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

Okay. Thanks, everyone, for joining our virtual fireside chat this afternoon. I'm Brian Bedell. I'm the Deutsche Bank broker asset manager and exchange analyst. And so we are very excited to have this call today with Tradeweb's President, Billy Hult. I think most of you on the call know Tradeweb after coming public just over a year ago. But just as a quick refresher, the company was founded back in 1996 with a mission to increase transparency in institutional U.S. treasury trading, launching their first electronic multi-dealer online marketplace for treasuries in 1998. And then over the past 20-plus years, they've expanded into pretty much every major fixed income asset class with still more of a rate-based focus. But we'll hear more today about strategies in other areas, including credit which, of course, is a competitive space, and we will hear from MarketAxess later in the afternoon. And just a quick bio on Billy. He is the President of Tradeweb and also serves on the Board of Directors. He joined the company nearly 20 years ago in 2001 as a product manager, where he oversaw the creation of a platform for the institutional electronic trading market. And throughout this time, he led the creation of Dealerweb and the launch of the company's first platform for wholesale electronic trading. He was appointed President in 2008 and has served an instrumental role in working with clients, partners and investors. And before joining Tradeweb, he worked in a number of trading roles at SocGen. We're also happy to have Ashley Serrao with us, who is the Head of Investor Relations and U.S. Corporate Development as well as a member of Tradeweb's Operating Committee. Again, thanks, Billy and Ashley, for being with us today.

So I'll start out with some questions of my own and leave some time for questions for the participants. And just some quick instructions on that. You can ask a question via the web portal or you can e-mail me at [email protected], whichever is easier. So maybe to start, Billy, can you give us a brief overview of how the Tradeweb team is navigating in the new work-from-home environment and what you are doing differently for clients, given many of them are connecting from home at this juncture? And then maybe a sense of what issues clients were facing during the market turbulence since February into April, and how that's changed recently as volatility has eased over the past month.

Sure. Hey, Brian, how are you? And first of all, thanks for that sort of generous introduction. I almost got a little teary as you were describing my history and my past involvement with the company. But a little bit more seriously, Tradeweb has always had a very kind of strong partnership with Deutsche Bank. And it's a pleasure for me to be on this call with you and a pleasure for Tradeweb to participate in this conference. So thank you for having us. I wish we were kind of face-to-face, but we're going to do the best we can kind of in this new sort of virtual fireside chat world. And thanks again for your first question. I'm a pretty blunt person, I think, as you know, and a lot of people that know me, so I'll kind of describe it bluntly. The first thing we wanted to do was make sure everyone in our company was okay and safe and healthy. And so we did everything we could to ensure that, that was the case. So we sent people home, I think, on the early side. Lee and I had a lot of conversations about how do we make sure our employees are as safe and healthy as possible. And I think that speaks to -- on some level, I think that speaks to the culture of the company and the type of company that we are. It was very important to us that people were safe and healthy as possible. It's been a crazy, crazy few months for everyone. When I step back a little bit, and I think about sort of how everything sort of from a business standpoint was operating and all the different things that happened in a very kind of quick and condensed way, we obviously wanted to make sure that platform stability was at the highest priority for us. So everything was in terms of, like, how do we make sure that our clients and our customers feel reassured around our technology and our system. With everything that was happening in the marketplace, the one thing that we wanted to assure our clients was that they could rely on the Tradeweb system and the network to work. And I think we did a pretty good job around all of that. And then we wanted to make sure, in the most kind of obvious and straightforward way, we wanted to make sure that we were connecting and there for our clients globally. And so we obviously went out of our way to make sure we were available in all the ways that you would expect us to be. And I think when we step back from that moment in time, I think we feel pretty good about how the company operated at, obviously -- and you kind of mentioned this, Brian, a very stressful time for everyone personally, but also a very stressful time in terms of how the markets were functioning and operating. And I think Tradeweb, quite frankly, excelled as a company in that moment. I always kind of thought about it a little bit this way. And Lee and I, I remember, having sort of had a bunch of conversations about this, that this was going to be hard. It was going to be difficult, but we sort of felt like good companies were going to be okay. We also sort of felt that great companies were going to excel in this moment. And obviously, we feel confident and strongly that we're a great company. So our entire MO was about how do we excel as a company in this very stressful moment that was happening.

