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

Great. Well, good afternoon, everyone. Thank you for joining us. We're going to get started with our next session. Next up, I'd like to welcome Tradeweb CEO, Lee Olesky. Tradeweb is one of the fastest growth companies in our coverage with over 20% revenue growth so far this year. Have made a number of secular changes in electrification of fixed income markets where the firm continues to gain market share. We'll spend some time with Lee today on how fixed income markets are continuing to evolve and, of course, the role Tradeweb place in that evolution. So thank you for being here.

Pleasure.

And it's great to see you in person.

So look, I wanted to start with just a broader maybe a little bit of a market structure question around client behavior changes on the back of the pandemic. Clearly, we've seen a pickup in the pace of adoption of electrification in both kind of credit and rates markets since last year. Curious to get your thoughts of how sticky it is, how sustainable this trend is and have we sort of entered a new paradigm to some extent?

Yes. Well, thanks for having me on. Pleasure to be here. It's been a busy year. I -- the pandemic has been a huge challenge for so many of us. But with regards to electronic trading, it's -- no doubt it's been an accelerant. And it's kind of across the board in our experience at Tradeweb, whether it's 700, 800 basis points of growth in IG credit or high yield or interest rate swaps is probably closer to 900 basis points. The customer behavior has changed. And it's hard to say that's due to anything other than a lot of hard work and good effort by our team, but also the changing environment for where people are based to trade. It's a lot easier to trade electronically when you're off remote by yourself, and that's showing up in the marketplace. The other thing that we're seeing just sort of through the pandemic is another behavioral change, which I think is attributable to willingness to just try new things. And I don't know if it's unique to Tradeweb, but we're finding some of our newer initiatives, whether it's the portfolio trading that we're doing or just automated execution. We have a suite of products called AI, AI Execution and Ai-Price, but the AI Execution has grown in '21 something like 56% over the previous period, which is really about just making it easier to interface. Instead of clicking to trade, we're providing algorithms for our customers to orient how they want to execute and they're doing it electronically and automated. So this is a pretty seismic change in how people are interfacing in fixed income on Tradeweb, whether it's the growth in the percentage of electronic and credit and swaps. Or it's the surge of using automated tools like AiEX or portfolio trading. It's really across the board just an acceleration as a term I keep coming up a little bit. It's a few years of growth in a 1-year period.

Yes. Just sticking with the point about sort of change in customer behavior. So helpful to kind of level set and say, look, folks are trying new things and feel more comfortable doing that. If you look further into '22, and you spend more time with your customers, sort of what are the biggest pain points that you continue to hear where you think innovating around those pain points could create incremental growth opportunities for Tradeweb?

It's a lot of the same themes that we've been focused on for years. I'm not sure much has changed in that respect. It is about efficiency, cost reduction, always it's a search for the best price. So liquidity, coupled with price is always the biggest driving factor amongst clients. There's more unique challenges depending on which firm you're talking about. It is a fairly diverse group of customers that we have. Buy side, sell side, hedge funds, algo shops, some want API trading. There's a number of different unique nuances. But fundamentally, it's efficiency. That's it. How do I get through my day, the trading side is a process. It's not administrative, but it's a process that they want to make more efficient and lower cost.

Great. All right. Let's go through some of the businesses for a couple of minutes here. Maybe starting with credit. And look, tremendous amount of success for Tradeweb this year. I think revenue growth is up something like 40% year-over-year despite fairly flattish volumes for the industry broadly, if you kind of look at trade data for IG and high yield year-to-date. And really, it feels like it's coming from a number of different places, but something that keeps coming up is portfolio trading obviously, talked a bunch of that -- about that over the course of the year, you brought it up already this afternoon. So help us maybe dissect how much of this year's success in credit could be attributed to portfolio trading? This is still a fairly small part of the overall market. So as you think about where clients could go like 3% to 5% today. Could it go to 10%? Could we go to 20%? Kind of what do you hear from customers? And then third point to that is really your competitive moat, right? I mean, it feels like you led the way there, but as others try to come in and compete in portfolio trading, how do you still differentiate yourself to sustain the stage?

