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

Well, welcome back, everyone, to our segment on electronic fixed income trading. We're pleased to have Tradeweb's CEO, Lee Olesky. We're very happy to have the owner or the majority owner, I guess, earlier in LSE.

But Lee, I've known for a long time. So he founded Tradeweb, co-founded in 1996. Took a little leave of absence, went and found another dominant trading platform, we'll leave that nameless, but then came back to Tradeweb. And Tradeweb IPOed in April of 2019. And even really, I guess, Lee, you've experienced some pretty great -- I think there were record -- not think, there were record results in the first quarter. And we just talked to market access a little bit. But can you, I guess, distinguish between what were sort of macro tailwinds and, say -- and growth, there was probably -- I think, probably both, right, a fair bit of both?

Well, let me start off by saying thank you, Rich. It's such a pleasure to be at your conference. I appreciate you having us again this year. And I really look forward to doing this in person next year. So -- but we really appreciate you including us in this. So yes, we did. We had a great first quarter, record breaking. In terms of the quarter though, it actually was a relatively subdued quarter from a volatility standpoint when you compare it to last year, right? So everyone does a year-on-year comparison. When you go back to March of last year, it was pretty crazy. So it was -- I wouldn't say it was a hugely supportive macro environment, and that's kind of continued through April and May. We put our numbers out. We've certainly seen very nice growth, strong growth. But I don't think it's an environmental story vis-à-vis the markets, it's really about our kind of multi-asset class strategy, multi-protocol, customer-facing, innovation, new things that we've been bringing to the market that I think is shown up in real organic growth. The team has done a phenomenal job [indiscernible]. And in the last 5 months, that's shown up in the numbers. I've known you a very long time. That's been going on at Tradeweb for 20 years. It's not that -- that innovation we started with 2 people and $8 million, and here we are 20-odd years later. And because we've only been public for a couple of years, people tend to focus on the time that you're public. But really, this innovation has been happening for some time and the strategy to be multi-asset class and multi-customer segment, right? So not just wholesale, but institutional, retail, global. I spent 10 years in London. We have a significant presence in Europe, a great team over there. Asia, China, all these things have shown up in the current success that we've had and the volumes that we're getting.

So I think that's very helpful because, again, like you said, volatility, even though it might have picked up quarter-over-quarter, it's still -- when you look on a year-over-year basis, it's nothing like last year. But I guess a little bit more, we are seeing rates higher, and this will give you a chance to talk about potentially other parts of your business that are more -- like how will mortgages do and what other rate sensitivity, certainly would expect some part of treasuries or not, how do you look at it?

Yes. I'd say, candidly, we try not to get too obsessed by the macro environment of the moment. We're focusing on a broad and diverse offering between rates, credit, money markets, ETFs, a slew of other things that are on the board that we want to get to, that play into our kind of connectivity to the market, our market size and scope, our network. We talk about our network a lot. So I think when you drill into even something like rates, we'll have years like '18 and '19, where really we had great growth in treasuries. We had great growth in swaps. But then in '20, the environment changes a little bit again, we had great growth in mortgages. So it really does depend at a particular moment in time which of the asset classes might be outperforming, but all the while, there's this -- we use the term secular, but it's like this trend of electronification. So that increase in the percentage of the market that's going electronic has kind of -- that's been the wind at our back. That's been the thing that's helped us, and I'm sure many of the folks that you're talking to today that's been a constant drumbeat. The markets that we're in trade roughly 6 -- I don't know, $6 trillion, $6.5 trillion a day. We trade now $1 trillion of that $6.5 trillion. And if you add up the rest of our competitors, the numbers aren't going to go into the multiple trillions. It's going to go up hundreds of billions, but not trillions. So these markets are still in early to mid stages of digitizing, which is the thing that helps us across the board. And then depending on the moment in time, the macro environment, you'll see a surge or an innovation that creates a growth in a particular quarter or year for one of the asset classes. But we're really -- we're not betting on those different asset classes. We're not that kind of organization. We're betting on the electronification and the innovation and the broad reach of the different asset classes that we're in.