Yes. No, no, that's -- it's -- obviously, that's the most important thing. And I think just getting people used to connecting on home, I think it's been a -- I think you guys just said it on the earnings call. That was a big part of that mission as well.

Yes, a big, big part of the initiative. I mean, one of the things that obviously happened, Brian, as the markets got fully stressed was a sort of whether or not you're talking about credit or government bonds or interest rate swaps or mortgage-backed securities, there was a real kind of search for liquidity in the market. And we felt pretty confident that a lot of the things that we had been doing -- and you heard me talk a lot about our AiEX function, which is essentially a smart search for liquidity in the marketplace. We felt really good and confident that a lot of the different initiatives that we had gone into with clients were going to distinguish themselves in this moment around this search for liquidity. And I think when we step back, I think -- and I think people are going to be looking at what happened at that period of time for a long time. I think this is going to be sort of a moment for the record books. I think one of the takeaways is going to be, we all need to get better in terms of how we go about that search for liquidity. And I think in a good way, Tradeweb is extremely well positioned to be a leader around that. So that's one of the things that I think we feel very good and confident of.

Yes. And then -- and just maybe in thinking about the patterns in February and March and then now, now that things have settled down later in April, and of course, this month in May, maybe if you can just describe some of the behavioral changes that you've seen in the last several weeks compared with during the heart of the crisis part of the pandemic. And then just weaving into that, my sort of a second question here, but to what extent is this going to drive a permanent inflection or a faster inflection up in the pace of electronification of fixed income trading?

Yes. I mean listen, it's so interesting, right? Because sometimes we tend to think about volatility as like one kind of thing, and there was obviously this moment of kind of volatility in March, and there was all of this, everyone's talked about this and written this that there was all of this sort of electronic volume that was happening throughout March in rates, in credit. And there was also all this lease volume that was happening in rates and credit. There was volume that was happening in the market. Along with that volume, which really had for a moment in time was almost a breakdown around market functioning. And you're exactly right. As we've kind of transitioned out of that moment, we've gone into a new moment with a different type, I think, of market environment with some very interesting kind of lessons learned. And then the new reality that we live in today around work from home, I think absolutely there's going to be a focus on -- for sure, one thing, which is market data. How do I get more market data integrated into my trading behavior and my trading decisions? And I think that's always been something that we fundamentally viewed as important. And then secondly, I would say, we've talked for a while about the importance of digitizing trades. We've kind of made statements that in the future, all trades are going to wind up getting digitized. And I do think that there's going to be more and more premium on making sure that traditional voice trades, at a minimum, get digitized and can have the advantages of the electronification because this is a moment where from all of our customers' perspectives, the middle offices and the back offices, front offices all have to be connected. The premium on making sure that connection works is higher than ever. And I think that's again a role that we will play a leadership position in.

Yes. No, that's -- it's -- everyone's trying to get the pulse of that inflection upwards, and we certainly are seeing that in the volumes overall. And maybe just shifting gears to growth initiatives. You've obviously got a lot of great tailwinds with the secular trend of the increasing electronification. But in addition to that, you are targeting several specific markets where the current electronic penetration is lower than that of, say, treasuries, and you have the capabilities to accelerate that. You guys had cited interest rate swaps on your earnings call a few weeks ago. Maybe we can start there. I think your share is about still just less than 8%. So what type of range of share improvement do you think is achievable over the long term? And if you can go through what you are specifically doing to accelerate that?

Yes. Yes, you make a great point. I mean, it's interesting. We're about now almost kind of 14, 15 months as a public company. And as we were going through this process, Brian, all the questions that we would wind up getting were generally business questions, were generally about like what's happening in government bonds and then obviously, what's happening in credit. And then there was a point in time, not that long ago, where we were sort of a little bit like, hey, how come like global interest rate swaps, which is this huge, huge business and this huge marketplace and clearly, a market where we have been strong leaders and doesn't quite get that kind of airtime. So I appreciate you kind of asking about that because we think it's a really important and big business and a big opportunity for the company. I think it also, on some level, speaks a bit to what kind of company we are. We got into global swaps early when it was a sort of voice-driven, almost like a back-alley-type market, heavily negotiated. And clearly, it's an example of a marketplace globally where regulation has had a huge impact in terms of how that market and the pace of that market's electronification. That being said, when I say it speaks to what kind of company we are, I think we feel very strongly that we played a very large leadership role because we were early and because we had significant businesses around these adjacent markets like government bonds. We were able to play a significant role around how that regulation was shaped and formed. And when we kind of step back today, yes, it's just a big, global, strong, vibrant growth business for us. And at the same time, to your point, it's a business that has more runway and more ability for electronification. So we feel like this is a high area of focus for us as a company. And it's clearly a business -- and it's interesting because it's a business that we were in, I think I'm trying to remember. You would probably know, Brian. I think there were like the amount of SEFs that kind of had declared themselves as this market began to kind of move in that direction. It was a huge number, and we always felt that we were going to be in a strong position around that. And I think the company's emergence as a leader globally in swaps is probably one of the more important things that we've been able to accomplish.