Yes. Yes. portfolio trading, we were the first to the market in 2019, I think it is, about 2 years we've been at this, has clearly been creative solution that it's a whole ecosystem. So it's not like reinvented portfolio trading. We just automated it. And in the way that we automated it, it resonated with a lot of clients. And it's -- I mean taking a step back on portfolio trading, we're doing portfolio trades now. It's shifting a lot of risk at 1 time. That's what a portfolio trade is. It's hundreds or more securities. It's trades of a size that can be as much as $2 billion now, which several years ago, you would have said in the credit markets that that's an extraordinary risk shift. And what's happened is the market has, around us, adjusted to being able to price those transactions and move them on. And it's interesting because they're linked to other innovations in electronic trading, things like our Sweep. We now see trades where we're doing the portfolio where the bonds are showing up in the Sweep afterwards. So this is all -- it's all kind of tied together. There's really a connected-dots thing. It's an ecosystem that has been surging. And I mean in terms of -- I kind of lost track of your 3 points there. But...

How much of the success? And is driven by...

It's interesting. The portfolio has been great. It's been a innovation. So it's catchy. It's definitely grown. It's 5% of the market now, we think. In November, we were almost at 6% of the market, was portfolio trades. It's not just in credit though. I mean we're applying portfolio trading much more broadly. Of course, we're going to have competition. We've been doing this for 20-plus years. And ever since we decided to actually put the platform on the Internet in 1997, we've watched as we've had competitors come into the market, literally hundreds over the years and have folks replicate what we do. And the key to our success going forward is really the same as what it's been to date, which is we have to keep innovating. We have to keep innovating. We have to stay close to the clients. We have to have great engineers who can deliver the products efficiently, quickly. And be aware of the ecosystem and the clients and what the client demands are and be 1 step ahead, keep pushing ahead, coming up with the next innovation. The interesting point I was going to make because I think you said something about how much of your growth is tied to portfolio trading, and it's certainly a component. But we're growing -- I mean our credit market share has doubled in the last 2 years, right? We hit a high point. I think November was a high point over 14% of the market, electronic activity over 20% in terms of overall share. But it's not just portfolio. We have had a surge in RFQ, all trade, which is our all-to-all methodology, our Sweep businesses. We have so many different protocols that are being deployed out into the marketplace that are all kind of growing along with portfolio trading. Portfolio trading though is just a very easy to digest and kind of a cool thing to say, well, you're trading hundreds of credit bonds to the size of $2 billion with one click and it's getting priced very, very quickly.

Yes. Yes. So I mean, look, public markets like 1 or 2 things that we can hang our head on, right? It's easy to digest, and that's kind of what we're going after. But I guess to your point around credit trading evolution. It feels unlike maybe 3, 4 years ago, the number of protocols that customers and dealers are willing to, experiment not be the right word, but really used now has expanded. So it's kind of become a little bit more holistic where it's been in the past. How do you think this ecosystem can help you build out things where you're small, right? So all-to-all trading, for instance, right? Relatively smaller in the context of everything else that you do. Is that sort of the next leg of growth? And ultimately, how sustainable is the pace of market share gains that we've seen recently is for you guys over the next few years?

Yes. I think holistic, you nailed it with holistic because that is our strategy. Our strategy is to really have as many clients participating on our network and client segments and linking these things up together electronically. So our customer segments go from wholesale machine-to-machine trading, all the way to retail clients coming in on websites and buying little bits and pieces, which doesn't move the dial a lot, but -- and certainly, in this environment, it's not as if there's a lot of retail activity for 100 basis points. But these things all inform us. And they do get stitched together. I mean we're now doing things in the wholesale space. We have something called ReMatch that links to our institutional business. So if something doesn't happen in a big session-based trade, it gets rematched into an RFQ trade that's happening in institutional. We're linking our treasury markets to our credit markets. We're doing -- within portfolio trades, you can do a variety of derivative transactions and cash transactions. So all these things are kind of coming together and are very complementary because at the end of the day, that's kind of how our clients transact. And it's just been -- it's a siloed kind of world that has evolved with this, okay, you're in credit, you're in rates, you're in wholesale, you're in retail. But in fact, it's a much broader market. And our goal is to try to incorporate all of that connectivity within Tradeweb to make the execution more efficient, lower cost and an easier search for our customers.