Well, I'm stealing some of my thunder for the next panel, but one of the themes are, are we really competitors, when you talk about market access, Tradeweb and Trumid, are -- is this theme of getting the market electronic, really, are we some ways complementary as well? So I think that's -- and I certainly saw it in other asset classes like e-brokerage and things throughout the past 20 years as well.

Yes.

So we'll let them answer that because that will be...

Okay. I don't want to steal anybody's thunder. I get a kick out of that a lot.

One thing I do want to ask about, because you're in touch with these people, is this return to work and we expect maybe by year-end, maybe earlier, a material amount of employees, traders to return back to the, I guess, more usual or -- well, I'm just trying to get what your view is on it. Do you think anything will change? And do you expect material amount -- like it to be like the old days or sort of -- have we sort of somewhat changed and not going back to some extent?

Yes. It's definitely -- it's a really good question, and I really don't have the answer today, and I don't think anyone does for that matter. I really think we're at another moment of change now where firms are coming at different phases back into the office. At the same time, some firms are staying much more remote. Others are going to be going to hybrid. I think if you had a bunch of leaders in the room, they would -- and they were really being honest, they'd say, we're not sure how this is going to function exactly in terms of the workforce. I know we were having an operating committee meeting this morning, and a lot of us were -- some of us were in the office, some of us were remote. And we have the screens and there's all these pictures on the screens, and someone would talk in a box we go green. And we're just getting used to this new dynamic. First, we got used to being remote for a year. Now we're getting used to being hybrid. And I think that's a -- it's uncertain how that's going to resolve itself. And there's some people that are really resisting coming back in for super good reasons, long commutes, family obligations, all sorts of things that are unique to individuals. And then there are others that can't wait to get back into the office and leave all that other stuff behind. And so I think this is going to be an interesting 6 to 9 months of people figuring out how they perform best and how their businesses perform best and how you kind of make it work. We -- I'm excited for it because I feel like we're an innovative company, and we're a big start-up at this point. We'll figure it out, but we don't profess to have all the answers. We know we got to treat our people with respect and be listening and communicating and coming up with flexible solutions. And I suspect that's what's going to be going on around us. So that's a big dynamic. That's a big change that we're all going to be going through over these next coming months. How it impacts our business will be tied to that a little bit, but I think the bigger trend is intact, which is the digitization of these markets. I don't really see it going backwards. I think that's highly, highly unlikely. I think that a lot of folks have moved to a digital footprint. So there's been a kind of acceleration of, let's just say, several years. I'm not sure exactly how many, but you look at the markets, the swaps markets, the credit markets, they've accelerated their electronification by any measure over the last year. Other markets haven't accelerated as quickly, but there's been an acceleration. And I don't see that reversing. If anything, I think it kind of continues to ramp up towards a much, much more digital kind of environment, as people get accustomed to these things. We found amongst our clients who are largely remote, more of a willingness to try new things that could save them time because -- and they are more limited in terms of their resources, including me, right? So there's no support around you. You got to -- the phone is tougher to operate. You got to be in the box and operating in the box, and it pushes you to do, I think, some more things. And our team has been great at innovating and rolling out new stuff, and that's kind of showing up in our results, I think.

Yes. I mean, again, great results in the first quarter and throughout last year. So another phrase you used is connecting the dots a lot, and I believe that has to do with the sort of electronification about the multichannel, multi-asset class sort of model on how things work together. So I guess the question is, like, is there anything that would jump up as connecting the dots that you've done recently in this, say, last quarter or last year or more recently, I guess?

