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

Okay. Thanks, everyone. So we're going to get going with our next session. It's my pleasure to introduce Billy Hult, Tradeweb's incoming CEO as of January 1, officially. But Billy certainly not new to Tradeweb, of course, having been with the company since 2000 and in the President role since 2008, driving many of the firm's growth initiatives and quite frankly, a lot of growth successes that Tradeweb's had over the years. So as many of you know, Tradeweb is one of the largest and most diversified operators in electronic markets around the world with secular talents in automation of trading, supporting its fairly robust earnings growth profile over the last several years and hopefully in the future. So look, with lots of volatility in the market, I think we're all pretty keen to talk to you about changes in fixed income markets, electronification, how Tradeweb is positioned to participate in those.

Great. Great. Thanks for being here again.

So why don't we start with the first question around just the CEO transition. As you kind of enter 1 month before your clock starts officially, I guess, on January 1. Could you give us your thoughts on sort of what are the things you're going to be most focused on? What are the products and asset classes you're most excited about moving forward for Tradeweb?

First, Alex, thanks for having me. It's great to see you. Nice to see you or as well mine, I am sort of in a not surprising way like slightly looking forward to that, like CEO-elect piece of the title to go away. So on January 1, that goes away. But as you know very well, like there's a sort of a human component to all this Lee, who's retiring in January, he and I have been friends and partners like forever and so there's a part of me that sort of understands and we'll say very clearly like this is an important moment for the company. I think CEO transitions are by nature very important things. The basic question is like, how do you sort of respect the past, the traditions of the company, the cultures of the company. And like how do you accelerate things going forward into the future. And from my perspective, as you were kind of mentioning, like it's even a little bit harder for me, I've like it's been a part of the past like forever and ever been the company since 2000, like I remember basically onboarding like the first user of the company like way back when. So I feel a lot of pride in ownership around like what we've accomplished. That being said, like here we are, and we're moving forward, and we are accelerating into the future. So the first thing I would say is, from my perspective, getting a, extremely strong management team in place like priority 1, talent management priority 1. So very happy that we announced the hiring of Tom Pluta as President of the company. He's got many, many years of experience at JPMorgan. It was important to me to hire somebody. First of all, I would say, Alex, that like lives and breads and understands and like everything about what Tradeweb does is sort of first language. That was important. Obviously, having chemistry and trust and all of that, very, very important. So really excited to have Tom. Second thing I would just mention quickly is we hired Sara Furber, our CFO about 14 months ago, excellent star in the industry, really happy with her. So we're really, really happy with the management team. I think we're ready to go. I think the company is energized and excited. All of that stuff matters. From my perspective, the first thing I would say is, you know me well, Alex, like I'm by definition and by nature, like super external. So I'm going to have a really strong mandate within the company, like we have to be excelling externally as a company with our most important clients. That's not like the absolute like secret sauce of the company, but it's something that we have excelled at. I think the stakes are really high. I think the competitive landscape, which I know we will talk about really, really interesting right now. So I'm going to have a right out of the gate mandate that the company will excel externally in terms of how we collaborate with our clients. I think that's really important. My business priorities will not surprise you like at all. I feel like we have landed in credit. We are real in credit, and I feel like I'll use the word again, acceleration. I feel like we have this opportunity to continue to accelerate forward in credit. That's going to be sort of #1 priority. Number 2, from my perspective, I know we will talk about this. There are obviously market structure changes a foot in Tradeweb's very first business that we were in like way back when government bonds. So laser-focused on managing some of those market structure changes being the industry leader in that space, and we're not going to take our eye off the ball there. Third is, obviously, data plays a larger and larger role, not just as a stand-alone independent business, but also, obviously, in terms of how it gets integrated into trade execution. I think Tradeweb has distinguished itself over the last bunch of years. I talk about AIX, the ability for the buy side to engage in liquidity in the marketplace in a smarter, more sophisticated way, we're going to continue to be kind of cutting edge there. So those would be a few of the kind of significant priorities that I would kind of lay out for you.