Yes. In the last year or so, it feels like we've seen more sort of new entrants coming into the credit space, particularly some of the quant-oriented firms. Quant hedge funds smaller maybe today, but growing and certainly turnover of those firms is higher. Are you seeing that in that business? Is that something you expect to accelerate both pace of electrification but also turnover in the market?

Yes. I think transparency and velocity and just the general environment attracts more attention. And when you have a network and you can access a network with thousands of institutions like we have and we have -- obviously have competitors that do similar things, it brings more potential players to the table. At the same time -- again, it's this ecosystem concept, right? At the same time, technology advances, software engineering, data science that's happening all around us, affords new entrants an opportunity to get into a space with a much smaller footprint, less of a cost. So you add all these things up, and I do think it will likely lead to more velocity in markets that get more transparent or more easily accessed and are electronic, where you can connect in and trade very, very easily.

Great. Let's shift gears, but thing within credit. IG -- U.S. IG high-yield has been the dominant kind of product said that you guys trade, the biggest driver of revenue growth, obviously. As you think about expansion into other corners of credit markets, is that an opportunity you see for Tradeweb over the next few years, whether it's emerging markets? I know you've been adding some resources in the muni market as well. Kind of what else is going on in the credit markets?

Sure. We're always looking at adjacencies. I mean that's how we've gotten to where we are. We started with just treasuries all the way -- years ago. And we're always looking for the next avenue to pursue. And EM is something that we see as an opportunity, along with munis and sort of other things. But just to talk about those 2 for a second. We began talking about this years ago with the team, and we like to lead with our strength and our advantage. So when we set out into EM, we said, okay, what are we uniquely suited to do? And the first thing that was most obvious was OTC derivatives in EM. So we started with derivatives in EM. We're also in China, which is kind of a whole separate topic, which we'll save for either later or another time. But that was our kind of leg in, and we've built a very nice business, also a business that is not electronic. So as much as interest rate swap market might be as much as 30% electronic right now, the EM swap market is like single-digit electronic. So a combination of unique opportunity relative to the competitive landscape, first mover, which we love. We love being the first mover and a lot of room to grow. So we started with derivatives in EM, and now we're starting to look at cash instruments, and I expect we'll continue to power forward in the EM space. I think there's a demand out there for customers, the customers want competition. That's the bottom line. They want a few platforms out there battling it out to provide the best possible service, the best software and the best price that they can get. Munis another -- munis is an interesting area. We've been mainly focused at that from the retail and middle market standpoint, but that's something else that we're looking at. It's a ways behind candidly in terms of electronification, but that creates opportunity, especially in the -- the taxable bit is only a relatively small component of 20% or so of the market. So the rest of that market is kind of wide open.

Great. So you mentioned competition and pricing. So I was going to wean that into my sort of set of questions around cap rates within credit. We've generally seen capture rates on the cash part of the trading improve over the last couple of years. Now a lot of it just has to do with the mix, right, like where you grow and what type of activity you're participating in. So given where you're seeing momentum in the business over the next couple of years, is it reasonable to expect that the capture rates in cash credit will continue to grind higher? And as an offset to that potentially, at what point does pricing become a bigger deal where we might actually start to see competition on pricing between platforms, which doesn't really exist today?

Yes. No, I think that's right, that last point. The mix is really everything because we kind of bucket it all together. And in credit, we get paid a very different fee schedule in derivatives versus cash high-yield. So the mix is everything. And if you look at our business, the surge of growth that we've had in the cash instruments is what's driving that enhanced price as an average point. So that's really all about that. I expect we'll continue to grow there. So that should move in the right direction. And pricing competition is yet to kind of directly rear its head. We started the business. We competed against Bloomberg. They were the only competitors we had back in the '90s and early 2000s. And they didn't charge for years, and they really don't charge much today for execution. So we're very familiar with an entrenched competitor that's actually charging nothing for a service that we -- that's how we make our money. So we've gotten to our $1 billion-ish in revenues against our largest competitor who is not charging. So you better be very good at the tech you're supplying, the liquidity you're supplying, the customer service and everything else because you're charging for your service. So we've had that discipline forever. Having said that, I don't think we're a bit less than our credit competitor with market access, but I don't think the pricing is an obvious point. Where it's less obvious point is on scale. So I do think we have tremendous scale advantage in terms of our -- we've got 350 people that are software engineers, data scientists in our tech team out of the 1,000 employees that we have. That give us a real advantage in terms of innovation, speed to market, which people are starting to understand. They're picking that up by seeing what we're delivering into the market, whether it's portfolio or Spotting or Sweep or this or whatever we're doing new and interesting, we've been doing that for years. And the team that we have is able to deliver, and we're able to -- it's all about building layers on top of layers but sometimes you have to just start all over and reinvent things. But there's a lot of critical mass there. And so that operating leverage helps us with speed to market, access to market, understanding how to build software in a clever way. And then kind of, frankly, sometimes reusing it. If we said, "Oh, okay, we're going to do -- we did preferred over here in this way. Now we're going to do it this way over here. We're going to stream here". That's a big, big advantage, which isn't -- it's not like a pricing advantage. It's a scale advantage.

