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

Welcome back to Piper Sandler's Global Exchange and Financial Technology Conference in 2020. We're about to start our next block of fixed income electronic trading. We're pleased to welcome Lee Olesky, the Founder and CEO of Tradeweb. So, Lee, go back a long time. I think he founded it in 1996, had a little stint away, but he came back, and it's pretty much I think around 2000. So they've been back a number of years. They went public last year. They've made great strides, both on the expense front and as well as the new products and the technology that they provided to the fixed income training industry. So, Lee, first, welcome.

And then first -- the first question is, Billy Hult, your #2, your President, has got and talked about how you together made platform resiliency, global connectivity a high priority during the pandemic period. But he also felt that you and he specifically discussed that good companies would excel during this time frame. Can you talk about how you how you thought you did because it certainly sounded like things went pretty smoothly? So I'll let you start with that, did Tradeweb excel during the sort of this transition of work from home and global volatility -- hidden getting global volatility?

Well, thanks, Rich, for having me, and it's a pleasure to join you today. So did we excel? I think, we're still in the middle of this. So I'm going to hold back judgment until I think things hit the new normal. But so far, so good. We, like everyone else, very quickly, in the middle of March, took the decision to work remotely. And in terms of our capability of operating remotely, we absolutely excelled in that respect, but less important the 950 people at Tradeweb who suddenly went home, and it wasn't so sudden because we saw it coming. We have offices in Asia. And so we were actually gradually going home across the world. We were all remote pretty quickly and relatively early in the cycle. The thing that really stands out to me during this whole process was how the whole [ company ] was able to shift to a remote footprint. And that's all of our thousands of clients [ wontly ] our competitors, exchanges, all sorts of businesses really. It did surprise me a bit that it went as well as it did. And yes, to this day, right now, we have, I don't know, 12,000, 14,000 users connecting in remotely every single day to Tradeweb. So -- and we haven't really had any -- March, there was tremendous volume, and there was definitely some issues out there. But holistically, we've had very, very few real issues. And I think most importantly, we've stayed live for our clients during the most intense stressful times in March. And since then, we've had seamless interface. So I do think for the last 3 months of this crisis, we've excelled. But some of a lot of other participants in the market, which is a huge positive. I think it could have been a lot different if we went back, I've been at this a long time, 10, 20 years ago. There's just no way this could have sustained. So we're very pleased with how all of our team has performed. It is a challenging environment. It is mentally stressful. It is exacerbated in many respects by the latest wave of the situation that we're confronted with in New York and other locations in the U.S. So it is a -- this is a very, very difficult time. And yet the team at Tradeweb has been extraordinary, not without challenges. And I think we will still have -- we have a ways to go before we're back in the office in a meaningful way. But the market has been functioning. I think once the Fed and the Central banks really stepped in, in March, and put out a safety net under a lot of the assets that we're in, things got back to a more stable situation. Obviously, it varies depending on the asset class. And we're functioning remotely. We are -- we went from this mode in March of, let's take our entire technology team of 300-plus people engineers, everything, stop the development, and just make sure that our team is remote and being serviced properly and is able to do their jobs remotely and that we're connected with all our customers appropriately and that we can handle the massive surge of volume that we saw in March. We were -- we had days -- we had a day where we did 1.5 trillion in volume. And we're averaging 1 trillion a day. These are for the Tradeweb. These are very -- they're big numbers for anyone, but they are very big numbers for us. So so far, so good. I think, we've moved away from first and maybe even the second phase of handling things where we're just trying to stabilize the system and make sure everything was functioning. And the people were capable of connecting. And we're now we're back in full-on development mode. We're releasing new things, we're focusing on new products, new functionality. Typical stuff in M&A. And so we are functioning quite well. I'm going to save the judgment on whether we're excelling for another couple of months because I do think the next process now is going to be about getting back into the office in a way that's safe and acceptable to our teams. And that's going to be -- I think that's going to be another challenging moment for everybody.