Awesome. Let's touch on a couple of those. So actually, why don't we start with the second one you mentioned, which is market structure changes. I'm assuming you're talking about the potential regulation or introduction of U.S. treasury clearing as part of that. Quite an important development. It could mean lots of things for your market for the role all-to-all plays in it. So maybe just spend a couple of minutes on the impact and the benefits you see from a change like that to the business and how...

Yes. So it's a good question. So like 2 things. First, I would say is PIMCO wrote, as you know, a sort of white paper, I think it was about 6 or 7 weeks ago on their very strong perspective that they wanted an all tall market environment for government bonds, not happy with liquidity in the market. As everybody knows, the treasury market has gotten very volatile. There's been some concerns around liquidity in the deeper part of the off-the-run market. When PIMCO speaks, it's like everyone's kind of listening. It is interesting that they did not -- they are not a proponent of central clearing. So they kind of split off of those issues. I would say from our perspective, a couple of things. First of all, we are a proponent of absolute more efficiency in the marketplace. So it's been kind of interesting for us to note for a while that the interest rate swap market has centralized clearing and the government bond market, which you would think would doesn't -- what we would also be a proponent of is that it's done the right way. As liquidity becomes a concern in the market, what we would highlight is, we don't want participants in the marketplace who are important to be kind of priced out of it as clearing costs might rise. So that would be something that I would mention. I think we are moving into a place where there is going to be more market structure change in, for example, government bonds. From our perspective, it was always really important that we understood the full market structure of all these businesses that we are in. So Tradeweb is obviously very well known for being in the client dealer parts of these markets. But we're also in the wholesale side of the market that has this very developed central limit order book technology. That's where the wholesale market, and I would say, the dealers trade with the dealers, but it's really almost a machine-based market these days. My general feeling is over the pretty medium term, we're going to have more buy-side clients onboarded into that world. I do also feel like we are going to continue to solve for some more of these liquidity concerns and liquidity issues in the deeper part of the off-the-run market. The one thing I think we can say for sure is there's not going to be like one protocol that will exist in the government bond market. Tradeweb's in the RFQ market, the request for market protocol, there's the wholesale central limited order book trading. AiEX, the smart search for liquidity is playing a larger and larger role around all of this. So the market is constantly developing and changing. And I would say from my perspective, I've always been super focused on the company having options open and never being short an evolution or a change around the structure. The biggest example that we can think of, Alex, is the credit market looks so much different today than it did even 5 years ago. So keep your options open. I love the fact that Tradeweb is set up in the retail space, the client dealer space and the wholesale space because there are ways where we can kind of put these pieces together and create efficiencies for our clients.

It's interesting that you sort of decouple central clearing of treasuries with liquidity in the off-the-run market. So do you think there's enough willingness from industry participants to solve the liquidity issue by really partnering with folks like yourself and maybe a handful of others without having U.S. government bond actually be intentional…

I think there is. I mean I think they both have their own kind of sets of proponents along the way. I think that's one of the things that makes this issue, if not complicated a little bit challenging with a lot of reward on the other side. But some of the terms around this get a little bit conflated, right? There's the concept of the treasury actives market, which are like the 2 or 3 most liquid line items like in the world. And then there have been these kind of concerns around the real liquidity and the deeper, less liquid part of the government bond market. I think there's going to be a period of time where you're going to have, for sure, as an option, the biggest, most important asset managers who are trading anonymously on order books. And part of the answer to that is going to be around clearing. At the same time, I do think that there's going to be an ability for clients to get the ability to trade with other clients on the less liquid aspects of the off-the-run market.

Let's talk a little bit about electronification broadly. We've seen pretty material acceleration coming out of COVID. It looks like things have moderated a bit when I look at the results across all the major platforms that are out there, including Tradeweb. How are you thinking about the stickiness of electronification in terms of what we've seen. And on the forward basis, what are your forward kind of expectations for the addressable market? And ultimately, what are some of the impediments still that clearly don't make this a straight line?