Got you. Great. Well, look, I don't want to spend our entire session on credit. Obviously, there's lots of other business you guys are in, rate still being the biggest business. So let's focus a little bit on the swaps market. Again, another huge area of success for you guys this year. I think revenues are running around ish kind of 40% up year-to-date year-over-year as well. And that's really before contemplating what could happen once we get the macro tailwind from QE pull back or higher interest rates, et cetera. So thinking more strategically, though, about this business in terms of the addressable market. You pointed out earlier that rate swaps are 30-ish percent electronic. When we look at the cash charge market, it's 70-ish percent electronic. Is that the North Star? Like is that kind of where that market could eventually go? And -- what's the competitive landscape look like there? Because we spend a lot of time on credit between obviously you and MarketAxess and maybe a couple of other people spend less time on that in the swaps market. So what does that look like?

Yes. Swaps market is a huge business for us. It's one that we were the first ones out of the gate with. We didn't quite get the timing right. I think we launched that when I was in London in 2005. And it took the financial crisis to kind of kick it into gear and some regulatory changes with SAP in the U.S. and MiFID II. And then in the last, I don't know, half a dozen years, it's really surged and it's our most profitable business in the rate space. And I think, has a lot of room to go in terms of digitization, electronification, 30% is relatively low. But I think most of our markets are going to continue to become more and more digital and more electronic, even the treasury market. I mean, we made an inroad through an acquisition this year with eSpeed. We think there's upside there, both from a competitive standpoint in terms of gaining market share, but also in terms of markets going more and more digital. But yes, I mean, 30% is -- it's less than the credit markets, but the credit markets a few years ago were 20%, 25%, and now, IG is 40%, just 1.5 years later. So these markets are moving in the right direction for us. And I think we've got a lot of wind at our back.

Right. And in terms of the competitive dynamic in the rate swaps market, again, who do you typically run up against? And is the competitive landscape that much different than what you found in credit...

Bloomberg is our biggest competitor in swaps. We've taken nice share over the last several years, both in the electronification and from a competitive standpoint. It's innovation. It's always innovation. It's always coming up with tools. Swaps now is streaming prices. It's 2-sided markets. There's a number of things that we've done in the interest rate swap space that have been creative tweaks. I don't need to bore everyone with all the details, but that's what separates us. I think that, that is the theme that you'll see throughout our -- all our businesses is making that next step to solve the client's problem to make things more efficient.

Great. You mentioned the spot markets treasuries as well. It's another area where we've seen you gain share even before considering NFI, which presumably will add to that as you guys fully integrate it because, right, you're sort of early days and complete technology integration of the 2 platforms. So kind of a 2-part question, I guess. One is, maybe help us dissect the sources of accelerating market share momentum that you're seeing in this business? And then once you fully integrate NFI, what kind of additional capabilities do you see moving forward on the back of the platforms being together?

Yes. I love our space in treasuries because we're now the #1 platform in the world so that we do more activity than anyone else. We hit all customer segments, and we have every conceivable protocol. There's a few that we've got on the white board that we're working on. But we're all the way from super fast machine-to-machine embedded in our data center, order books, streaming prices through to retail, which obviously is not moving the dial in a meaningful way at this moment. But with RFQ and RFM and all different variations of that. So you layer on top of that, these different customer segments. And from a technical standpoint, all of those clients that are either in institutional wholesale space will be able to connect with us through 1 API. So we're -- we'll have to change our tech stack a little bit, which we're doing right now to get the order book in line. That's something that will be accomplished next year. And I just think we're going to have a very unique offering. And it's important to have the #1 market share when it comes to price discovery. So all of the components kind of fit together and should allow for some acceleration in growth in the treasury space. And then I think your point about market conditions is relevant. We're at a moment with the tapering and with rates going up and a lot of speculation where it looks likely to me that we're going to have a bit more volume in the future, and we've certainly got a lot more issuance out there, right? So you combine all of these factors, little innovation, comprehensive offering, bit more activity, we're really excited about that.