Lee, I would say, I just hope we execute on this virtual conference as well as your firm. Looking at your results, and the results pretty much throughout the industry as well, just a fantastic transition. One thing -- we talked about this in March, we talked, but there were -- the movement to electronics, I heard Billy talked about it a bit last week. Like, for auto execution, automated responses and so forth. It certainly -- it seemed like spurn, more electronic activity, at least in select. I don't think it was across the board. I think you've mentioned that there were pockets where people went back. But do you think -- could you outline like where things where people were more out to fall back to more traditional behavior than earlier -- and what types of clients move more to the auto execution.

Yes. So I mean, if we go back to March, a lot of the activity moved away from what we call the Auto-Ex stuff, which are basically simple algorithms in that you don't have to click to trade, you just set up the program and it runs. And people backed -- our clients backed away from that because there was just so much stress on the market. And effectively, even the algorithms couldn't quite discern by the parameters we had set up. It was such an unusual set of circumstances. But that's so much in the rearview mirror at this point. I mean, we are back up. If you look at all the stats, there's a significant amount of Auto-Ex back happening. That actually came back in Europe a little bit before it came back in the U.S., but the numbers are very strong. And in terms of the price generation coming from our liquidity providers, that's absolutely settled down. I mean, there are pockets in our markets, high yield, but still, I think, has a ways to go. But they are, generally speaking, we're back in a more reasonable environment. And so our clients are using the tools that they were using pre COVID with almost the same level of intensity. And in fact, interestingly, some of our new services products are being used more. And I think that that is this acceleration that's happening with digitization really across the board. It's what we're experiencing right now. Here, I am talking to you through my MacBook Pro, out to, hopefully, an audience of just more than you and I. You never really know who's on the other end when you're doing these things. But I'm sure there's a lot of people listening in, and it's a new -- it's a whole new way of doing things. And that month of March and even into April, everyone is adjusting to all that. And one of the things that I personally am experiencing and I think everyone is, is you just want a more efficient environment in your home office, your remote office. And so that, I do think accelerates the trend towards automation, towards using technology more efficiently at an accelerated pace than would be happening if you were sitting in the office on the trading floor with all the resources that you can access. So things like portfolio trading for us has definitely gained real ground. Maybe -- it's hard to know what would have happened, maybe it was just gaining ground anyhow, but that seems to have picked up. More so, it's a real efficiency where you can take 500 bonds and trade them in one shot as opposed to doing it a piecemeal. So we're seeing some of our tools get more use. And I think that's just going to continue to happen. I think anything that makes someone's job more efficient especially when they're working remotely will be gobbled up and use more quickly than it would have been when you're in the office. I mean, we're on a constant drumbeat here of moving towards an electronic -- a much more electronic market in terms of interface on trading. But it's also spreading to the pre-trade side of things in terms of the execution process, how we send out prices [Audio Gap] as our AI pricing is another tool that's is continuing to grow. And as we do more and more trading and more activity, the content builds up, so our data essentially becomes more valuable in the analytics that we're going to introduce and then we're thinking about the things. We're thinking about data, I think will be picked up more easily as we go forward because we -- this remote concept is not going to -- even once people are back in the office, which hopefully will be happening in the not-too-distant future, I think a lot of the habits that we pick up now, we will continue to do in the future.

You mentioned the AI pricing and the use of data. That has sort of been -- we intended to make it particularly important during the period. For people that want to use some of the more automated tools that you have. So could you -- are you planning -- is that an area that you think if you build out the capabilities there that it might potentially lead to faster adoption? Is that something that's credible?

Yes. We've recently brought in some great talent to help us on a couple of different levels related to data, the technical side, where it's engineering and cloud and network to the algorithmic side data scientists, to the strategy side and the product side, coming up with products. And this has been a, I'd say, a higher focus for us. In the last few months, we've announced some of these hires in terms of selling the services. We've got a new team that's working on these things. So I -- yes, I think that this is a real opportunity for us. We've had a great business in terms of distributing data. We have a tremendous relationship with Refinitiv. That's our redistributor of a lot of our data. But I think as things get more and more sophisticated in terms of electronic trading, having the analytics, having the tools that assist our customers will be an important part of our growth.