Yes. It's like interesting, right? There's some behavior that developed that is sort of almost like a one-way train that's not going back, right? The way that data gets integrated into trade execution, the way that the buy side has become much more sophisticated in terms of algorithms in terms of how they engage with market liquidity, that's not taking a quarter step back or a half step back, that's just going forward. What I would say is the riddle around all of this kind of we're here sort of early December 2022. And I know there's -- you and I have talked about this a little bit. There's like a part of us that I always wonder like why are end users, why are customers still doing business like it's 1996. The riddle around that, from our perspective, has always been large behavior, large market moving big risk trades still tend to happen on the phone. And that was true before the pandemic. That was true in a lot of ways, still during the pandemic, although those trades got digitized, I think, in a productive way. And it's still kind of true. And so what we work on are micro protocols that allow the real risk transfer of trades to happen. One of the things I know we'll talk about, Alex, all-to-all trading and credit and portfolio trading and credit. I think in credit all-to-all trading without question has become sort of a table stake protocol for the market. Do I feel like that is a protocol that's where the client tests this like big giant wide net out there and says, "I'm going to send out this inquiry, not to 4 dealers but to 150 responders out there in this big network. Do I think that works? Yes. Do I think that works for large market moving trades, trades that the client really deeply cares about? Probably not. So you're always trying to understand how do we get after these larger, more important types of trades, whether or not it's credit, interest rate swaps or government bonds.

Yes. So let's talk about some of the specific products, starting maybe with global swaps. It's an area where you've seen tremendous success. And I know we, as an investment community spend a ton of time on U.S. credit, and we're partially guilty of that as well. But rates at the end of the day is still the biggest part of your business, and it's put a phenomenal growth. So can you spend some time discussing potential for further electronification of mobile swap market, the competitive landscape within that because it varies and it's quite different than it is in credit. And ultimately, what is driving your revenue growth there?

Yes. So it's interesting, right? Like you know this better than anyone. I think if someone looked at the data of Tradeweb's earnings calls and looked at the sort of business questions on those earnings calls, you're spot on, it would be like 85% of the questions are on credit, and they're all like what's happening with like your high-yield market share. It's like super focused on that. And I get that, and it's not that I'm frustrated about that. But you are right, we have this kind of like a great story about our global swaps business, right? Like the global swaps business was the first, was a business that was, I think if I could describe for everyone in this room, like how resistant initially the community was into that market going electronic, it would be hard for me to describe it to everyone. It was like absolutely not, right? Thank you for doing that in government bonds, TBA mortgages, European governments like don't even consider moving in the direction of global swaps. It was really regulation back around after the financial crisis with Dodd-Frank in the U.S. first, that push that market electronically, we were as a company extremely well suited because we had all the customers, and we were able to navigate a lot of that regulation in a way that worked for the dealers. So we felt like we were in the cat bird seat there, but it's become -- when I think about how that has become the combined global swaps business, our biggest business, there's a little bit of serendipity for me because I remember that kind of early resistance to that. We feel great about a couple of things. One would be the European swap business still going through the process of onboarding significant clients through MiFID regulations. So that's still kind of very strong upward movement for us there. We are still developing back to this concept of micro protocols. We're still developing protocols there that get after real risk trades in that market. We launched a protocol called request for market that's worked out exceptionally well for us with some of the big hedge funds, some of the big real risk users in the market. And that's a marketplace with all of the different volatility over the past year where the activity continues to be exceptionally strong. So that's a -- that marketplace, I think, holds very high, very esteem for us, and we feel really good about how we're positioned there for sure.

Yes. You mentioned cyclical dynamic. It's obviously been very important. I remember at the time of the IPO, we talked about the other side of that coin because you guys were known public the time where rates were going lower and that was a big concern. Now we're kind of back at a point where it feels like great environment for rates in 2022. Rates are likely going to peak in 2023. So as you think about the cyclical headwind that creates to the business versus some of the structural elements you just talked about, how would you dissect the 2 in terms of revenue growth?