Yes, yes. Similar to the evolution of fixed income trading, I think, broadly 20 years ago. There were multiple or many, many platforms.

Yes, yes. True, by the way. That's a good point.

Maybe just along those lines, obviously, the fee rate per million in swaps is also a good 30% to 50% higher than your rates complex overall, especially in the longer tenure interest rate swaps. So could this area become one of your largest organic revenue growth contributors over the entity?

Yes. I mean without question, it's a huge -- there's a huge wallet in swaps. Like I can kind of make a joke to you that there's a reason why a lot of people at the different banks who ran swaps businesses wound up doing bigger and broader and higher things at the bank. It's a big business, again, globally. And one of the big pieces of the business is there's a large overlap in the types of clients that trade swaps with other markets that Tradeweb has had a leadership role in. Whether or not that's European government bonds or TBA mortgages, it kind of fits inside of our network or ecosystem as a business really well. But there's still like this continued sort of march around innovation, and to your point, further electronification. And we're still kind of making sure that we do things that put us down that leadership path, whether or not that's how we create functionality around requesting for markets or different new initiatives that we may be looking at in our Sweep business or our wholesale business. So there's a lot of -- there's still a lot of runway here. And I think it's a business that keeps the company's attention very much so. So it's a big business, an important business for us.

Yes. And then speaking of long runways, maybe just shifting gears to credit because as most followers of the space are aware, it represents definitely one of the best runways for electronification of bond trading with well under 30% of the market traded electronically in high grade and less than half of that in high yield. And you've been more aggressively expanding your share over the past year, helped in part by, I think, your net spotting functionality, which maybe you can walk through the mechanics of that process. And why you think you have some unique capabilities to grow share in the credit space?

Sure. I mean, listen, I think, first of all, I would start by saying with a lot of respect, we think MarketAxess is a really good company. And we respect what they've been able to do in credit. And we compete with them, but I think we compete with them the right way, and I think they compete with us the right way. So I think there's a good amount of mutual respect between the 2 companies. We always felt like our position in government bonds was going to be an advantage for us in credit because of the fact that obviously, credit bonds trade on spread and because of the fact that we thought that the way that the treasury piece of a trade had always been sort of inefficient from the client's perspective. So without giving away kind of too many trade secrets, we figured out an interesting and, I think, good workflow working with the banks and working with the most important clients that allowed for the things that matter to clients, right? And what are the things that matter to clients? It's how do I save time, and how do I save money? And I think at the end of the day, net spotting is one of the good things that we've been able to kind of bring into our clients' workflow in a way that's really worked for them. I described it as this kind of lightbulb moment that goes off, and it's 100% the case. When we step back from things like, what are we doing right around innovation? The reality a little bit, I think is, Tradeweb from the very beginning has competed, I think, in a very close way with Bloomberg in our kind of core rates businesses. Whether or not you're talking about government bonds, TBA mortgages, European government bonds, Bloomberg's been kind of right around us from the very, very beginning. We felt like the marketplace wanted similar type competition in credit. And so we felt really good that if we built the right kind of business with the right kind of innovations and doing things like we're describing around net spotting -- I think another example would be like portfolio trading. If we can create those innovations for clients, we, 100%, can create a competitive dynamic or element that the client base wants. And so that's been -- we talked about swaps. And then, obviously, now we're talking about credit. That's been a huge area of focus for the company.

Yes. No, definitely. And I actually have an inbound question along the lines of this topic. And I was going to ask this also. But just maybe just right along those lines in credit, just maybe talk a little bit about March and April. Your share gains did moderate in those 2 months after that onset of really a big increase in the volatility of treasury. So just maybe just talk a little bit about the dynamic around that? And whether you think the share will normalize back up in May and June back up to, I think you were at a 7% or 8% share and investment graded?

