'm a customer and I'm doing like a big market moving trade, and I want to make sure I'm talking on the phone and doing it with one person. The other reason would be sometimes like, "Hey, it's a complicated trade or it's a negotiated trade or it's a trade that I'm having a hard time finding the other side to." Interestingly, as we've gotten very strong around our AiEX product, which is essentially a smart algorithm that allows clients to find and search for the other side of the trade, it's really less about the mouse and it's more about these algorithms now. This kind of answer to this mystery around why are people still doing phone trades. Large-sized trades tend to get broken up into more digestible trades, which find the other side through AiEX. So that's like a big trend that's kind of pushing things into the electronic stage. And as markets get busy, it's kind of accelerating even further.

Got it. And you touched on electronification of markets. You have clearly a long-term secular driver in your business. Hopefully, you've been with Tradeweb since its formation. You've seen the business evolve. So maybe talk about, over the past decade, some of the factors that are driving client demand for greater automation. Why today? Why is that demand increasing so much more?

There's something like about -- like, there was a moment where clients really appreciated and understood the value of being able to look on a screen and seeing 2-sided pricing. We're like, "Oh, wow, like I used to wonder where Fannie 5s were. And now we can look up on a screen and see like a plus market -- 2-sided plus market." It took a little bit of time for actually Tradeweb with the company to be able, like, "hey, look, these prices are going to go away. We're a trade execution business. These prices are going to go away unless you use the system and support it." So the sort of the value of the market data of it all was in the pre-trade price transparency was open, really obvious to clients. It took a little while for them actually to understand like, "Hey, look, support the platform, get the benefits of the trade execution." And then the pricing even gets better. So that was actually kind of like the first thing that really wound up sort of striking with the clients. And the other thing I would just mention is like, obviously, the digitization of it all, the straight-through processing, the ability to not have to write a trade ticket. These are things that have always been just like creating massive efficiencies for clients all the way through. Behavior change is kind of the whole thing, right? It's like, how do you change the behavior of these clients. And I've always described it a little bit like the first sort of battle around it all was like, how do we get these guys like off of the phone and on to the mouse? Clearly, what's happening now and particularly over the last couple of years is like the mouse, on some level, is actually like, going away. And AiEX and smart trading and all these things that are happening are really kind of taking over and becoming the new way for the buy side to engage in the marketplace. That's like, a clear, powerful and real trend that's happening in the market.

Helpful. Maybe just jumping into some of the key areas of focus. Let's start with credit. So market share in high grade over the last couple of years has almost doubled. When you then think about some of the items that are driving that, you've got the unique net spotting technology clearly adding to already what you got, a very healthy market. So looking ahead, what's your expectations around market share? Maybe talk about some of the new initiatives that can contribute to volume and share gain over the next 12 months.

Yes. Very good question. So I kind of like maybe describe it for a quick second this way, which is like -- and I think most people here know this, that Tradeweb grew up in the rates business, but we grew up 100% in the business competing, right? We had Bloomberg essentially from day 1 as a big, competitive force with us in the marketplace, whether or not that was government bonds, TBA mortgages, European governments, interest rate swaps. So we honed ourselves as a company through competition. How do we price our service? How do we build technology? How do we engage with our clients? How do we get great as an organization? Because we knew we had to be great. There was a period of time, and I give -- to your question about credit, MarketAxess is a really good company. Actually, they're a great company. We kind of felt like they had a pretty good free run without a lot of competition in the space. So we went out and we talked to the biggest clients, and we asked them like the sort of -- the question I think that everyone here would expect us to ask, which is, "Is there room for competition in the space? Does the market want competition?" And the answer we got was a sort of resounding kind of yes. Competition is good. And so we kind of got back and went a little bit into the drawing board and we said, "Like, okay, how are we actually going to do this? How are we going to compete, right?" And so we had to 100% acknowledge, I think, something that they do really, really well, which is like how they built their all-to-all system. We had to figure out a way to compete with that and to build up our network and allow our network to be healthy enough and big enough so that this big network, this big, vast network of responders would be available to us. And I think we've done a lot of work -- a lot of good work on that. And then we had to do something probably more important, which is like, what can we do better? And what can we do differently? And how are we going to add efficiencies and value to our customers? So we've identified, I would say, at least 2 things. One is like, obviously, Tradeweb known for rates. The credit market and the rates markets already linked. We had to figure out the right way to create that linkage. We had to figure out the right way to allow customers to auto-spot and auto-hedge. And I've described that in the past as a little bit of a light bulb moment with customers, that we've created a lot of savings, a lot of value and a lot of efficiencies, right? So that's one. And then two is, obviously, and I think everybody here in this room knows that portfolio trading is a big and real trend in the fixed income market. I think we've been a leader and a pioneer around creating the workflow around that. I think that has resonated with clients. And I think that's something that distinguishes us. So I kind of highlight those 2 things as like real drivers behind why we've been able to pick up some market share. And I think all of that is described in the context of something that's obviously important, which is like, the marketplace likes and wants to and will support competition in the space. And I think we've distinguished ourselves very much recently as that competitive force in the market.

You talked about portfolio trading. Currently, a small piece of the overall market, I think 3%, 4%, something like that. Why is that a game-changer?