It's interesting if -- like maybe a year ago, someone had asked the question like what's the perfect environment for a company like Tradeweb. They might have described something almost similar than happened kind of this year, like higher rates, tons of volatility, kind of all of that stuff. I mean, the reality is the way these marketplaces operate affects our different businesses very differently, right? So a year like 2022 for Tradeweb, like off-the-charts, Alex performance for our retail business, which struggled back when we first talked in that very low rate environment, great performance for our retail business, I think exceptionally strong and a real validation for our global ETF business, which did very, very well. Really strong performance across the board in swaps and then probably not surprising to anyone in this room, and I heard Jeff talking a little bit when I was walking in about the mortgage business, mortgage business like significantly struggled, like almost like a perfect storm of a bad environment for mortgages. I think a little bit of not confusion about how all of this affects the government bond business, but definitely, for sure, last few months, some headline conversations about where the liquidity is in that market. It's been a little bit more of a risk-off market in the past bunch of months. But at the end of the day, I kind of make this point a lot, and I think it's important for everyone to hear me say this, we're still about picking up and growing market share. So we do feel really strongly as market share takers out there that we are set up really well as more and more phone-based business gets digitized and put through the electronic platforms. That's kind of like my overall takeaway from all of this stuff. I always kind of say focus on as a company, focus on what you can control. And from our perspective, it's really still about migrating this kind of phone-based business electronically. It's also about picking up market share in the -- with the electronic platforms. So on the competitive landscape front, obviously, Tradeweb has competed with Bloomberg from essentially day 1 in the government bond markets, U.S., Europe and then TBA mortgages. It was Tradeweb, and it was Bloomberg almost kind of side by side. My general instinct is, and you know I speak politely, they've been, from our perspective, a little bit slow on this dynamic that I was describing before, which is the first phase was from the phone to the mouse. The second phase is really now mouse into more of the algorithms, more of the sophisticated approach to engaging with liquidity. All of that doesn't line up like perfectly with Bloomberg. So I think that they've struggled a little bit on that evolution, and we keep increasing our footprint there. I think that's important. Credit and a whole other dynamic and a fun story.

Yes, let's talk about credit. So now that you mentioned it. So when we think about the success that Tradeweb's had in credit over the last couple of years, a couple of things really resonated, right? It's been not spotting that you introduced early that kind of get your foot in the door, I feel like portfolio trading has been really popular and gathered a lot of momentum and market share. As you move forward, what are the protocols, what are the kind of solutions that you're coming to market with to sustain that sort of market share gain? Because if I go back to your first comment, it sounds like credit market expansion is still kind of priority #1.

So I mentioned from day 1, we were kind of competing with Bloomberg in our core businesses, our original businesses. I think it made us quite honestly, better as a company, that competitive dynamic. I was not surprised credit is different. But I was a little bit surprised that market access did not quite have that competitive dynamic historically. And so my general instinct was sometime around the 2011, 2012 timeframe, I felt like Tradeweb had this real ability to compete with market access. First thing I did, which is not surprising to you at all was like go and spend time with the most important clients that are out there and really test that theory. Is there room for competition in the space, does the market want it or not, I felt pretty good, but the answer was yes. That being said, I can tell you this very clearly, I got a very, very straightforward answer that, like, by the way, they are very good at what they do. And if you just do what they do, you are absolutely doomed to fail. So you better do something better and different and add value to clients. So from our perspective, that the very first thing was, Tradeweb is big in government, how do we do the net spotting and the net hedging and bringing the rates market, the government bond market into the credit market, the right way, save clients time and money. It's always the sort of most important thing to do. So that works. Second thing was particularly around the pandemic was the launch and us getting behind portfolio trading. One of the things portfolio trading does really well is keep dealers in the position of being market makers. We're big on the balance of it all. I get a lot of questions, Alex, as you know, about where are you with your portfolio trading market share? Is it rising? Has it flattened out? Questions like that. My general feeling is really tough market environment for a protocol like portfolio trading in general, if you think about the volatility in the markets, et cetera. The way that, that protocol has kept up its market share, continuing to do big risk-sized trades and performed, I think, is an absolute validation of that protocol. And obviously, in a humorous way, to see market access slightly now get behind the protocol that was not perfectly in their best interest a while ago is some serendipity as well. So laser-focused on continuing to push forward in credit. I think the Aladdin deal that was announced this morning with BlackRock, important. It's, from my perspective, to give market access, again, credit -- by the way, I just -- I am realizing that I say a lot of nice things about them.