Sure. Yes. I mean listen, I think you described it really well. I would say like that volatility was up everywhere, whether or not -- it was definitely in treasuries. It was definitely in credit. It was definitely in swap spreads. That volatility was kind of all across the market in every nook and cranny, obviously. And listen, we want to self-assess all the time, and we want to make sure that we put ourselves in the best position to win all the time. That being said, we don't really want to overread one moment in time. And clearly, that was a unique moment. There were a couple of different things that were happening, one of which is, and I spoke very, I think in a good way, respectfully, of what MarketAxess has been able to accomplish. One of the things they've done well has been around all-to-all trading. And there was significant, and Chris, when he comes on next, can tell you more about this. I'll let him talk about that. But there was a significant amount of volume that went through that channel at that moment in time when the markets were extraordinarily stressed. There were also different -- I mentioned market function before. There were stresses around how our session trading business performed at a moment in time. But the reality is, as you were describing before, Brian, we're kind of like out of that moment in time now. We're into a much healthier ecosystem and a much healthier market function moment. And I think that all of the other things that I was describing around innovation and the client base's need and desire to have competition in this space are going to be big kind of secular trends around what happens going forward in credit. So stepping back, again, eyes wide open, I think we feel really strong about where we are in credit and the competitive position that we've built out there.

Yes. Yes. No, that makes sense. And then maybe just sticking with the growth initiatives, credit and interest rate swaps being 2 of them. And there's also -- I have an inbound question that just dovetails well with, I think. It's -- the question's more specifically about the stock has, obviously, done very well under the theme of secular growth trend and electronification, but what other specific opportunities could drive growth faster than that? You've mentioned 2 of them. And to the extent you can gain share in interest rate swaps and credit, are there any -- I know there's others as well that are maybe not as big as you, but what are the next maybe one or 2 big ones that you're...

We're going to -- listen, just 2 things real quick. I mean, it's a good question. It's one of those things where, like there are moments in time where we feel like really good about our business overall because I think there are still a lot of real significant opportunities going forward for growth. Clearly, still, there's more room for electronification in, for example, Tradeweb's very first market of government bonds. And so we are still focused on what that next innovation will be. Again, I'm not going to kind of give out too many trade secrets on this call, but it's an area of focus for us where we are sort of more than determined to play that leadership role. And then I would say, for example, I talked a little bit about interest rate swaps and the sort of continued sort of opportunity that exist inside of that very, very big business. I would mention and maybe highlight something like, for example, EM, emerging markets interest rate swaps, where we think there's opportunity, and we're moving the ball forward around executing there. Those are kind of 2 examples I would give.

Yes. Great. Maybe just on competition. I mean you mentioned Bloomberg, obviously, and MarketAxess. Do most people perceive you and those other 2 firms as not structurally an oligopoly, but at least the 3 of you are dominating the electronic trading market with some other companies around the fringe. But what do you make of other potential entrants? I know, of course, Intercontinental Exchange has recently been investing in this space with a couple of acquisitions and trying to put together their offering organically with those acquisitions. Are you worried at all about other players like that coming into the market? And do you see this market getting more fragmented, I guess, down the road or not so much?

Yes, it's a good question. That's a good question, Brian. I think I would say this, again, kind of clearly. Sort of worried? No. Eyes wide open and always aware of the competitive landscape and with a healthy level of respect for everyone that lives in our ecosystem, 100% yes. Because again, I kind of mentioned the fact that we competed against Bloomberg from the very beginning because I think it helped us as a company sort of hone our skills very early on around how you build technology for clients, how you price your service to clients, how you partner with the network the right way, how do you kind of get after the full trade cycle. You got to be pretty exact around all of those things when you're in a very competitive environment. So I think we're pretty good at all that stuff. And by being pretty good at all that stuff, you have to kind of be able to have a good sort of court vision and see where everyone else also is on the court. So healthy level of kind of respect all around there. But we're going to continue to kind of like, I think, do what we've done pretty well, which is execute and worry about ourselves and make sure that where we are the leader, we're going to continue to be the leader through innovations and through building technology and through, I think, in a good way communicating with our clients. And we're going to try to take advantage of where we have the right amount of symmetry and leverage and build out some of these businesses where we're second. And credit's going to continue to be this really big push for us because of the fact that we feel the need for competition. And what competition really does, which is back to your question, is brings out better innovations. And a perfect example of that is around portfolio trading in credit or to your first question in credit, around net spotting. These innovations happen on some level because there's a competitive dynamic in the space. And when there is that competitive dynamic, the ecosystem or the network tends to win.