Hopefully, you can see our fireside chat.

The scared me, the fire.

It's not a hack. It's my attempt to be automated and take this conference as to mimic what you've done at Tradeweb during the period. Anyway. Bank often -- sort of a double-edged sword here in the interest rate asset class, massive issuance expected or -- coming but also a low interest rate environment. You've definitely spent the time focusing in getting out there the opportunity you see in interest rate swaps. But how do you look at overall, like, the interest rate in [ volume with a ] complexed -- and how it could impact? You've certainly done well in the past, but the massive issuance versus low rates versus this swap opportunity that you guys have talked about?

Yes. We try not to -- we're not in the business of forecasting. And the macro environment macroeconomic environment, where markets are going to be going, when what's going to happen to yield? What's going to happen to the relationships? What's going to happen to volatility and the volumes and the velocity of training? Those are what I would characterize as things entirely outside of our control. What is in our control is to continue to innovate and build software and tools and connect up the network because there's going to be an ebb and flow. There's a cycle of things going up and down in terms of volatility in volumes. So that -- we try not to get too crazy about that. Obviously, some volatility generally leads to more volume, that's good for a company like Tradeweb that's essentially a bridge for matching trading activity. That's a positive. But ultimately, you can't get too caught up in that, in my opinion. Interesting question you raised about issuance. We're in such unchartered territory with trillions coming into the bond markets, Government at, U.S., Europe, the corporate surge of issuance that's happened and will probably continue to happen. It's hard to know what that that's going to do secondary market trading. Generally speaking, in my experience, that's usually a positive for trading volumes. But we have all sorts of things happening here, probably the greatest of which is the involvement of Central Banks and how they're going to really interface in terms of managing the yield curve on one extreme to, certainly, the short end is going to be very low yield for some time. Those are, again, sort of past our -- past my pay grade, at least. It's not something we really want to spend too much time on. We're focused on what can we control? How can we expand our network? How can we provide more tools for our clients? How can we scale? Because this is a business where we want to be able to offer services and new asset class and new products and new regions at a low price point because there's going to be enormous pressure. There has been and there will continue to be to bring down costs amongst all our clients. So knowing that's a imperative, how can we scale and apply technology that we used in a retail space into wholesale institutional space in one region of the world. What we're doing in China, how we can actually pick something up in Asia and apply it in the U.S., or in the U.S., apply in Europe. We're seeing that kind of effect of scale within the Tradeweb business. We have a significant tech team that's incredibly efficient and talented and they're able to do things now on scale. So those are the things that we can control. How do we attract and retain the top talent that we've got that can build the best software they can go out and interface with clients. Relationships still obviously matter. That's a critical component of what we do. Those are the things that we can really control as opposed what's going happen with the velocity of trading, yield, issuance, that sort of thing.

And you actually executed from the IPO, I don't think you have -- you never ever said it would be cost reductions, but there would be an improvement in margins. And that certainly has happened. And when we first looked at your expense structure, the noncomp expenses were roughly equal to your peer, slightly different asset classes, different models slightly. So the comp was a bit high. But you much narrowed the gap. I'd say, through the scale that you just talked about. So I guess my question is the investment, I expect in what you've put out [indiscernible] is that you expect to continue to invest? Will the pace of that investment sort of remain the same? Or do you see an opportunity accelerate? Or you think you put in adequate focus, emphasis on it right now?