You're a nice guy.

If you could get Rick to say one nice thing about wouldn't be the worst. But from my perspective, like absolute validation of something that I have said, which is all-to-all trading table stakes and super important market trading protocol. And we've never felt any other way. So what we've done with this Aladdin agreement and Aladdin partnership is figured out a way to continue to onboard a lot of these key Aladdin participants that are very, very important in the credit marketplace. So it's interesting, how all of this stuff kind of sometimes comes full circle. The one thing I would just say quickly about this, I do feel like there's room for real multiple winners in the space. I don't feel like when we do something well, it has to come out of somewhere else. And I feel that kind of strongly. On the one hand, the competitive environment has never been higher. And I think that's part of the nature of real competition in the space. I think everyone gets better when you're really kind of competing and I feel that way very strongly. That being said, it's amazing that the voice market is still everyone's #1 competitor. And I would sit here and tell you that, and Rick would sit here and tell you that. And that's kind of a cool dynamic because it makes us feel like we can all kind of accelerate in a certain way together.

Yes. Can you spend another minute on Aladdin, given just the recent the fact that it came out this morning. Just in broader strokes, what exactly does it do to your ability to compete more effectively? How does that play into the all-to-all algorithm build out? Who do you connect with -- is that a step function higher or is it more gradual kind of like?

It's a statement from -- it's a good question. It's a statement from BlackRock, I think, in a couple of ways, right? First is there re Aladdin business and there are Aladdin network at the highest level is just like super important to them, right? The second thing I would say is, without question, it's a statement that we have arrived as a real credit platform in a way that their clients want to integrate with us and take the time and spend the money and put the energy forward where their clients are connecting with our credit business. That says something. That says that we've created enough liquidity with the right kind of protocols and enough business that gets through that they want to be a part of our business network. So that's what I would say it means. It's putting us in a great place to do more and more business with the Aladdin network, which is obviously a very, very important part of the credit ecosystem from both a liquidity taker perspective and a liquidity responder perspective.

Let's talk about the business that doesn't get a lot of light, which is your equity business. It's smaller of the 3 big ones, right, between fixed income between rates and credit and equities kind of comes third. You had a lot of progress. So maybe what are the main products you offer on the platform? How does that firm overall kind of benefits from the move to passive. Clearly, ETF is a huge part of the offering there. But maybe just a little more meat around the volume?

In a certain way, I would say this, it does speak -- I mentioned this comment before, Alex, about being external and collaborating with clients and I think you know this really well. I'm not just saying that. Like I live that and I want the company to live that. I think it's a really important way to engage with the marketplace. Like Tradeweb, way back when, was a rates platform. We were a government bond platform. And so when we were talking about and you were asking a question about interest rate swaps, and I was talking to you about the resistance around interest rate swaps, one of the things that was pretty obvious is like, look, we were a rates platform. We were in government bonds. We were in TBA mortgages. We were in European governments. Interest rate swaps was like sitting right there. It was an obvious difficult but obvious business for us to get to next. In another complementary way because I'm a nice guy, Market Access was the credit platform. And so in a similar way, emerging market bonds with kind of their adjacent market and their home field as they expanded and they have done a very nice job moving forward in EM. From my perspective, in an interesting way, ETFs was kind of just sitting there a little bit in the middle, sort of jump all to use the expression. And our feeling was we were staying very close, again, back to my point about staying close with clients, we got the idea to get into ETFs, block trading, RFQ trading of ETFs through our biggest client back to BlackRock, they set me a book like in 2009 or 2010, like here's how the ETF market works. I'm not sure anyone would have understood that there was this explosion around ETF activity happening. From our perspective, absolutely speaks to like the scale that we bring into the marketplace. We have the clients. We have the technology. A lot of that was basically straightforward off-the-shelf RFQ technology that we had done when we first launched government bonds like way back when. So we feel great about our ETF business where it's headed, obviously performed exceptionally well this year. And then the other thing I would just mention is, as you know very well, in the ETF community, there are participants that are extremely important market makers in the credit universe. So by being as strong as we have been in ETF. On the edges, it's played to our strength around onboarding those clients in credit market making, which is something that's also been important for us.