That's a great point, actually. And we're seeing a similar thing with the stock. Since you guys came public, that's attracted a lot more investors to the space. And I know you would say that as well as MarketAxess. And so it's somewhat of a network effect on the...

You're tempting me to make a joke somewhere, but I won't make any joke.

All right. Yes. Either that or divulge the trade secrets in the call, right?

Yes.

Maybe just thinking about -- and maybe just going to the P&L for a second, but just thinking about the investment in the business. I mean obviously, you and Lee have both been very clear since your IPO that the business requires a lot of investment. I mean most investors think of both of yourselves and MarketAxess as revenue growth stories. But naturally, there's a lot of investment required in technology and sales. Your EBITDA margins have grown nicely since becoming a public company. But how should we think maybe about expansion of that from here? Are we still in a multiyear growth initiative investment phase, do you think? Or do you see the platform scaling more forcefully in the sort of near to intermediate term to drive those margin higher?

Yes. It's a fair question. It is a fair question, Brian. Here's what I said. I kind of describe it to you this way for a second. I think it was maybe like -- so it's sort of we're at the end of May, it was probably around the very, very end of -- or I should say this, the middle of April. And we had gone into, obviously, the work from home, and I think we were all -- everyone was unsettled. And there was a moment where I was kind of looking at my schedule, and I realized that like I was supposed to -- with Lee, I was supposed to be at the New York Stock Exchange that -- I'm sorry, I was supposed to be at NASDAQ that day, excuse me, ringing the bell for a 1-year anniversary of when the company had gone public. And I remember thinking to myself, like, wow, like, I'm certainly not there today. Like things changed pretty quickly. But on some level, my point is a little bit like we've learned a lot over the past year and a couple of months about what the investor base wants from us. And we've been able to respond the right way around that. And that speaks back to your question around earnings, et cetera. I would say for us, it's going to be this continued balance around showing investors what we can do with that and at the same time, continuing to invest in some of these opportunities that we've talked about today that are sitting there and staring us right in the face because we feel really good about where we can go from here and how we continue to build businesses. So it's a real balance for us around kind of checking both boxes on some level. But clearly, and I would say in a 100% way, we know we have a very strong understanding of what the investor base wants from us. And we're going to continue kind of, I think, showing good results there.

Yes. No, that makes sense. And then maybe about -- we didn't talk really about M&A for you guys, obviously. And this is also another question that came in about LiquidityEdge and MarketAxess' acquisition of LiquidityEdge. And so there's an example of a company acquiring a capability to try to leverage. But how do you guys see that? I guess, first of all, how do you see it from your perspective? Do you foresee Tradeweb as capable of achieving all of its goals -- growth goals organically at this stage? Or are there other asset classes or technologies that you think you might need to enhance that growth plan?

Yes. It's a good question but I wouldn't -- I'd say we're open. We're not going to put ourselves in a corner and say it has to be this way or it needs to be that way. And so the way we've kind of looked at it and we've done and learned from a bunch of different acquisitions that we've done over the years, where we can pick up kind of added technology or an added network that we wouldn't be able to pick up or do as quickly, we're going to be interested. And we're going to be kind of right around a kind of a consolidation moment in terms of these kind of things. So we're open. It's an interesting moment because at the same time, we're showing a lot of strength around how we build and grow organically. So we feel really good about our businesses. But we're 100% open, and we have a great team on our business development side that looks at these things all the time. And I would say that openness is strong.

Yes. No, that makes sense. That might be a good note to end it on. We only have another 30 seconds or so. So I don't know if there's any last things you wanted to say, Billy, or...

No, I just -- listen, I'm hoping that at this time next year, you'll obviously -- you'll invite me back to your conference, and we'll be able to actually sit around the fireside as opposed to having to chat remotely like this. But I appreciate your questions and your time and the people who dialed in questions and time. And I thought -- I think this was a great talk, so I appreciate it very much.

Yes, we appreciate it. And thanks to you and Ashley for being available for this. So we really appreciate it at Deutsche Bank as well. So well, thanks very much. Look forward to continuing the conversation. Yes.

Great. Thank you.

And talk soon. Thanks.

Bye.

Bye.