Sure. Sure. Well, first, I'll say that the true reason I use the term connect the dots is someone in my family does connect the dots puzzles. And so connected dots comes directly from one of those things, and it really is -- the reality in our markets is nothing is siloed, right? We started our platform just in treasuries. Others started in specific areas and people like to kind of put you in that silo. The markets themselves are much, much more integrated and the connection between futures and cash and credit and treasuries and all that, that's really how markets function. They don't function in a silo per se. And so when we talk about connecting the dots, it's really just connecting the various markets that we have within treasury, the various -- within Tradeweb, the various segments that we have. So we have segments that are retail, wholesale, institutional. We're trying to connect the flows where something in one segment might match something else. We connected the dots between the treasury market and the IG credit market with the spotting, but that existed before we connect. We just connected the dot. We just drew the line electronically between those markets. So it was a more efficient way of doing what they were doing already, right? So these things are happening already. There's a ton of other places where we're connecting the dot. We connect the dots between we have sweep sessions where it's a session where a bunch of orders are coming in buys and sells, and if they get matched at a price grade. If they don't, we connect the dot into another protocol that we have, RFQ, and it could go into institutional or it could go somewhere else. So it's just a matter of stitching things together to allow for the outcome that our customers want, which is just to find the best side of the trade -- the best other side of the trade for them, best price matching up whatever it is they want to get done. And it's our job to technically kind of connect those things. And that's kind of our connected dots, which is across asset classes, across customer segments and you can even make an argument across regions, right? So what used to be really hard to get an investment into the domestic Chinese bond market, where we've connected the dots so our institutional customers around the world can now access directly into the Chinese domestic market. It's another catch-all phrase for connecting the dots.

Yes. I mean one of the things I think that helps connect -- and you can correct me if I'm wrong, but does AiEX, the more automation, is that one of the things that would actually connect the dots or...

Yes. That's a great example of connecting the dots. I mean the AI execution, you can make it really complicated and say it's an algorithm that we've built, but that allows people to not have to click the button, right. So you don't have to click the button anymore. Basically, we're giving a bunch of rules up to 90 different parameters to a customer to say, "Okay, if it was your brain going through the process of deciding who you're going to trade with, which dealer you're going to select, a bunch of different parameters, how would you -- your trading brain function, where we're giving you a very simplified rules-based algorithm that automates that. And so that's our AiEX, is essentially a trade automation tool using an algorithm that we've built that just gives the highly skilled customers that we have a chance to spend their time and energy, finding real opportunities as opposed to what's really almost a processing like function. It's complicated. You have to have all the rules. People have to know what they're selecting, but then we're going to give them the data back to help them make their decision that I put the right dealers into this RFQ, did I pick the right model? Should it be stream? Should it be RFQ? So it's just further automating a process that allows efficiency for our customers. And it's not like we were the first ones to come up with that, but that's -- look, that's grown massively. I think we're up over 50% of the amount of trades that were done that way in the first quarter alone. So this is a -- it's a great tool.

I do want to ask about credit because you've been showed some significant market share gains, and we actually look the difference between your peer and your market share has narrowed to literally, I think, pretty much all-time lows or at least several year lows, where the market share is that close. And I guess, would you attribute that -- or what would you would attribute to that, partly market environment, partly other things or...