Yes. And one of the earlier points when we talked about the structural shift and electronification, you talked about the importance of data and how that's become just absolutely critical table stakes, you know? Part of the workflow for clients. So Genie is out of the bottle, can't put him back in, right? So as you think about your own data offering, both proprietary products and what you have with repetitive, what does the growth outlook look like? And how important strategically is this from a revenue perspective?

Yes. So 3 things, right? Like so I'll make the sort of like the most obvious comment of the entire data of everyone in the room, like that is becoming more valuable, right? So we like our ability to continue to monetize data on our own. The Refinitiv agreement is important. We will obviously negotiate that or renegotiate that the exact right way. But I think we're operating from a position of strength around that, and I have a 100% expectation that's going to go very well. Not most importantly because the first 2 are obviously important. But back to the concept of integrating the data into trade execution and driving flows, driving market share for us. I almost kind of feel like that's probably one of the most important pieces of this for us, right? Like as you and I have discussed a little bit in the past, Alex, like there was always a little bit of this sort of a random walk around how clients would engage with Tradeweb but really engage with the dealers. Like I would spend a lot of time sometimes like looking over someone's shoulder as they use Tradeweb. And they would click C and send an RFQ to Citigroup because it was like their ticket was alphabetical. Like it was really just super random kind of, right? And so we were focused on was giving the clients really interesting information about how their trading was going, right? Like who's performing for them, who's performing for them in easy markets, tough markets here on the curve, they're on the curve? Like getting the clients to really absorb all of this interesting data that we had. But we were doing that by like sitting down with them and like showing them pieces of paper. It wasn't a huge leap, but it was an important need for us to start the process of integrating all of that data into their actual trading decisions. That's like a massively cool evolution, right? It's not like a huge, huge stretch to say like that's AI. But that's the real beginning of a much more sophisticated way of engaging with the marketplace. So now if there are super smart clients that when they're picking 2 or 3 dealers to respond on an inquiry, they're not guessing. We know. And that's cool. It really self-reinforces.

All right. Let's pivot a little bit. I want to get one financial question and if we have time for Q&A from the audience. But I want to talk a little bit about capital management and maybe just also because of the recent the buyback announcement, I promise I was going to give you a hard time about that. With $1 billion of cash on balance sheet, $300 million feels okay, but could be more -- so how did you come up with that number? What's the time frame in terms of which you think you can actually execute to move the needle?

Yes. I think there's going to be more for us. So there's more to come on that without getting into over specifics on that. And I was listening to Jeff and Jeff made an interesting sort of point about kind of ICE's view around M&A versus organic growth. And we're not the exact opposite, but there's some opposites, right? We've got here. I'm sitting here today through a ton of organic growth, right? That's been the Tradeweb mantras, we can build it, we can onboard these clients. We can keep pushing this forward. We've done acquisitions, but it was never like our absolute, absolute sort of position A on things. I would say this, I feel really good about how we're set up organically for growth going forward, really good. That being said, to your question, without doubt, the company is going to be creative. We're going to be strong around opportunities that exist both from an M&A perspective and also from a partnership perspective because we feel like we're in a really good position to take advantage of obvious consolidation happening in the space plus valuation. So I think you can see more from us on that.

Okay. Awesome. Well, we're actually out of time. So sorry, no question from the audience, but thank you for being here. Appreciate it.

Thank you very much.