It's something that resonates with the biggest and most influential customers, to start with. So we always like it when like -- when you have a conversation with a -- I'll use BlackRock as an example because they've been a big proponent of portfolio trading and that -- and they sort of like say, "Hey, you've nailed this workflow, you know you're onto something." We think that there has been a historical inefficiency, obviously, around how bid lists and offer lists tend to get put out into the marketplace and priced. And we think all-to-all and MarketAxess' great work around that has helped solve for a portion of that. And I think in an elegant -- and somewhat obviously, portfolio trading is possibly, and I think I can describe this as almost like a 2.0 innovation around how am I going to get these kind of cumbersome bid lists, offer lists, these long line item types of positions ultimately priced? And there's something very elegant and efficient around how portfolio trading handles that.

Got it. Maybe just one final one on high-grade credit. Clearly, volumes are strong, market share is growing there. Can you give us a sense of where you've been winning this market share? Is it from dealers in the institutional segment, retail? Where is it coming from while the overall market, we understand, is growing?

Yes. I think it's a good question. And I think on some level, the credit market structure is kind of interesting because you have a lot of different things happening on here. You have customer sending inquiries to dealers, obviously. You have customers sending out inquiries into this all-to-all. And then sometimes you have customers responding to customers on inquiries. Then you have, like, I think something that's a very big piece of the market now that we call sweep, which is the ability for banks to trade with each other. And then you have something that sort of like maybe strikes everyone as slightly obvious, which is banks actually sending out inquiries to other banks. We feel like we are really well positioned across all of these pieces of the sort of credit ecosystem. And we're kind of like picking up share kind of across the board in some significant way. What I would say, though, and I think this is the important thing for everyone maybe to hear me on this, when I talk about like, these big innovations around net spotting and hedging and portfolio trading, I'm talking about things that directly impact our institutional client base. The Tradeweb network of customers is really -- in some ways, it's like one of the most important things that we've done as a company. And our commitment to solve efficiencies for those customers is at the highest level possible.

Got it. On high-yield credit, maybe is there something peculiar about the market segment or the space where maybe it's a little more tough to get market share? Is there something going on there?

Yes. There's a little bit -- it's a fair question. It's like the most negotiated of these markets. And so there are protocols that like have things like, countering that can sort of both be tricky to match. And at the same time, it maybe leads to more kind of voice transactions, the market that we're focused on. But I think if I was going to be sort of self-reflective on some level, I would say that's an area where we could improve our offering on and get better at.

Got it. Maybe moving to global interest rate spots, the largest 3 products. You get revenue, volumes. Can you remind us what your market share looks like here? And maybe unpack some of the drivers of growth. I think Electronification isn't part of that as well given that it's not a really an electronified market. You've got some of your MAP package tools in place as well. And I think also with the emergence of [ ultimate rates ], that might be helping the process. Like what are some of the [indiscernible]?

Bob -- you can help me with this, Bob, maybe. I think my brain's kind of a little dead from being inside too much, so I'm not sure I can quote the exact market share. I could say -- I could kind of describe it to everyone in this way, like the global -- the interest rate swap market is a super-interesting market, right, because it was the last of the real -- in the rates complex, it was the last of the real kind of voice to marketplaces. It was negotiated. It tended to be -- if a client put a trade on with the dealer, that client would take the trade off with that dealer. It was very phone-based. It was very protected for a long time. We 100% need a very strong decision that we were going to place a big bet in global swaps. We were there early, and we fought that market and it fought back. And it was not an easy move from voice space into kind of electronification. The good news for us, and I think the benefit of us being early, was that it really gave us a strong voice around helping shape regulation. Regulation is really the kind of big driver in that marketplace through both Dodd-Frank in the U.S. and then MiFID in Europe in terms of pushing that marketplace into the electronic state. And we -- Obviously, I think on some level, given our network in the rates business, we were extremely well positioned as that market moves from darkness into light, from phone-based into electronification. The really interesting piece, and I can kind of sit here today, and the global swaps business is our biggest business as a company globally. So it's kind of rewarding. I think it's a -- for sure, it's a validation and I think it's an important piece around getting in early, placing that debt early and then having that big knock-on network. The biggest consumers at a various interest -- to your first question, the biggest consumers at different points in the interest rate cycle of interest rate swaps can be mortgage end users, right? And so the fact that we had this very big mortgage network ultimately helped us and swaps quite a bit. So it's been a great kind of interesting story, but I can tell you that, that market was -- that was a real phone-based market of all phone-based markets not that long ago.

Yes. And there's still more to go, right?

There's still more to go because one of the things -- yes, one of the things for sure is that regulation is kind of happening in Europe in stages. So we kind of talk kind of baseball innings, and sometimes it's hard to get the actual kind of innings completely correct. But I think there's a feeling that like somewhere -- I don't know if we're going to say bottom in the sixth, top of the seventh sort of thing, but there's still, for sure, more onboarding of clients happening in Europe, and that is a fundamental reality. And then you have these moments in time in the rates market, back to your first question, again, where like, the swaps market -- the activity in the swaps market is really going to go up.

I think I'd add to the third one. It's a hard thing to measure because each of the segments of customer sectors are a little bit different in how they -- how far they've come. But I think when we look at the overall market in terms of electronification, it's really in the 25% to 30% range. And that says there's plenty more to go. We've done very well. We tend to -- in the places -- electronifying, we tend to be on the majority side of that. But it's -- but I think that tells you that there's plenty left for us to go after.