Sure. All right. Let's switch gears a little bit. I want to touch on data. It's a very important kind of secular theme for the whole trading community. Obviously, there's a lot more emphasis on pre-trade transparency and use of good quality data to really execute better. How do you think about the value of the data that comes through your system and the way you can monetize it? Because clearly, right now, you're tied to Refinitiv. But the breadth and the richness of the data continues to increase the more trades go through your platform. So how do you think about that and the opportunity set you see in the data space?

Yes. So I think data is often misunderstood in some ways, and it is complicated. We -- our use of data, data is all we do. And anything that helps in execution for us with the use of data is a real positive. So it's not just about selling data directly, right? So we use data to create prices. So we have AI pricing, which is 20,000, 30,000 instruments that are priced on a regular basis. That comes from our data, that comes from third-party sources, our data activity on the platform. That enhances the price, which leads to more trading activity, especially, we use that in all our session trading. So the more precise you are on the price. We have tens of billions that come into our system on a regular basis. The more matches you have, the more matches you have, obviously, the more revenue you have. Now is that a data product? I don't know. I don't know what to call it. But it's pricing that is data that leads to execution. We also have data that enhances our AI execution. So our automated executions, which are just some algorithms. It's not like it's real AI yet, but it's their algorithms that we give our clients so that they can not have to click buttons and can program trades. Well, that's all informed by our data that the way those algorithms function is they're getting data about who's putting the best prices out, what was the history of the last trade, all sorts of bits of data that go into execution. So for us, data is not just this thing that sits outside. It's actually part of our whole execution process and critical to it. At the same time, we do have a team that focuses on just selling data. And that team that focuses on just selling data has double-digit growth, very nice growth going forward, and I think lots of potential. So that's another area of data. And then we have a kind of single-digit growth with our Refinitiv redistribution agreement, which is also a terrific deal for us because it focuses on something that we're not -- it's not really our area.

Great. All right. Sticking maybe with P&L for a second. Let's talk about expenses and margins. Clearly, the revenue environment is very constructive. Hopefully, it's going to continue to be constructive into next year. Thinking through expenses, though, and your inflation. You talk about, obviously, talent, very important, there's tight labor markets. And all of that and hopefully more of this travel, et cetera, will bring some teen expense back online as well. So how are you thinking about the direction of margin for Tradeweb from here so you might have to spend a little more, but assuming there's revenue growth, is it still reasonable to expect leverage?

Yes. We do think of ourselves as a growth company. And the way you grow is you invest in your business and you attract and retain the best possible talent. We've been very successful at that, even in the midst of what is an incredibly disruptive period for society and talent management. We've had very good results with our team. We expect there to be more pressure on that as everyone is. I mean, we're living in the real world. But we're not going to take our eye off of continuing to invest in the long-term success of the business. That's how we built the business over these 20-plus years, and we'll continue to do that. It's a little easier to manage all this when you have the growth that we've had. So -- but I would remind everyone, we're not such a big company that we can adjust mid-course. If it turns out -- I've had bad years at Tradeweb. It's been a while, but we've had tough times in 2009 when banks were going out of business and it was crazy, we slowed down our hiring. We reduced and we buttoned up. And if we have to, we can do that again. I certainly hope we don't. But I think we get how we're measured by the market in terms of the combination of revenue growth and enhancing margin. And we want to be responsive to that. Those 2 linchpins but always with an eye towards growth, always. And thinking beyond just the quarter and the year, I think you really have to -- most of our stuff takes years to build and you have to invest in it.

Great. All right. Well, I think we're out of time. Lee, thank you very much for coming here in person. Great to see you.

Good to see you.

Hope to do it again soon.

Yes. Thanks, Alex.

Thank you.