I think, it's definitely a number of things. I think first and foremost, and we're subject to this as well, market likes competition. The market wants choice. I know I want choice when I'm selecting things. And I know our customers want choice. So we better be building the best service interface, the best software interface and the best tools to lure our customers at the best price and give them liquidity at the best offering as well, that's probably first and foremost. So I think as part of that package, we've been doing a number of things that are innovative. We're relatively new to credit. Credit for us in the U.S. IG, I don't really go month-to-month. I just don't think that's a practical way of doing it. But if you look at 2018 to 2021, so that period of time, we've tripled our market share in electronic trading in IG. We probably come close to doubling it in the last year, but the month-to-month stuff doesn't really -- we care about, are we in the right space? Are we winning our fair share of the business? The 2 stats that I really love are not just credit but also swaps. In the last year, we've been more than half the market share gain to be. That's where we want to be. We want to be on the -- getting more than our fair share of the electronification. But in credit, in particular, the team has done a great job of identifying trends with portfolio trading, connecting the dots between spotting the treasury trade next to the IG trade and integrating that, then netting it down. And so I think we've been really early movers. We've been sort of first out, and that gives us an advantage because it's a -- it doesn't just end when you say, okay, here's our portfolio trading offering. I think we're on the fourth version. And it will keep going. And the first time we sat around the table, I remember hearing from the team is like, oh, we'll try to do 100 bonds in one portfolio trade. Well, that's out the window, then it was 200, then it was 500, now it's 1,000. I don't even know what it is now. So that will keep going. And the bits and pieces that go into the software and the design will get better and better. And at the same time, the most important thing is the trend of what's happening in the market. And this is a -- I mean, I love this stat, the portfolio trades are averaging now -- their typical size is like $100 million per trade with 100 instruments. So think about all that risk, that's one click, one price, boom. That's a huge time savings and we're just connecting the dots. I mean that was going on in another format prior, but we -- we digitized it. So it's easier to do it. And at the same time, you have the surge of the ETF markets. And so these things are kind of happening at the same time. And then you have the pandemic, which has pushed more people to trade remotely. So there's a number of catalysts that are occurring that have really helped our business grow in the last year.

It's been great to watch. I think, it may differ with some people, that volatility and what we've seen, actually, in the end, sort of benefited, I think, the electronics, which I don't think has always been the case in the past. I think you even said back last March about the -- like some people went back to their old ways initially.

Yes, extreme volatility freezes everybody. So that pulls liquidity out. And yes, people will go back to old habits or they'll just get out. And -- but those are not the moments to measure the success of the business, in my opinion. I wouldn't look at the last 2 weeks of March, but last year is indicative of anything other than -- oh my god, we first saw everyone was running home. We went 100% remote as a market. I mean there's so many crazy things happening at once. What matters to us is the sustained growth of the business, the long-term growth of the business and kind of continuing to innovate and drive forward.

Last question, Lee, we could end right there. That really says it all. But I guess, the things that we should look out for investors that are watching this market and what are you focused on or what should they be looking at as positive markers? As we got the return to work sort of phenomena, you get basically higher rates and we really don't know where volatility overall is going. So how should investors be sort of looking about the space from now to year-end? Anything that you're particularly zoned in?

Well, no one here has a relatively short time frame. I do think, though, that for us, we continue to focus on innovation and the new things and executing at a high level with our plan and our plans that we have, which means you should expect us to continue to push into new areas with new bits of functionality, new bits of software that we're rolling out to the market, growing our global network in different regions of the world, picking up new flows and maybe some new focus on different asset classes and things that are related to what we're doing. Our overall goal is to kind of capture as much of that network as we can with an offering that's comprehensive and can kind of pick up the ability for someone to do something in a variety of ways, regardless of whether -- whether they're an asset manager or hedge partner, they want to do a size trade or small trade or portfolio trade, our goal is to get out to as widely as we can to that whole trading community from wholesale all the way through to even retail.

Well, congrats, it's working, and you should be the -- you're the beneficiary of it, Tradeweb and the stock.

Yes. Well, we have a great team of people here. And I'm incredibly proud of the organization. And yes, we're just going to keep our head down and keep pushing.

Great. That is our time. We do have the President's panel, which we have 3 colorful presidents of electronic fixed income trading companies, including Billy Hult. So I hope if you have a chance to tune in. But anyway, Lee, I want to thank you. We've done this a number of times over the years, and it's great to see the progress you're making in. Next time, hopefully, it's going to be physical, again.

That would be great. Rich, thank you so much for having me. It's a pleasure to join you.

Great. So that wraps up our session with Tradeweb. Next up is the President's panel for the electronic fixed income. So we get to see -- get to hear from each of these -- like dominant electronic trading companies' presidents. So again, thanks, Lee. And we'll start at 2:30 with the panel. Thank you.