Yes. We're fortunate. We're in a space where there is quite a bit of runway still to go and quite a bit of opportunity ahead of us. So we are, first and foremost, focused on the growth opportunity and continuing to invest in that organically through M&A, et cetera. And that's a huge, huge driver for us. The -- we get that we're all stockholders in the company. We understand how markets view margin expansion and earnings growth, and those are also critical components. And we're just doing that trade-off. I think we want to stay disciplined. We want to be responsive to the market's demand for accelerating earnings. But first and foremost, we think there is an awful lot of opportunity to continue to grow our business. And we've been demonstrating that for long time, over 20 years now between my Tradeweb years and by throwing BrokerTec that's another one that was part of the process. So we've been doing this year in year out. I think since 2004, we've been at double-digit revenue growth each year. In the last few years, we're mid-teens, last 3 years, I think. So, we -- there's room for more growth. We're going to continue to push out with regional expansion. We were the first firm into China to allow access into the Chinese fixed income markets in 2017 -- July 3, 2017. And we continue to sort of do the regional push. We continue to push into that different asset classes. So yes, we started off as a rates platform of 5 or 6 years ago. We said we should be doing something in credit. In the first quarter of this year, we had $15 million in revenues in our credit business, which as a relatively nascent business from those years back, great growth. Even the equity markets, ETFs is another example of a business that we saw a real opportunity. 8, 10 years ago that ETFs would continue to grow. We work with some clients and said, okay, where can we play a role in the ecosystem of creating more efficiency? And we came up with the block component using our RFQ technology. We've got a great business now that we started in Europe. We brought back to the U.S. We've got these great entrepreneurial guys running the business. And those businesses have grown tremendously for us. We're in the money market space, the repo space. So we're going to continue to push out in ways where we see opportunity to continue to grow our business.

I guess just to wrap it up, we only got 2 minutes Lee, is that -- again, you have been around -- as your peer has for 20-plus years at it, and you've seen the ebbs and flows of regulatory changes, global financial crisis, now pandemics, but what do you see over the next -- what's -- we're not going predict the event, but given what the company has gone through, what do you expect to see Tradeweb innovate to or get to over the next 3 to 5 years, given your experience that you've got for 20 years, what -- this sort of stimulus that has sort of happened in March, April, May?

Yes. Yes. Well, what I've learned over the years is to expect the unexpected, right. Nobody predicted the pandemic. And the one thing that I would say is you do have these events that are either technology leaps forward. We experienced that with the Internet when we first started the company in the mid-'90s, we were the first company decided to actually trade securities over the Internet with institutions. In 1998 to the regulatory changes that came on the heels of the crisis in '08 that changed markets, derivative markets, which we hopped on. I think that the event we're in right now is another one of those catalysts for meaningful, meaningful change on a lot of levels, cultural levels, but let's just stick with business for a second. And this remote environment that we're all getting familiar with and learning to operate in, will have a lasting impact on business and lasting impact on Tradeweb. And I think it's another accelerant. I really -- I think this is another moment. It may take a few years to kind of resolve itself. But I think we'll look back on this and say, wow, this was like some of the technology leaps forward that we do pin in the '80s and '90s to some big regulatory events. This is going to be a historic event that will change the shape of Business. I think for a digital company like Tradeweb, we're really uniquely positioned to thrive in this remote environment and it's going to be up to our team to navigate and to do it. But I -- we feel like we're very well positioned to move things forward aggressively as we go into a more digital and remote environment even once we go back to the office and work. So we're pretty excited about the opportunities right now. And like everything else, we're going to have to figure out how to navigate what is going be, I'm sure, not a straight-line as we've experienced in the last few months for deploying and growing our business, and continuing to be able to attract the talented people and maintain great relationships with our clients around the world.

Lee, I want to thank you. We're out of time that that's exactly what sort of -- we want to get a view on what you thought about what happened and where you're going and you did -- you gave us exactly that. So congrats on leading the company through officially another crisis. So who knows what next year will bring. Anyway. I want to thank you, and hopefully, we'll be able to do this face to face, maybe 4 feet apart, maybe its 6 feet apart, I don't know, next time.

Yes. Thanks, Rich.

Thank you. Thank you. For our audience, we're up next with MarketAxess at 3 p.m., it's going to be 4 p.m., and we'll be there shortly. So thank you, Lee, talk to you soon.

Thanks, Rich.